A last post on Makhlouf

One final post before the waters close over the issue.

When I wrote my post on Thursday afternoon about the SSC report on Gabs Makhlouf’s conduct in the “Budget leak” affair, Makhlouf himself had still made no comment.  By then, he had made no comment at all for four weeks, since the press release put out –  hand in hand with one from SSC – at 5am on Budget day.  Among other scrutiny he had avoided, he’d deliberately stayed away from a select committee hearing he would normally have attended, thus denying MPs any last chance to question his conduct.

But later on Thursday afternoon, Makhlouf issued a short statement  (4:41pm being about as close to close of business as he could possibly get).   In the circumstances, it is worth quoting in full.

“Mr Ombler’s investigation was conducted thoroughly and fairly. I have read the report carefully and encourage others to do so. I apologise that Budget information was not kept secure. The inquiry that I asked the SSC Commissioner to undertake will help us understand exactly how that happened and how to stop it happening again.

The report confirms I acted at all times in good faith and with political neutrality. It also confirms that I acted reasonably, other than in my descriptions of the incident. I am pleased that my honesty and integrity are not in question.

It has been my privilege to have had the opportunity to serve New Zealanders and I’m very proud of what my Treasury team has achieved over the last 8 years.”

He’d probably have been better off to have said nothing, and left us wondering. We already knew from the SSC report that Makhlouf disputed all the report’s adverse findings, and showed no sign of any contrition, or even of a sense that with the benefit of hindsight he should have done things differently.  But, perhaps, (we might have wondered) in his heart of hearts he really knew things hadn’t been handled well.

What does Makhlouf’s statement actually say?

The first paragraph is, in context, mostly an exercise in distraction. He apologised that the Budget information itself hasn’t been kept secure but (a) he had more or less taken institutional responsibility for that a month ago, and (b) that wasn’t the subject of the SSC inquity that had been released earlier on Thursday.  That report was about Makhlouf’s own conduct after the premature access to Budget information came to light.  It was a pretty damning report, especially when read in full (which I join him in encouraging people to do), and read knowing it was written by and for people who had worked closely with Makhlouf, including at the height of the “Budget leak” affair  (the timeline in the report has Peter Hughes in two meetings with Makhlouf, Ombler in one, and there was sufficient coordination and discussion that Treasury and SSC were issuing simultaneous press statements on 30 May).   It was only two weeks since Hughes had gushed about Makhlouf: if they had thought they could acquit him of everything, most likely that would happily have done so.

The final paragraph is irrelevant to the topic of interest on the day.

Which leaves simply that second paragraph.  A very senior public servant needs to draw attention to the fact that an inquiry judged that he was acting in good faith.  “Good faith” is an incredibly weak standard, and I don’t recall anyone –  through the whole affair –  suggesting that his actions were taken other than in good faith.   16 year olds probably mostly act in “good faith”, but it doesn’t mean they make good calls.

And what of political neutrality?  Sure, there is no suggestion that Makhlouf was some Labour hack, but who ever thought otherwise?  After all, he had been appointed and reappointed, with the consent of ministers, under a National government.  Had the tables been turned, and Labour MPs had done the same thing under a National government presumably Makhlouf would have handled things in exactly the same way.

That is, badly.

And then we get the central sentence of the short statement

It also confirms that I acted reasonably, other than in my descriptions of the incident.

As I pointed out in my earlier post, the “reasonableness” test used by Ombler was a very weak one –  nothing about whether the actions were what could reasonably be expected from a senior longserving Secretary to the Treasury –  and yet there were still three explicit findings against him, about “unreasonable” choices.   Read the report itself and Ombler could easily have identified several more (for example, Makhlouf’s refusal to accede to the urging of the head of the GCSB –  actual technical experts –  to correct the inappropriate use of the word “hack”, or his meeting with the Minister in which he was reading out the draft of the infamous press release (containing “hack”) but clearly didn’t understand enough to be able to answer the question of why GCSB wasn’t investigating).

But stick with the three adverse findings by Ombler.  Gabs attempts to diminish them, calling them just being about how he “described the incident”.

It is barely even accurate and is highly misleading. Here is the extract from the report

Mr Makhlouf did not act reasonably in relation to:

  • his use of the phrase “deliberate and systematically hacked” in his media statement issued at 8:02pm on Tuesday 28 May
  • his use of the bolt analogy in media interviews on the morning of Wednesday, 29 May
  • in his media statement on the morning of Thursday, 30 May, continuing to focus on the conduct of those searching the Treasury website rather than the Treasury failure to keep Budget material confidential.

The first involved a press release –  on what was already a very sensitive political issue –  the second involved a sustained round of interviews (he had chosen to do, at the request of the Minister) with four of New Zealand’s main media outlets, and the third  –  about a release on the morning of Budget day, amid seriously escalated political tensions –  goes directly not just to description but to mindset and perspective  (as Ombler noted, even during the inquiry interviews Makhlouf continued to hold to an interpretation of Budget confidentiality conventions that (a) no other serious observer holds, and (b) which Ombler politely takes apart).

Those alone were really serious failings, and Makhlouf accepts not one of those findings.

He might take comfort (as he does)

I am pleased that my honesty and integrity are not in question.

But that isn’t really the point is it? What is in question is his competence, his judgement, his ability to lead under fire, his willingness to listen to others, his ability to recognise mistakes and learn from them –  let alone his willingness to account to the people of New Zealand for his handling of this episode, played out in the full glare of the public spotlight.

The whole episode, right to the very end, reflects pretty poorly on Makhlouf and on SSC, including the fact that Makhlouf didn’t front up to the media at all, and that SSC didn’t insist (Makhlouf was still their employee on Thursday). No one could force him to hold views that he didn’t, but if he is going to refuse to accept any responsibility, or acknowledge any misjudgements, he should at least have had the decency to have fronted up to the media and faced, and answered, serious questioning.  As it is, he got off without even a formal reprimand – enabling him to get away with spin like this press statement –  and simply refused to explain his view.  Peter Hughes argued that Makhlouf’s reputation had taken a big hit anyway, and that that was really what mattered for those in these “big jobs”.    But it isn’t.   The old biblical maxim is relevant here

“For unto whomsoever much is given, of him shall be much required,”

People in those “big jobs” have money, power, influence, status, connections –  in Makhlouf’s case even citizenship –  bestowed on them.   We should expect much higher standards of responsibility and accountability for them.     Sure, there are then bigger costs (to those individuals) when they fail and are held to account, but that is how the system is supposed to work –  the quid pro quo for all those things society bestows on them.   It reminded me of Victoria academic Lisa Marriott’s work

Associate Professor Lisa Marriott, from Victoria Business School, has spent six years looking at the unequal treatment of people who commit welfare fraud compared with those who commit tax fraud, with her research showing that beneficiaries are treated more harshly at every turn.

I don’t suppose it is conscious choice, but it seems to happen anyway.  In Makhlouf’s case, the system worked to minimise the price he paid, the accountability, for some really severe misjudgements and a refusal to accept he’d done anything wrong. (Of course, the circumstances of the calendar helped too – had his term still had six months to wrong, it is hard to see how he could have survived in office, avoiding facing media or parliamentary questions, all while maintaining he had done nothing wrong.)

Pottering around doing chores this morning, I listened again to Makhlouf’s Radio NZ interview on 29 May, and the discussion with RNZ’s political editor immediately after the interview. It was fascinating to do so having to hand the SSC report and the detailed timeline it contains.  We now know a lot about what Makhlouf really knew (or should have), what advice he’d taken (and rejected) and so on…..and it was a reminder of just how much of a political firestorm this was (a point the SSC report largely ignores, even though Makhlouf was –  in good faith no doubt –  inflaming it): the RNZ political editor was talking of this as an episode that could cost with Bridges or Robertson their jobs (at this point, Makhlouf was the unquestioned good guy).  It would be tedious to run through many details, but suffice to say that although Makhouf had a fair idea of the nature of what had gone on (the report makes that clear) he made no effort in the interview to hose down talk of a serious cyber-attack and he explicitly rejected the idea that there had been any incompetence or sloppiness at the Treasury end (when the report makes clear that Treasury had a good idea on the previous afternoon that the clone site indexing issue was a probable explanation).  He fed the frenzy, played distraction……and was still playing distraction in his statement this Thursday, as he headed out the door, refusing to take any questions,

In my very first post on this business I wrote

Whatever your view of how Gabs came to be appointed and reappointed, or of his overall stewardship of the office of Secretary to the Treasury, it is a sad business in many ways.

And, of course, it has only gotten worse –  and sadder –  since then.  What a sad, rather tawdry, way to end an eight year term as the most senior public servant in New Zealand.

And yet it was (and remains) all of his own making, as –  instead of hosing things down, making amends, apologising –  he climbed onto the pyre as if determined to commit reputational-suttee.

Perhaps acknowledging nothing, conceding nothing, avoiding a formal reprimand, helps him in some short-term sense –  harder for the Irish to backtrack perhaps? – but he leaves a severely-dimished figure, and you have to suppose his future colleagues around the ECB Governing Council will always look rather askance at him, wondering about his judgement, pressure under fire and so on.

It is sad to see, especially when it is someone one has had a little to do with. As an outside observer and commentator I’ve been a bit ambivalent about Makhlouf.  Mostly critical of his stewardship to be sure, but there was a reasonable speech just a couple of weeks ago, and it is only a couple of months ago since, out of blue, one Saturday afternoon I had an umprompted text from him.  He must have been reading this blog.  He chose to remark on two “particularly good posts on [  ] and [  ] this week”.

 

The SSC on Makhlouf

The SSC report (undertaken by Peter Hughes’s deputy) on Gabs Makhlouf’s conduct in the “Budget leak” affair late last month was finally released this morning, along with a statement from the State Services Commissioner himself, and a press conference (for which we appear to have to rely on media reports).  It was a very mixed bag but (remarkably) manages to show Gabs Makhlouf’s conduct and judgement in an even worse –  materially worse –  light than most would have expected, even having followed the media stories at the time and since.  Had it not been his last day in office anyway, his position would surely have been utterly untenable.

As it is, Peter Hughes appears to find himself betwixt and between.  He is clearly keen to distance himself from Makhlouf.  (As one small example, I was bemused that he had his comms person contact me last night to correct a mistake in my post yesterday, expressed thus: “in the current political climate, Peter feels it important to make clear that he did not reappoint Makhlouf” (previous Commissioner Iain Rennie had): not exactly standing behind your employee.)   And many of the words in his official statement, and (particularly) those reported from the press conference sound good, and pretty hardhitting.  From the official statement

“I have concluded that Mr Makhlouf failed to take personal responsibility for the Treasury security failure and his subsequent handling of the situation fell well short of my expectations.  Mr Makhlouf is accountable for that and I’m calling it out.”

and

At a press conference on the report, Hughes said his expectation of what chief executives should do when things go wrong was “very clear” and the chief executives knew it.

“They need to own it, fix it and learn from it. And I expect people to stand up and be accountable, and I am disappointed that Mr Makhlouf did not do that on this occasion,” Hughes said.

“The right thing to do here was to take personal responsibility for the failure, irrespective of the actions of others and to do so publicly. He did not do that.”

There were no hugs for Makhlouf (see Iain Rennie/Roger Sutton).  And yet that was it.  Hughes is reported as saying that were Makhlouf not leaving anyway he’d have looked at some formal reprimand (easy to say now, all hypothetical), and yet to do so now would be “cynical and meaningless”.  I don’t see anything cynical about it at all, and the meaning would be to show citizens and voters that there is at least some degree of formal accountability for people at the top.    Hughes went on to say that in these ‘big jobs” reputation is everything, and Gabs’s will have taken a big hit.  That is no doubt true, and as report makes clear it was entirely self-inflicted.  But what employers and governments can do is to make formally clear –  endorse the reputational hit – that conduct of this sort is utterly unacceptable, and judgement this poor would not be tolerated in very senior public servants.

And it got worse

“We can’t run the public service on the basis that you’re only as good as your last mistake. We can’t do that – that’s The Apprentice, it’s not Fair Go New Zealand. I have to look at this in the round, I have to look at this in terms of his eight years of service, and that’s what I’ve done…

What message does that send?  That really severe misjudgement by one of the most senior public servants in the end doesn’t matter that much, cos’ he’s a good bloke?  It is fine to talk in terms of learning from mistakes –  and just possibly, if this were a new Secretary to the Treasury one week into the job it might be applicable here –  but this was someone who had held top office for eight years and yet, when the heat really came on, performed very badly.  And, worse, as the report makes clear still today does not accept that he did anything wrong.  No “learnings” in that case.

And, of course, this was the same Peter Hughes who just two weeks ago at the gala farewell for Makhlouf, hosted by the Minister of Finance at the Beehive said

“Thank you from the people of New Zealand. Our country is a better place for your work.”

He said Makhlouf had brought “strong leadership and a great deal of personal integrity” to Treasury.

He had been “authentic and straight up” and had been calm and unflappable.

“I will certainly miss your calm authority,” Hughes said.

As I noted in a post at the time

In no conceivable universe (except perhaps some parallel one inhabited by SSC) could Makhlouf during that Budget episode be said to have displayed “calm and unflappable” leadership.  Had he done so, there’d have been no inquiry.

And the inquiry report demonstrates just how far from calm and unflappable Makhlouf’s conduct appears to have been, and how little “strong leadership” and “personal integrity” has been on display.    That gush, when Hughes must already have known much of what would be in the report –  a lot of it was in the media, some involved meetings he himself had attended –  seems both borderline dishonest, and if not then casting some doubt on the judgement of the State Services Commissioner himself.

It is perhaps worth noting too that the Minister of Finance has been playing the whole thing down even more than the Commissioner.  His statement makes no reference at all to the adverse findings in the Deputy Commissioner’s report (even though in my reading of the report, the Minister emerges not too badly –  recognising that the report dealt only with his, and his staff’s, interaction with officials).

But what of the Deputy State Service Commissioner’s report itself.   There was a great deal of interesting material, which puts Makhlouf in a very poor light, even though the standard Mr Ombler was asked to use was a fairly weak one, interpreted in ways that made it weaker still.   The standards he was asked to use were whether Makhlouf acted in “good faith”, “reasonably”, and “maintaining political neutrality”.   I didn’t have too much difficulty with how he interpreted good faith and the political neutrality (and as I’ve said before I thought most likely Gabs acted in good faith, and was not knowingly partisan), but here “reasonable” is defined as an action/decision that was “one that was open to be reached and is within the limits of reason”.   Either in how his mandate was written or how he interpreted it, there is no sense of a standard being whether actions/decisions were of a standard that might be reasonably expected from the most senior public servant in the land, who had held that high office for eight years.

And yet even on that rather generous standard, Mr Ombler still found that Makhlouf failed to act reasonably in three important respects.

Mr Makhlouf did not act reasonably in relation to:

  • his use of the phrase “deliberate and systematically hacked” in his media statement issued at 8:02pm on Tuesday 28 May
  • his use of the bolt analogy in media interviews on the morning of Wednesday, 29 May
  • in his media statement on the morning of Thursday, 30 May, continuing to focus on the conduct of those searching the Treasury website rather than the Treasury failure to keep Budget material confidential.

Very little of what Makhlouf did during this period, after the first few hours, seems to meet a standard a fair-minded observer should expect from such a senior public servant.

Among the puzzles is just who Makhlouf was taking counsel from, if anyone, during this period.  Paragraph 10 of the report list the people Ombler talked to in the course of his investigation, but although various Treasury officials are listed, only one of Makhlouf’s second tier is mentioned (a new acting Chief Operating Officer on secondment from elsewhere in the public sector).  But none of the rest of his second tier –  the people he’d been working with for years, and who had a better sense of The Treasury, the Budget –  is mentioned. It is most unlikely –  in Budget week –  they were all away.  Did he really not talk at all to Struan Little, the Deputy Secretary responsible for the Budget, who takes over as Acting Secretary tomorrow.   Did people like him not take Gabs aside and suggest he was losing perspective?  If not –  based on all else in the report – that reflects poorly too.  We know that when Makhlouf decided –  late on the Tuesday night –  to do a round of media interviews the next morning, he explicitly rejected his Communications Manager’s offer to help him prepare lines/answers  (he went on to do those interviews with no outside prep, and not that much sleep apparently either).

What also becomes clear is that, although Treasury staff initially thought there had been a leak, by pretty early on (1pm on the Tuesday) they were converging towards recognising that the material may well have been taken from searches of their own website (all that clone site indexing stuff), and by 3pm that day they had turned off the function that was creating the snippets (of the sort that had been released earlier that morning).     They told Makhlouf this by 5pm, before Police, GCSB or anyone else was much involved (although one gap in the report is there is no discussion of contact between Treasury staff and the Minister’s office during the afternoon  – it is just impossible to believe there was none).

What is more, the report records that Makhlouf told the Minister of Finance (7;15pm on the Tuesday) that it was ‘very likely” that the information released had been accessed through deliberate searches on the website (all that clone indexing stuff again was explicitly mentioned).  Sure, they don’t seem to known that with certainty, but a calm chief executive would surely have taken it as the most likely explanation and tailored his actions and comments accordingly (while not closing down other lines of inquiry).

The timeline in the report has a lot of detail on the back and forth among Treasury, GCSB, and Police over this period.   GCSB seem to have made clear that it wasn’t a matter for them, and  –  since Treasury already knew the likely nature of the way the information had got out  –  to the extent there was anything for Police, it was already clear that it probably wasn’t about what had gone on, but on the narrower question of whether that activity had been illegal.

But none of that stopped Makhlouf.    At 8.02pm he had gone out with his, now infamous, “deliberate and systematic hacking” statement, and (by implication) associating GCSB with his statements/actions.  He had sufficiently little understanding himself that he told the Minister he didn’t know why GCSB weren’t investigating, and yet went on to tell the Minister he thought he (Makhouf) had to make a statement.  He read out the draft statement to the Minister –  hadn’t even given him a draft in advance to reflect on –  and at the same time said he wasn’t going to do media interviews. The report notes that the Minister’s staff who were in the meeting gained the impression that what had gone on was a far more serious computer system intrusion than what (Treasury staff already knew was most likely) the case.  It looks a lot like a chief executive, stung by the breaches on his watch, probably rather emotional, not turning to wise counsellors, and not ensuring that he had himself fully understood what staff were telling him.   Any statement should have been toning down the issue, accepting (probable) responsibility, not amping it up and (a key point in the SSC report) attempting to shift responsibility.

It got worse.  Treasury hadn’t shown GCSB their draft statement (with the word “hack”) and when Andrew Hampton saw it he texted Makhlouf and said Treasury needed to correct the statement (Hampton’s comms adviser then lodged a complaint with Treasury at not being shown the draft statement –  as would be conventional when one government department refers to another in a statement).  Makhlouf and Hampton talked and Makhlouf simply rejected the advice (even though GCSB is a key adviser on cybersecurity threats etc).

Earlier in the evening, Makhlouf hadn’t intended to do media interviews.  That was about his last good call in the whole affair.  But late in the evening, the Minister’s press secretary rang to ask him to do so, and Makhlouf agreed.  He seems to have taken no advice, including on possible responses, and instead got up at 4:30 on the Wednesday morning to prepare himself, where he came up with the infamous and highly misleading bolt analogy.

According to the report, by about 1:40pm on the Wednesday Treasury not only had a high degree of confidence that the “leaks” had simply involved systematic searches, but they had been told Police weren’t taking the matter any further.   Makhlouf told the Minister this at about 5:30 on the Wednesday.  He said he would make a media statement (and a parallel one from SSC) but thought it could wait until Friday, after the Budget was out of the way.  It was just another in a series of extraordinary lapses of judgement.    Wisely, the Minister’s office got back to Makhlouf shortly thereafter to indicate the statement should go out before the Budget.  (Presumably it was about this time the National Party had indicated they would hold a briefing in the morning to reveal how they got the information.   The report is endlessly cute on this point –  despite the fact that Treasury had a near-certain view of how the information had been found, we are expected to believe that they had no strong sense, even quite late in the piece, that National staffers had done the searching).

A reasonable person might have supposed that, having amped the issue up in his press release on Tuesday night, raised the stakes further in the media interviews on Wednesday, and (as background noise) having had senior ministers alleging all sort of impropriety, that a statement would be rushed out just as soon as it could possibly be got together (perhaps even a press conference with Makhlouf and his head of IT).  But no.  And Ombler concludes that this was all quite reasonable because “it takes time to draft an appropriate media statment and to appropriately consult other agencies”.    Except that the decision to do a press statement had been done by 6pm, the draft was sent off to various agencies –  including SSC (who thus saw the draft of the statement they now rightly criticise Makhlouf for) –  at about 8pm, the Minister’s office had it by 8.53pm, and the whole thing was finalised and sent out to various officials under embargo just after 9:30,    There was no reason why it could not have gone public then, not released into the dead of dawn, at 5am the following day.

Except, of course, that the statement was not well done.   As the report concludes, Makhlouf ended up focusing more on the people who had found the information than on the failures of The Treasury itself, and played up an extraordinary interpretation of Budget confidentiality conventions that surely no one else would have regarded as reasonable –  and which Ombler decisively picks apart.  Such conventions bind ministers and public servants, not people who find information through weaknesses in your website.  According to the report, Makhlouf even now rejects this interpretation.

The report suggests that Treasury staff themselves seem to have got caught up in a similar defensive mindset. In a way that is understandable: the “leak” would have been deeply embarrassing, but it was Makhlouf’s job to lead the organisation above the embarrassment and to do the right thing.  He simply didn’t do that, and no one else –  in his department or elsewhere in the public sector (the very top tier of public servants) – was willing or able to stop him.  Where, for example, was his employer –  Peter Hughes – after the first statement, after the interviews, or when he got the draft of Thursday’s statement (and the timeline records he was in two meetings with Makhlouf on the Wednesday afternoon, but the report tells us nothing about what he said or did with those opportunities).

Bottom line seems to be that Makhlouf does not regard himself as having done anything wrong.  Even with the benefit of hindsight, the report contains no sense of Makhlouf looking back with regret or wishing some things had been done differently (and he had a draft of the report, so had the opportunity to inject such perspectives if Ombler had missed them).  Consistent with that there was no contrition or apology at the time, and not a word from Makhlouf since.  He deliberately avoided parliamentary scrutiny at FEC the other day, and there has been not a word from him today.   And at the close of business today he is off, no longer accountable to anyone in New Zealand at all.  It is a shockingly poor standard of conduct on display.  He could not have survived in office –  with these findings and no contrition –  had it not been his final day.  It must be a tough day for Treasury staff, many of whom will probably be going out of their way to stay clear of Makhlouf (even those who otherwise have good impressions of him).

We –  citizens –  deserve much better.  We deserve more answers from SSC themselves.  And, one would have to say, the people of Ireland –  and of Europe –  deserve much better: if this is how their new Governor (and ECB Governing Board member) reacts under pressure when something goes wrong on his watch, it is a real worry as economic and financial pressures and tensions build.    And it is a reminder of how utterly crucial it is for anyone near the top to have at least one person they trust who is willing to tell them to their face when the top person has stuffed up, lost perspective, got it wrong.  If Gabs had such a person, they were missing in action in Budget week.

Secretary to the Treasury

Gabs Makhlouf finishes as Secretary to the Treasury tomorrow, and there is still no sign of the SSC report on his conduct in the “Budget leak” affair. (Although the State Services Commission doesn’t really seem to live in the 21st century –  when it publishes press releases it seems not to put them on its website simultaneously with sending them out to the favoured list of journalists –  so it is always possible it is in fact out.)   Even if the report finally emerges in the next day or so, they’ve basically run out the clock. And that would, surely, be convenient for everyone –  government, SSC, Makhlouf, and the public sector CEs club –  except those actually seriously concerned about accountability in public life.

But yesterday we did finally get an announcement of an appointment of a new Secretary to the Treasury.   The job was advertised more than six months ago  (the fact that there would be a vacancy on Friday was known three years ago), suggesting that SSC had some difficulty finding a good person for the job.  In a well-functioning organisation/system, there would have been at least two or three really impressive, and pretty obvious, internal contenders (not necessarily internal to The Treasury, but to the New Zealand public service) and it wouldn’t have taken that long for a decision to have been made in favour of one of them.  A decision would have been announced several months ago, and the chosen person would have taken office on Friday.    Serious questions should be asked –  but no doubt won’t be answered –  about the process, and (more fundamentally) about the state of the upper levels of the public service (supposedly developed and nurtured by first Iain Rennie and now Peter Hughes) when twice in succession, SSC has chosen to turn to outsiders, with no knowledge or experience of New Zealand, to fill the premier position in the New Zealand public service.  Successful organisations mostly appoint from within.

Of course, The Treasury isn’t a high-performing organisation these days –  use any standard you like, but including stakeholder surveys, reviews of the technical quality of policy, the perspectives of capable staff who have now left, or even just the telling anecdotes (someone told me the other day about their dealings with Treasury social policy analysts, who reportedly struggled with the difference between average and marginal).  There are some good stories too, and some very able people, but few now view it with the mix of fear and awe that once characterised official Wellington. But the degradation of the public sector institutions’ isn’t unique to The Treasury –  after all, if it were just a Treasury problem, it shouldn’t have been hard to find a new Secretary to the Treasury from elsewhere in the high-performing policy parts of the public sector.

But what to make of the new appointee, Dr McLiesh?   The only honest answer is that it is very hard to know, and only time will tell.   That isn’t really good enough, in someone stepping the role –  in Peter Hughes’s own words –  in which they will be (not the organisation, but the individual)

“is the principal economic advisor to the Minister of Finance and the Government.”

It appears that very few people in New Zealand –  at least those in a position to comment – know her, and so we are left having to take Peter Hughes on trust. But then he was the person who reappointed Gabs Makhlouf, and that choice doesn’t inspire much confidence (even less now than at the time it happened).[UPDATE:SSC has got in touch and pointed out that the reappointment decision was made by Iain Rennie.]

I may be in a small minority here –  although I suspect not –  in that, however able someone is, I just don’t think it is appropriate to be recruiting foreigners –  especially not ones with no background in or experience of New Zealand – for such critical and sensitive roles.  Few other countries –  at least ones that had got beyond either colonial status or complete dysfunction –  would, and we shouldn’t.    Countries have interests that are, at times, in conflict with those of other countries, and that is true even for someone coming from the UK (Makhlouf) or Australia (McLiesh) –  and, in fact, those potential conflicts are much greater as regards Australia than the UK (just think of the banking sector for example).   One needn’t criticise the individuals concerned to think that we really should be capable of running our own country, and if the Secretary to the Treasury is not an elected policymaker, the person who holds that office should be a highly influential counsellor to elected governments, and hugely influential on what should be the premier department of state.  Someone rushed in from another country –  even a very friendly one –  just does not have primary loyalties to New Zealand, or a sense that their own future, and that of their children and grandchildren, depends on a job done excellently.   And they have no historical, social or political context for their advice.    We don’t have foreigners with no background in New Zealand as MPs or ministers, no matter how able.  And we went through a big debate 15+ years ago in which we decided that we didn’t want foreign judges either –  even though, at least in principle, judges simply apply Parliament’s law, and should be much less influential than the Secretary to the Treasury.

One might also add some comment about selection bias. Really top-notch foreigners –  really well suited to be premier economic adviser to the government of a sovereign state –  might normally expect to be recognised and rewarded best at home.  The New Zealand public sector isn’t spectacularly well-paid (unlike, say, Singapore or Hong Kong) and New Zealand is a poorer and smaller country than either the UK or Australia.   And it isn’t as if, these days, New Zealand is at the leading edge of reform, economic thinking, or public adminstration.  As far as we are aware, neither Makhlouf nor McLiesh had compelling family connections to New Zealand that made them want to give up the glittering prizes of home, make the sacrifice and just happened to be available to serve New Zealand.     Neither, at the time of appointment to the New Zealand Treasury secretary rule, seem likely to have been serious contenders for the comparable appointment in their home country.  Perhaps they were the best we could get……but that then is an indictment on the SSC handling of the New Zealand public service.

At the time Makhlouf was appointed, it was made known that the government had rushed through an emergency grant of New Zealand citizenship to enable Makhlouf to have the job (as if, somehow, a label transformed loyalties).   The question should be asked now as to whether Dr McLiesh is also being given a rushed grant of citizenship.  And if not, what is going to happen when really sensitive issues arise?  When I worked at The Treasury for a couple of years, there were a couple of second and third-tier people who were Australian citizens, and care was taken around NZEO (New Zealand eyes-only) documents to ensure that those people did not see them.  Perhaps that works down the line, but how appropriate is it as an option for the Secretary to the Treasury?    If, for example, an Australian banking group, and/or their New Zealand subsidiary, is in crisis?

(The point here is not that any such appointments would be likely to consciously seek to serve another country’s interests, but that (a) the rules are designed to protect against extreme eventualities, and (b) appearances matter greatly.  I have worked as a mid-senior level official in two foreign countries’ national bureaucracies, and so know something of which I speak –  fortunately perhaps there were few/no Zambia/NZ issues.)

And what of the individual?  Eric Crampton has been the most vocal (public) critic of The Treasury under Makhlouf.  He is quite positive, if guardedly so, on the new appointee, who has a PhD in finance, and during a term on the staff of the World Bank was the co-author of several journal articles with highly-regarded academic authors.   I put less weight on that, partly because I’m not convinced of the cult of the PhD (in non-academic contexts, where I’ve seen people with top degrees from even better universities and with pretty strong publication records who simply weren’t suited to senior public sector roles).

I guess I put more weight on (a) what she has, and hasn’t, been doing and saying in the last decade or so (since moving into the New South Wales public sector), and (b) on who appointed her, and so the likely criteria being used to make the choice.

The new Secretary to the Treasury joined the New South Wales Treasury in 2008.  New South Wales, you will have noted, is not a country but a state.  Quite a few people live there, but in the end it is still more than a city council but less than a country.  So much power and functionality has been centralised in Australia, that technocrats regularly ask what the point of state bureaucracies really is.    Where this matters, in thinking about the New Zealand Treasury role, is not around managing a budget, or even dealing with individual (perhaps very complex) infrastructure projects, but around most everything else.   Tax policy for example.  Or monetary policy (The Treasury has just been handed a seat on the new MPC), financial system regulation, or even much of the big picture around health, education or welfare policy.  McLiesh has precisely no experience –  according to the SSC’s statement, which will have been putting the best foot forward –  in advising national governments on critical areas of national policy.    And there is a pretty good chance that, until the last couple of months, she has never given New Zealand economic policy, and its major failures (productivity) and challenges, a moment’s thought –  unless perhaps on a skiing trip she happened to pick up a local newspaper.    Frankly, this new appointee appears about as substantively well-equipped to be the key economic adviser to a sovereign national government, in a country with its own currency etc, as Makhlouf does to sit on the ECB Governing Council.

Perhaps one doesn’t really expect fairly senior state public servants to be making speeches, writing articles etc.  Mostly, it isn’t the day job.  I went looking and couldn’t find any evidence of anything.  But people who nurture a longstanding commitment to excellence in economics and policy advice often find avenues – and avenues are found for them –  to tap that expertise, in papers, commentaries, discussant comments or whatever.  But I couldn’t find anything with her name on done since she left the World Bank.  Perhaps I missed something –  I’d be keen to know if so –  but she looks like someone who has successfully transformed herself into a fairly well-regarded public sector operator.    There is a place (an important one) for those skills.

In eleven years in the New South Wales public sector, McLiesh has had five jobs.    From the look of the documents, they weren’t a succession of stellar promotions, but of frequent rotations, and then a move last year to run what seem to be the NSW equivalent of polytechs (in the wake of a sudden departure of the previous incumbent).    One of the questions that should interest anyone in thinking about the New Zealand Treasury is the management record: especially so for anyone uneasy about the current state of The Treasury.  Perhaps the new appointee really is a stellar change-manager and someone with a demonstrated track record of lifting performance in troubled organisations.   But when you are on your fifth job in eleven years, there have to at least be questions about whether you’d stayed around long enough for anyone to really tell the good that might have been done.

Which brings me to the final relevant set of considerations: who made the appointment, and what is the evidence on their predispositions?    I wrote about the appointment process, and the advertising for the job, in a post back in January (skip the first few paras).  From that post

The procedure for the appointment of public service chief executives is set out in the State Sector Act.  Section 35 provides that when there is a vacancy the State Services Commissioner must

invite the Minister to inform the Commissioner of any matters that the Minister wishes the Commissioner to take into account in making an appointment to the position.

That is the Minister’s opportunity to scope the job, and identify his or her priorities.  And although there is now a perception that appointments are made by the State Services Commissioner, in fact the law is clear that the Cabinet can not only reject a nomination, but can appoint their own preferred nominee.   In other words, while Peter Hughes (the State Services Commissioner) has considerable influence, appointments ultimately reflect to a substantial degree the choices and priorities of ministers.

And, writing about the capabilities SSC said it would be assessing people on

All probably fine and reasonable in their own way –  if what you want is some generic public service manager –  but again what is notable is the absences.   Neither here, nor anywhere in any of the documents, is there any sense of wanting someone who might model excellence as a policy adviser, or lift the performance of the organisation in a way that might deliver credible and compelling answers to the appalling productivity underperformance of the New Zealand economy.

And why not?  Presumably because neither Grant Robertson, nor his boss, nor his party, nor the parties they govern in league with, care.  Nothing –  in these documents, in speeches, interviews or anywhere –  suggests otherwise.

Perhaps Grant Robertson really was made uncomfortable by Makhlouf’s extraordinary behaviour in the “Budget leak” affair, but that aside we’ve not heard or seen a word suggesting that he wants something materially better or different in The Treasury.  Only yesterday he was out promising more wellbeing and Living Standards Framework stuff.

And Hughes?  His track record isn’t one of promoting people with real expertise, and leadership capability, in the subject area they are responsible for –  what does Andrew Kibblewhite know about Justice, or Andrew Bridgman about Defence, or Carolyn Tremain about economic development. to take just three high profile examples.   Real expertise might not be disqualifying –  people seem to speak highly of the new MFAT head –  but it scarcely seems to be a prerequisite.  Nothing in the Treasury advert really suggested he’d made an exception in that case.  The focus seems always to be on appointing general public service managers, who won’t rock the boat, won’t upset Peter Hughes, and will get along nicely with ministers.    If that is what you want in the job, quite probably the new Secretary to the Treasury may do quite well, while probably seeking to use the job as a stepping stone to something bigger, better, and better-paid (richer country and all that) back home.     But count me sceptical that the appointment presages a substantial improvement in The Treasury.   (And, as always with public service heads these days, the likelihood now of disrupting the Treasury second tier, so that the incumbent has their own people:  some might argue that change is warranted –  but the sun/moon feeling card senior manager has already gone  – but where are better candidates likely to be found in the diminished New Zealand public sector?).

Near the end of my earlier post I wrote

I guess there is nothing to stop the person who is eventually appointed choosing to make productivity a priority and foster work developing compelling analysis and recommendations.  But it doesn’t seem very likely.  Even if Treasury isn’t as resource-constrained as some government agencies, there won’t be lots of capable staff resources readily able to be diverted to something that just isn’t a government priority.  But more importantly, what sort of person do we suppose is likely to get the job?   And why would such a person, who got through the selection process (acceptable to both SSC and the Minister) be likely to change their spots once in office.  What would be their incentive?  And how likely is it that they’d be the sort of person who would even care much, or understand the issues well enough to know where to start.

That still feels about right now.

I’d love to be wrong about this, and truth is that at present we have only very very partial data.  If the new Secretary to the Treasury really is the agent of transformation, dramatically lifting the performance and standing of the organisation, I’ll be delighted –  and, I hope, ready to highlight my pleasant surprise.  But it isn’t clear, on the information to hand now, why we should expect anything more than a competent generic public service manager, with little expertise in national economic management, no background in New Zealand, and –  perhaps most importantly –  no mandate or imperative for anything much better or different.

Our institutions have been in decline for some time, and there is little reason to suppose that Peter Hughes –  or the ministers he works for –  will be the agents of reversal, or that this latest appointment is a sign that change (for the better) is really in the wind.

 

Some material on Makhlouf’s performance

Someone –  perhaps a current public servant or someone who depends on access/opportunities – sent me a carefully anonymous email with a collection of material (all public) that the compiler thought relevant to judging the performance of Gabriel Makhlouf as Secretary to the Treasury.   I’m passing it on as I received it (deleting only the –  meaningless to me – email address I received it from).  I’m not sure if the person was just trying to persuade me (I suspect not) or wanted to get the material out more broadly and wanted to use me as a conduit.
I’m not sure I read all the material in quite the same way the sender does: so-called “gender pay gap” data are just meaningless, and I’m not going to criticise someone for not “doing better” against a meaningless benchmark –  even if the person concerned was a champion of the “diversity and inclusion” movement, which is full of vapid rhetoric.   Similarly, I’m not persuaded that the proportion of women in senior management is a meaningful statistic, even if Makhlouf himself did once come out and suggest he’d adopted internal quasi-quotas.   If people on the left want to attack him on those grounds I’ll leave that to them.
I also couldn’t play the Bloomberg TV pre-election clip, so I’m not sure what to make of that (although I never thought of Makhlouf as partisan per se).  I had my own post earlier this year in which Makhlouf participated in some craven –  and highly inappropriate in a serving senior public servant –  adulation of the Prime Minister.
But since I do care, a lot, about the quality of analysis and policy advice, I thought the table in the very last section (below) was pretty telling and –  on the face of it –  almost scandalous.     And the best evidence of poor judgement under pressure was, surely, what we all saw in the “Budget leak” affair a couple of weeks ago, compounded by his retreat behind closed doors and public silence –  no apology, no contrition, no explanation –  since.
Beyond that, make of it what you will.   Here is what I was sent.
Publicly available evidence regarding the actual performance of Makhlouf as Secretary
In what state does Makhlouf leave the capability, culture, performance and reputation of the Treasury – below his actual LEGACY from observable statistics
EVIDENCE REGARDING OPERATIONAL PERFORMANCE
Some recent examples of operational failure
  1. Technology: Website security failure May 2019
  2. Comms: Heartwork the Wellbeing Game 
  3. Comms: 2019 Budget Cover photo
  4. Technology: Coding error in Treasury child poverty calculations 2018
Can NZ be confident there won’t be further significant operational failures at the Treasury
 
EVIDENCE REGARDING POLITICAL NEUTRALITY AND JUDGEMENT:
makhlouf 1.png
EVIDENCE OF DIVERSITY AND INCLUSION ACTUAL PERFORMANCE versus RHETORIC
TREASURY has the LOWEST % of women in senior leadership in the entire public service
TREASURY has the 4th largest gender pay gap in the entire public service
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m3
m4.png

2. Why was the Treasury’s 2016 Cultural Audit withheld from OIA

https://treasury.govt.nz/sites/default/files/2017-11/oia-20170007.pdf

m5

EVIDENCE REGARDING STAKEHOLDER SATISFACTION AND REPUTATION

2017 Stakeholder survey results:
https://treasury.govt.nz/sites/default/files/2018-09/oia-20180319.pdf

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2. Inability to recruit locally for entry level roles reflecting weak reputation and culture – Treasury’s HR team travel to London to recruit analysts / senior analysts
m8.png
EVIDENCE REGARDING QUALITY OF POLICY ADVICE
From Treasury’s  2018 annual report
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It would be interesting to OIA what the score would have been if “methodical robustness of at least 80%” was not applied as was the case in previous years
Consistent decline is evidenced by observing this measure over the last 4-5 years – all in Annual Reports

Vapid slogans and other top-level public sector vices

When I wrote last week about Gabs Makhlouf, outgoing Secretary to the Treasury (whose serious misjudgements around the “Budget leak” mean he really should already have gone), a former Treasury official got in touch to say that while what I said seemed reasonable, if anything I was probably a bit too generous to Makhlouf.  Perhaps, but it is probably better to err on that side.

Perhaps what my former colleague had in mind was something like the perspectives –  raw and brutal – in a truly remarkable column published at The Spinoff by Tony Burton, formerly (until just last month) the deputy chief economist at The Treasury.  The title tells you most of what you need to know: “How bosses’ obsession with vapid slogans borked the public sector”.  One can only assume Tony doesn’t intend to look for work in the New Zealand public sector ever again…or at least for not as long as Peter Hughes, and the CEs appointed in his image and likeness, are in place  (Tony’s background was as a UK academic, so I guess he can always head back there).    Anyone with the slightest interest in the degraded state of policy advice and the New Zealand public service should read it.

The first paragraph will give you a taster

Sometimes on a Tuesday morning you may hear a low, vaguely rhythmic rumble coming from a Treasury meeting room. A handful of its middle-aged Pakeha bureaucrats will have descended from the department’s working floors where budgets and economic predictions are done to assemble around the table. Stalin humiliated his politburo by forcing them to sing along to a recording of wolves howling. The Treasury leaders are probably attempting a waiata, but the sound they produce is a drone of submission eerily similar to its Soviet precursor. Welcome to the New Zealand public service in 2019.

and this, of The Treasury

The collapse in the organisation’s expertise has been so profound that Treasury even appointed an HR professional to the minister of finance’s office. Think about that for moment. The Treasury are government’s main economic and fiscal experts. An important way for Treasury to help the minister of finance is to provide some of those experts for his office. Yet Treasury appointed someone whose area of knowledge is running Treasury as an organisation. Imagine you went to see a GP and were told the office manager was the most qualified person in the practise to provide medical advice. That is the position Grant Robertson is in.

If anything, he seems to have it in for Peter Hughes even more than for Makhlouf (I guess the latter will be gone next week, while the former rules the roost of the New Zealand public service).  Of Hughes as head of MSD (Burton worked in MSD when he first came to New Zealand)

One of his first acts was to command all staff to heed ‘Peter’s Principles’, of which there were 10. (Yes, he really did issue 10 commandments from on high, though I understand it didn’t take 40 days.) The status given to expertise in the organisation’s culture is best exemplified by the last principle: “’Just do it!’ means … just do it”.

Astonishing.

There are a few bits where I’d disagree with his emphasis or interpretation (about history before his time) but it is really important reading –  entertaining, passionate, disdainful even, but raising profoundly serious concerns.  He doesn’t really offer solutions, but the first step to a solution has to be a broader awareness and acceptance of the problem.   There is no sign yet of that, and thus it remains difficult to be optimistic that anything will be much better when Peter Hughes finally gets round to appointing a new Secretary to the Treasury.

Nor is it clear that even the government, let alone the Opposition, really cares.

But New Zealanders pay the price for this decline and fall.

UPDATE:     A reader with knowledge of the secondees to Robertson’s office got in touch and suggested that the claim (see above) that “an HR professional” was appointed as one of Treasury’s secondees did not seem right.  I have lodged an OIA request with The Treasury to confirm one way or the other (which they could answer quickly but probably won’t), but further inquiries resulted in an email suggesting that one of the current Treasury secondees may be the person Burton had in mind.   Here is his LinkedIn page.     The person concerned is a relatively recent Treasury recruit, having joined in 2016, with degrees in Architecture and Public Policy.  Of his time before his secondment last year to the Minister’s office he writes

Analyst
Company Name:  The Treasury – New Zealand
Dates Employed:  Apr 2016 – Present
Employment Duration: 3 yrs 3 mos
Location: Wellington
I worked on fiscal and policy issues spanning state services to transport, and worked with Treasury leaders on its organisational strategy.

He appears to have worked on a range of policy issues, but also “worked with Treasury leaders on its organisational strategy”.  It has been suggested to me, from people who should know, that this role would have been based in Human Resources.

I would have to say that, if this is the person who was meant, the paragraph in the original article is at least slightly misleading (personally, I feel misled as a reader).   Again, if it is this person, they do not appear to be what most would think of as an “HR professional”.   One might debate what sort of people Treasury should hire as analysts – as Eric Crampton has done vocally – and even how experienced secondees to the Minister’s office should be (bearing in mind that the role is usually more about managing relationships and paper flow, founded on a knowledge of the organisation and its people and the potential significance of the issues, than on providing substantive personal analysis or policy advice to ministers), but this specific claim in Burton’s article does feel like something of an overreach.  Initially I had found it the most compelling single thing in the article –  it was something new to me and quite specific, coming from someone who  –  in my limited dealings with him over the years –  seemed pretty careful about detail.  I should have been more sceptical.

 

Makhlouf on public debt

Gabs Makhlouf has now had his gushy official farewell, even as we await for the SSC report on his conduct and judgement during the Budget leak affair.  His term expires next Thursday (27th) and so with each passing day it looks more likely that the SSC will simply run out the clock, so as to further minimise the risk of an undue embarrassment to them (party to Makhlouf’s choices), to Makhlouf, or to The Treasury.

But, clearly not content with a post-Budget lull and a quiet last few weeks at work, Makhlouf has released a (final?) on-the-record speech, addressing the question “What is prudent debt?” in turn reopening debates, at least on the left, about the government’s approach to fiscal policy.   It is a rather odd affair, as the speech appears to have been given to a bunch of Treasury staff (“the Treasury’s Economic Forum”).

As I’ve written here previously I’m generally not convinced that the Treasury Secretary should be making public speeches.  The primary role of such an official is the administer The Treasury and advise the Minister of Finance (unlike, for example, the Governor of the Reserve Bank who wields independent policymaking power).  And whatever the merit of their views –  and there have been very able Treasury secretaries in other times and other places – in speaking openly they are either constrained to not depart far from current government policy (themselves partisan choices), or they create trouble for the government and undermine the willingness of ministers to engage privately with the free and frank advice officials are paid for.

But on this occasion I don’t have too much problem with the speech being put on-the-record.  It seems to reflect analysis and advice already provided to ministers, in a core area of Treasury’s responsibility, and if that advice itself hasn’t already been published –  and it should have been, pro-actively – it would almost certainly be made available in response to an Official Information Act request.

Moreover, although I have been very critical of numerous of Makhlouf’s speeches over the years (Google “croaking cassandra, makhlouf speeches” if you want examples) this speech was one of the better (not great, not that deep, but not bad) ones I’ve seen.     That doesn’t mean I agree with it all –  that isn’t the relevant criterion –  but that much of it is thoughtful and considered, and doesn’t just parrot glib, but perhaps conventional, cliches.   There is too much reference to “wellbeing” in it for my liking, but that is probably true of every public sector document at present –  please the masters –  and since it is mostly vacuous it is mostly relatively harmless.

Why “prudent” debt.  Because the term is explicitly used in the Public Finance Act –  governments are required to conduct fiscal policy consistent with maintaining a “prudent” level of debt.  They don’t have to tell us what they consider is prudent, but they do have to tell us what debt levels they are aiming at.   Quite what criteria are relevant to determining the prudence or otherwise of a particular level of debt isn’t spelled out, and so although the choices are ultimately for politicians to make, it is appropriate and indeed desirable for The Treasury to offer advice, at least on how best to think about the issue  (I’m less sure it is the place for The Treasury to put a number on prudence, as Makhlouf does, because their values and priorities won’t necessarily be those of the elected politicians.  But so long as they, and we, recognise that, and take their advice for what it is, it is still likely to be a useful contribution to the debate.)

Personally, I found the more persuasive part of the speech to be where he addressed the issue of buffers.   One’s view on how much debt the government should carry in normal times needs to be informed by one’s view of how badly adverse events could throw one off course, in ways that would lead a government to want to carry more debt for a time.  One can think of severe recessions, severe natural disasters, or even things like banking crises. In a severe adverse event, the last thing one wants to find is that one doesn’t have the fiscal flexibility (market or political) to facilitate prudent adjustment and absorption policies.    In a New Zealand context, a buffer of perhaps 20 percentage points of GDP seems sensible and reasonable.   One shouldn’t expect to use it in every downturn, but every few decades something very severe will come along, and one needs to have the flexibility to cope. And, on the other hand, 20 per cent won’t always suffice –  wars happen.

But beyond that, it was less clear how much substance there was to the speech –  or to the, as yet unpublished, supporting analysis.   For example, the Secretary seems (perhaps understandably) hesitant about criticising other countries, but he seemed reduced to trying to argue that there were substantive structural reasons why public debt should (prudently) be lower in New Zealand than it might be in some other countries, rather than just openly saying that levels of public debt in, say, the UK, France, US, Japan, Greece are higher than looks sensible.   His arguments for why debt here should be lower than in other countries don’t amount to much: small size (not clear how this is relevant at all), and exposure to natural disasters.  The latter might have some merit (although Japan’s experience of natural disasters in the last 150 years is much worse than New Zealand’s), but it isn’t exactly integrated to a structured framework.     And one could, quite reasonably, counter that our much more rapid population growth rate would naturally, and all else equal, lead to a higher prudent ratio of debt to GDP than one might observe in most countries (population growth doesn’t really get a mention).  On the other hand, our dismal productivity record might also be relevant, but again it doesn’t rate a mention.  And nor does the distinction between countries with floating and fixed exchange rate (the latter typically need more fiscal flexibility).

It was also a little surprising that, in a speech that bills itself as taking the “long view” there was no mention of how we might best think of past peaks in public debt ratios.  Depending on which measure one uses, thirty years ago public debt as a share of GDP might have been around the peak level Treasury now thinks appropriate.  What should we take from that earlier episode?    And there was no mention at all of the earlier period when, for decades, New Zealand ran public debt to GDP well in excess of 100 per cent of GDP.  How should we think about the prudence, or otherwise, of that record (and wouldn’t, for example, prudent debt levels (share of GDP) for 1913 New Zealand have been considerably higher than those for, say, 1913 United Kingdom?

There were also places where the political strains were showing.    On the one hand, the Secretary to the Treasury is right with the “governments have to ‘invest’ more” line.

And there is certainly an in-principle case for higher investment in New Zealand. The risks I discussed earlier – particularly climate change – will likely need to be managed through major investments. And as we discussed in He Puna Hao Pātiki, many of our social assets – social housing, and the healthcare and education estates – are aged and reaching the end of their useful life. In some places there is a critical under-provision of these essential social assets. High-quality infrastructure investment is needed to support urban growth and the supply of housing. Further investments in this physical capital can support the wellbeing of New Zealanders, and aid the development of our human and social capital.

You might agree or disagree with him, but it certainly reads as if he believes that there are big potential returns (economic and social) to lots more public investment.  And yet he spends the next page walking back from what this seems to imply, arguing (more or less) that it would be better if we had more unemployment so that these projects he favours wouldn’t crowd out private spending.  It is a pretty incoherent stance: if the projects are really as high-yielding as the Secretary makes them sound, we should welcome and embrace them now, even if other spending is crowded out.  And if they aren’t really that attractive, one should be cautious about championing them at any time.  But there is little sign that Treasury has faced or addressed that tension.

There also wasn’t much sign of the Secretary engaging with the record of government failure (perhaps not so surprising in an official more generally, but Treasury are supposed to be the guardians of good spending discipline).    Personally, there are several reasons why I don’t favour higher levels of public debt (and don’t regard the limits of what the market might lend as particularly relevant), including the continued stream of low quality projects governments manage to do even at present.  Wouldn’t a persuasive case for more debt involve, among other things, repeated case studies of the excellent and efficient ways governments spend and invest, with actual economic and social returns coming in at or above estimates generated at the time the relevant project proposal was approved.  This isn’t a benchmark of perfection – any investor, public or private, will get things wrong at times –  but of excellence, including showing how poor projects are recognised early and either remedied or terminated.  Given how weak the governance and accountability are, we should be very wary of letting governments loose with the credit card.

It was also striking that there was no mention in Makhlouf’s lecture of the way in which government social provision is likely to affect private sector savings behaviour.  One can largely agree with the welfare system as it is, and still recognise that without it, it is likely that the private sector as a whole would save more, notably for retirement.  That biases me towards thinking that the appropriate ratio of public debt to GDP in normal circumstances in an advanced country is really quite low.   In fact, for a comprehensive net debt measure, a benchmark of around zero per cent of GDP might be a reasonable starting point, with a resonant round number appeal (a bit like middle-aged people used to look forward to the day they become debt-free –  before governments messed up the housing market).  (As it happens, on the OECD’s broad measure –  general government net financial liabilities –  zero is about where New Zealand is now.)

A few other quick points:

  • it was good to see the Secretary specifically address MMT,
  • and it was good to see him refer, late in his speech, to the government’s growing use of Crown entity debt, in ways that erode the significance of the actual core Crown debt targets. Better perhaps for Treasury to encourage as to think about net debt more broadly – to encompass such things, and the NZSF assets –  than to run with putting a number on the variable the current government chooses to target,
  • it is a debate worth having, but I remain as unconvinced as ever – and I used to run the Reserve Bank’s financial markets function –  by the argument Makhlouf repeats that the government needs to have a significant level of gross debt to support (a) market functioning, and (b) optionality around future borrowing capacity.

Overall, not a bad speech, and better than many of Makhlouf’s.  One can’t help thinking that much of the material and many of the ideas might better have been released in a series of working papers or discussion documents –  to encourage expert debate more widely –  before the Secretary put his imprimatur on an official view.  But, in the end, next week  he’ll be gone, heading for Ireland, and we’ll be left to reflect and debate the best longer-term approaches for New Zealand.

Who knows, but by then we might even have a replacement for Makhlouf announced.  It is pretty shambolic that a week from his departure –  date known long ago –  the recruitment and appointment agency (SSC) hasn’t announced an appointment to what should be the most important public service job in New Zealand.

Farewelling Makhlouf

I saw three reports of last night’s Beehive function to farewell the outgoing Secretary to the Treasury.  There was Barry Soper’s piece on the Herald website, and Herald political editor Audrey Young’s account, as well as Richard Harman’s Politik column (the latter is subscriber-only, but with one free article a month for non-subscribers).

Soper’s is the more hard-edged take

The atmosphere in the cavernous Beehive Banquet Hall last night was about the same as it would have been if Donald Trump walked into a Democrat’s convention.

and

It’s surprising the inquiry wasn’t done and dusted in time for the farewell given all the statements so far point to the fact that the Secretary knew full well when he claimed there’d been a hack attack that it hadn’t taken place, the GCSB spies had made that clear the night before.

But

But if last night was uncomfortable they were doing their best not to show it.

Across the three accounts, we learn that – Grant Robertson aside, as host –  no Labour ministers were present, but that a phalanx of New Zealand First ministers  and MPs were, including Shane Jones, whose (lack of) regard for the proprieties of public office is well-known.

I suppose that when it was decided to push ahead with this nauseating function, people had to at least go through the motions, but it sounds as if it was worse than that.    Audrey Young talks of the “glowing tributes” Makhlouf received (Harman talks twice of “fulsome praise” –  when I was growing up that meant (eg OED) “offensive to good taste, from excess or want of measure”, so perhaps Harman was deliberately being a bit double-edged.)    Reports suggest that at least Robertson was somewhat honest, since his praise seemed to involve the things that had seen a dumbing-down of The Treasury, and a lowering of its standing and capability to offer rigorous economic analysis and advice.  I guess when your government has no economic ambition, you don’t need much analysis.

But what seemed wildly inappropriate was the account of the State Services Commissioner Peter Hughes’s address.  You will recall that the State Services Commission is investigating Makhlouf’s personal conduct in and around the Budget affair.

“Thank you from the people of New Zealand. Our country is a better place for your work.”

He said Makhlouf had brought “strong leadership and a great deal of personal integrity” to Treasury.

He had been “authentic and straight up” and had been calm and unflappable.

“I will certainly miss your calm authority,” Hughes said.

In no conceivable universe (except perhaps some parallel one inhabited by SSC) could Makhlouf during that Budget episode be said to have displayed “calm and unflappable” leadership.  Had he done so, there’d have been no inquiry.

But, more importantly, how are supposed to take seriously (supposing anyone was inclined to) an inquiry into very recent conduct, when the person responsible for the inquiry gushes like this, and apparently went on to praise the collegiality of the public service chief executive “club”.   Looking out for each other no doubt (even if, privately, they must all be thinking “Gabs, how could you have?”)

And after all that attendees had to listen to Makhouf “at length” (is there anything worse at a farewell than long speeches?).  The sheer vacuity of it all was captured in this piece of (delusional) political pandering.

“I have to say, Grant, that one of my proudest moments was listening to the Budget speech and hearing the living Standards’ Framework come alive,’ he said.

While serious analysts struggle to identify any real difference the soft-centred feel-good rhetoric made.

The other thing that caught my eye in the Harman column was the photo at the top of it, showing Makhlouf and Grant Robertson chatting pleasantly with the PRC Ambassador, Madame Wu.  Pretty nauseating in the wake of the repression this very week of the Hong Kong protests –  but no doubt Madame Wu is delighted that our government, unlike Australia, the UK, the EU, and senior US figures, has said nothing at all.

But in particular the photo brought to mind Gabs’s shameless (and not even well-grounded) pandering to the PRC.   There is, for example, this

Secretary to the Treasury Gabriel Makhlouf has welcomed a new Memorandum of Arrangement formalising a financial dialogue between the New Zealand Treasury and the Ministry of Finance of the People’s Republic of China.

signed on the Prime Minister’s recent tributary visit to Beijing.  Of it, Makhlouf noted

There are fiscal, financial and economic issues of mutual importance to our two countries and there is much we can learn from each other

Quite what he thought the New Zealand Treasury could learn from economic policy etc in a middle income highly repressive state without the benefit of the rule of law or a genuine and open contest of ideas was never made clear.  You might excuse that bumpf on the grounds of “well, it is meaningless, and just the stuff officials sometimes have to do”. But the same can’t be said for the dreadful speech he gave in Beijing last year.  I wrote about it here.   An excerpt

What appalled in this particular speech was the craven grovelling to the PRC, the total relativisation of our two countries in ways which suggest that he thinks their system, their government, is just as good as ours.  (I don’t suppose he really does, but when you are a senior official, backing your government, what you say counts  –  including no doubt to the PRC authorities. He does the kow-tow)

He begins his speech with the rather empty claim that

Yet there is so much that we have in common.

We are all human beings I guess, but it wasn’t clear what else he had in mind.   He tries, not very convincingly, to elaborate.

All of us here want open trade, thriving business, and economic growth. Those things matter for our material wellbeing. But they are only a subset of what contributes to the quality of our lives. I’m sure we share a belief in the importance of good health and education, decent housing, the support of family and friends, a clean natural environment, a safe and peaceful society. We seek that for ourselves and for future generations.

As the Secretary surely knows, the People’s Republic of China has no commitment to open trade, having a highly regulated economy, and tight restrictions on international services trade in particular, and on investment.    But what of that broader list of things he thinks we have in common?  Perhaps it is fine as far it goes, but he is talking to people in a country whose government has a million people from Xinjiang in concentration and re-indoctrination camps.  And for all the Secretary’s talk about wellbeing –  and even “social capital” –  it is notable that things like free speech, free expression, the ability to change your government, freedom of religion, and even the rule of law – explicitly disavowed not long ago by the PRC Chief Justice –  are totally absent from his list.  The things that divide free and democratic countries from the PRC regime are huge and important.  Perhaps even the sorts of things that might appear in a typical New Zealand assessment of wellbeing?  But they, apparently, don’t matter much to the Secretary to the Treasury.  He goes on the praise the Belt and Road Initiative –  under the aegis of which the previous New Zealand government committed to the (rather frightening) aspiration of “the fusion of civilisations” with the PRC.

In all that he was just warming up.  There is later a substantial section of the “NZ-China relationship”, which is almost nauseating in places.  Thus

It is a relationship that goes beyond diplomacy and trade. It’s also about the links between people, about investing in our mutual success, and about recognising our shared interests in the world.

Liberty, democracy, the rule of law for example?  I guess not.  Respect for established international borders?  I guess not.    Then again, there is this in common, that both China and New Zealand have dramatically (economically) underperformed their near neighbours over the last century of so: in China’s case, Japan, South Korea and Taiwan, and in New Zealand’s case Australia.

Then we get this

It hasn’t all been one-way traffic. New Zealander Rewi Alley helped establish the Gung Ho movement in the 1930s and dedicated 60 years of his life to improving the living standards of Chinese workers.

You mean the active member of the Chinese Communist Party and unashamed apologist for its evils  (I have one of his books sitting on my desk, co-authored with the dreadful Communist fellow-traveller Wilfred Burchett, written towards the end of the Cultural Revolution celebrating the quality of life in the PRC).    Then again, when we have a Chinese Communist Party member in our Parliament what might one expect from our elites?

The Secretary moves on to celebrate PRC foreign investment in New Zealand.  He notes, without further comment, that

Over half of the 25 largest Chinese investors in New Zealand are state owned enterprises including Huawei, Yili and Haier.

as if this is a good thing (Treasury not being known for its enthusiasm for SOEs in New Zealand), as if he cares not about the national security threat various allied governments have determined Huawei represents –  and note that Huawei likes to represent itself as a private company –  and as if he is unaware (or cares not a bit) about the PRC law under which companies (private and public) are required to operate in the interests of the party-State, at home or abroad.  In the best of circumstances, state ownership (and murky ownership) is a recipe for weakened capital allocation disciplines etc, and the Secretary to the Treasury really should know that.

That is the sort of leadership our Treasury has had for the past eight years.  But I guess you can see why he probably mostly went over okay in the Beehive.   And why Madame Wu was so keen to chat.

My trains anecdote yesterday prompted a former Treasury official to get in touch with another farewell story.

I recall him also saying, in the context of the Christchurch earthquakes, that what was needed was a “Canary Wharf” kind of initiative in Christchurch. I recall his total absence of any reference to cost/benefit or evidence leaving us all looking at the floor – we were trying to imagine what a Canary Wharf in Christchurch might consist of, aside from being mystified about what it was about Canary Wharf that he was seeing as welfare-enhancing.

No doubt we all say dumb things at times, and perhaps especially people who think aloud.   But not all of us, having already risen to such giddy heights – albeit by leaving home and coming to a small and remote country – say things of quite such economic illiteracy in formal work contexts, and then get promoted further, to be chief economic adviser to successive governments for eight years.

It isn’t Makhlouf’s fault New Zealand has drifted further backwards, in economic terms, over the last eight years.  But over that time he led an institution that could have played a powerful role in shaping and influencing for the better debate about how best to respond to our longstanding continuing relative decline.  Instead he chose to shift the focus to feel-good distractions.  He –  and those who appointed and reappointed him –  bear responsibly for that, for what is in many respects a betrayal of our people, perhaps especially the poorest and most vulnerable, who can’t just flit in and when their term ends flit off to another high-paying job in yet another country.