Treasury

Farewelling Makhlouf

Michael Reddell Treasury

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.

Reading Treasury’s economic forecasts

Michael Reddell New Zealand economic performance, Treasury

Belatedly working my way through The Treasury’s Budget economic forecast tables, I checked whether they had become any more optimistic about the success of the government’s economic strategy.  Successive governments have talked about a more outward orientation,  and it seems likely that any successful and sustained lift in New Zealand’s overall economic performance would have as one marker of success an increasing share of GDP accounted for by trade with the rest of the world (big markets out there, big opportunities to buy and sell).

But the numbers in The Treasury’s latest forecasts translate into the same downbeat charts I’ve been generating now for some years.

Here is exports as a per cent of GDP.

x gdp

By the end of the forecast period, when the government is likely to be finishing its second term, Treasury (on current government policies) thinks exports as a share of GDP will then be about where they were in 1977.

And imports?

m gdp

There is nothing remotely transformational.  Just more mediocre underperformance.

What about productivity?  Well, here The Treasury is rather upbeat.

This is the actual record of labour productivity growth, including an estimate for the March quarter 2019 using Treasury’s published GDP forecast.

Tsy productivity GDP phw.png

That’s next to no actual productivity growth for five years, and none at all for four years.

But, as ever, Treasury thinks things are just about to come right.  “As ever”?   Here’s a table I included in a post at the end of last year, suggesting that Treasury simply had the wrong model for thinking about productivity.

HYEFU forecasts for labour productivity growth published in Dec
Forecasts for June yrs 2014 2015 2016 2017 2018
2016 2.2
2017 1.6 1.6
2018 1.1 2.1 2
2019 1.2 0.8 1.5 2
2020 0.7 1.3 1.7 1.1
2021 1.4 1.5 1.2
2022 1.3 1.2
2023 1.2

The forecasts in the latest BEFU for the three out years (to 2023) are exactly the same as those published in December’s HYEFU.

Treasury has consistently expected a significant recovery in productivity growth, and it has equally consistently failed to arrive.   Is there any reason to think they are more likely to be right now?   It isn’t as if anything much in the policy framework has changed for the better.

(Of course, if the productivity growth fails to materialise, so –  most likely –  will the headline GDP growth, and the revenue estimates will be threatened.)

The other thing I find consistently odd about The Treasury’s macro numbers is their view all our inflation problems (undershooting the target that is) are now behind us: from this quarter, the forecast inflation rates are consistent with annual inflation at 2.0 or 2.1 per cent all the way to the end of the forecast period.    As a result, on their numbers, there are no OCR cuts (their numbers will have been finalised before the recent actual cut) and before too long OCR increases start being implemented: three years hence they expect to have seen 75 basis points of increases.

And, of course, this is the same sort of story they’ve been telling us for years.  Wrongly.

In many respects, medium-term macroeconomic forecasting is a mug’s game.  Few, if any, can do it consistently well.  So the numbers aren’t interesting in their own right –  they tell us nothing  much about what actually will happen –  but they do tell us something about the forecaster’s models, and when the forecaster is also the government’s lead economic adviser that in itself can matter.

On these numbers, we have a Treasury that sees no sign of an increasing outward orientation to the economy, seems to think an unemployment rate of about 4.5 per cent is as good as it gets in normal times (ie roughly the NAIRU), and continues to pick projections of productivity growth seemingly out of thin air, even against a backdrop of years of little or no productivity growth for recent years, no change of economic policy approach, no nothing,

For all the (quite appropriate) fuss about the outgoing Secretary to the Treasury, it is now only three weeks until his scheduled departure date and no replacement has yet been announced.    That in itself should be quite concerning, suggesting SSC is struggling to come up with someone with the right mix of competence and go-alongness.  There is a whole range of institutional performance issues a new Secretary should address, but the characteristics that might qualify someone to be appointed by the current SSC regime may well be exactly the wrong sort of characteristics to expect any material change for the better from after 27 June.

 

On Makhlouf and standards in public office

Michael Reddell NZ politics, Treasury

If I hadn’t been away, and then come down with a very nasty cold (which will soon have me back on the sofa again), no doubt I’d have commented earlier on the Makhlouf affair.  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.

Human beings make mistakes.  I don’t suppose anyone would be calling for Makhlouf’s head if it were only a matter of having been chief executive of a (not overly large) agency where the document/computer security was so weak that what happened early last week could happen.  Not even when taken in the context of an organisation that didn’t seem to be quite as attuned to keeping secret what they were supposed to keep secret as we might have hoped (recall their policy on computers and lock-ups even after the RB OCR leak, or the episode last Thursday in which Treasury staffers were giving out copies of Budget documents to journalists outside the lockup, under the impression that the recipients were fellow Treasury staffers).  It isn’t a good look –  even recognising that Budget material is typically politically sensitive rather than market sensitive –  and perhaps might have taken a bit of the gloss off the farewell functions in the next few weeks.  But that would have been all.   The chief executive would have been responsible, and in some sense accountable, but those actions –  or failures –  wouldn’t have been his personal ones.

But the focus now is on choices that Makhlouf himself personally made, words he himself chose to use (or not use) and so on.    They are a rare case when the public gets a direct look at how a top public servant handles himself under pressure.  Not well.

The whole business started on Tuesday, mid-morning when National released Budget material.  By 12:20 pm that day there was an official statement from Makhlouf.   It was fine.  The heart of it was this

“Right now we’re conducting our own review of these reports and the information that has been published,” said Makhlouf.

As you’d expect.   Presumably the office of the Minister of Finance and (perhaps) the Prime Minister’s office had already made it clear they wanted to be keep updated.

But it must have been a busy next few hours at The Treasury, and presumably Makhlouf was extensively involved, at least in reviewing whatever information and advice his staff were generating.

His next public statement was issued at 8:02 on Tuesday evening.   And this was the one that started him down the perilous path

Following this morning’s media reports of a potential leak of Budget information, the Treasury has gathered sufficient evidence to indicate that its systems have been deliberately and systematically hacked. 
 
The Treasury has referred the matter to the Police on the advice of the National Cyber Security Centre.

It sounded impressive and sobering at the time.  No doubt it was supposed to.   All reinforced by Makhlouf’s rash interview on Radio New Zealand the next morning, with his overblown bolt analogy and attempts to play up the “attack” and “penetration” language (using it and never once objecting when the interviewer used those words).  I heard some of it at the time, but listening to it again this morning with the benefit of perspective it is all the more extraordinary given what Makhlouf clearly already knew.  He ruled out any “sloppiness” or “incompetence” in his own staff or systems.

But, of course, what we now know –  what Makhouf knew at the time –  is that the National Cyber Security Centre had already made it clear to Treasury that, based presumably on what Treasury staff had told them, there was no sign that anything fitting the bill of a “hack” had happened.  If they suggested –  as Makhlouf claims – that it was a matter for the Police, it was probably only in a “nothing to do with us, but you could try Police” sense.    The NCSC reference should never have appeared in Makhlouf’s statement at all –  they were dragged in, it appears, to provide Makhouf with cover.

Even allowing for the fact that it was a busy day, you can be sure that every word in the Makhlouf statement would have been considered carefully.   Presumably Treasury comms staff were involved, and at least a couple of his key deputy secretaries (including, one hopes, the one responsible IT and security).  We don’t know if they ran a draft past the office of the Minister of Finance (on Makhlouf’s telling, the matter was referred to Police at about 6pm and the Minister informed at about 7pm).   But in many respects it doesn’t matter: it was Makhlouf’s statement (personally) and even if someone else suggested things the words actually used are wholly his responsibility.  Public service chief executives are supposed to operate at arms-length, and are personally accountable as such.  At this point, the Minister had no leverage (after all, Makhlouf was leaving in four weeks time).

(The Minister’s own statement is another matter.  It upped the ante further, in a way Makhouf never directly did, attempting to tie the National Party to criminal activity (“the material is a result of a systematic hack and is now subject to a Police investigation”).  The fact that the Minister’s statement was released only 15 minutes after Makhlouf’s suggests that likelihood of close liaison between Treasury staff and staff in Robertson’s office. The statement looks unwise and opportunistic, but surely that is politics.  Absent further evidence, I’m prepared to believe the Minister and his office –  none of whom will have had a high degree of technical capability –  were misled by Makhlouf and The Treasury.)

After Makhlouf’s RNZ interview on Wednesday morning we hear nothing more of substance for most of the day.  A non-partisan observer might reasonably have concluded that the Simon Bridges release/attack was backfiring (it was my take).   But that was those of us not in the know.  Makhlouf and his senior IT staff (and their bosses) must have known very well by this point what had actually happened  (and if Makhlouf personally did not sufficiently understand the point, that too reflects poorly on him, for not having asked hard enough questions, or ensured he was on totally solid ground).   They must have known that at any time National could reveal how they had actually obtained the information (the search bar on Treasury’s website).  But they said nothing more all day, despite knowing that they had poured fuel directly into an intensely political controversy.

And then two awkward things must have happened.  First, Police actually reacted fast (and around something where it might have been politically convenient for them to have acted slowly) and advised Treasury that was nothing unlawful for them to investigate, and then Simon Bridges indicated that he would hold a press conference the following morning to explain how National had actually obtained the information.

Thereupon, there must have been intense activity at Treasury, as they attempted to get ahead of the story again.  This was the 5:05am statement.     But it wasn’t just another Makhlouf statement, as he managed to get the State Services Commissioner to issue a parallel statement.  One can only wonder how much consultation with ministers (Finance, State Services) or their offices went on through this period –  but it is hard to believe that Peter Hughes would have put out such a statement, getting in the middle of a political controversy, with little or no notice, little or no consultation.

And what did Thursday morning’s (5:05am) statement say?   There was a bit of unavoidable clearing the decks

Following Tuesday’s referral, the Police have advised the Treasury that, on the available information, an unknown person or persons appear to have exploited a feature in the website search tool but that this does not appear to be unlawful. They are therefore not planning further action.

But it was hardly a mea culpa by Makhlouf.    Once again, he seeks to perpetuate the “hack” theme, invoking the idea that the NCSC were working with Treasury to identify what had gone on.

In the meantime, the Treasury and GCSB’s National Cyber Security Centre have been working on establishing the facts of this incident. While this work continues, the facts that have been established so far are:

(there follow 11 bullet points, the now-familiar material about clone websites, indexing documents, and the simple ability to use Treasury’s search bar.)

And pushes the notion that someone else had done something wrong

The evidence shows deliberate, systematic and persistent searching of a website that was clearly not intended to be public. Evidence was found of searches that were clearly intended to produce results that would disclose embargoed Budget information.

Rather than that his job had been to run an organisation keeping politically-sensitive government material secure until the government chose to release it.  Something he had failed to do.

As he gets to the end of his statement Makhlouf does reluctantly concede the systems failure.

In light of this information, Secretary to the Treasury Gabriel Makhlouf said, “I want to thank the Police for their prompt consideration of this issue. In my view, there were deliberate, exhaustive and sustained attempts to gain unauthorised access to embargoed data. Our systems were clearly susceptible to such unacceptable behaviour, in breach of the long-standing convention around Budget confidentiality, and we will undertake a review to make them more robust.”

But even then is keen to muddy the waters.    Embargoes are irrelevant here –  they only apply to people who accept information under embargo, on terms and conditions set by the person releasing it.  There was no embargo here, simply insecure Treasury systems.  And then there was the final sentence, again playing distraction.  There is no “longstanding convention around Budget confidentiality”.    There are obligations on public servants to keep “Budget secret” information secret, an obligation that applies especially to the Treasury Secretary, responsible for Treasury systems, and there are rules in the Budget lockup.  But none of that applies to anyone else.  A journalist who receives a leak about Budget material isn’t breaking the rules or any conventions in breaking the story –  in fact, they’d be failing in their job if they chose not to run a newsworthy story.

And that was it.   No apology for misleading the Minister, no apology to the public for misleading them (all that talk of “hacks”, attacks on iron bolts etc), just an attempt to get in ahead of the Bridges press conference –  as if he himself were a political operator –  and to keep on muddying the waters and minimising responsibility.  Makhlouf has given not a single media interview since –  despite that very lengthy one on Radio New Zealand when he was playing the “under systematic attack” card, and probably garnering quite a degree of public sympathy, for all it was worth.

It was an extraordinary couple of days, and an extraordinary display of poor judgement by one of our most senior public servants.     He’d made a series of very bad calls, all his own personal responsibility, and in the full glare of the public spotlight.

A decent and honourable person might have taken a day and then announced his resignation.  After all, human beings make mistakes, and when they are serious enough, and public enough, sustained enough, and committed by someone very senior (in whom the system reposes considerable trust), bad choices need to have consequences.   Given that he is leaving shortly anyway, surely the decent thing to have done would have been to have issued a statement indicating that he’d made mistakes, regretted and apologised for that, but that it was best now to clear the air, and that accordingly he would be resigning with immediate effect.   Had he done so, my regard for him would have risen considerably (I’d even toyed with words for a post I might have written had he done so).

The alternative approach might have been to have announced that he had offered his resignation to the State Services Commissioner, and left to the Commissioner to decide whether or not to accept.  But reports to date suggest there has no even been that offer.

Instead, after several days, we learn that SSC is to hold an inquiry.  Unfortunately, their statement is not on their website, but according to media reports

The State Services Commissioner will conduct a new inquiry into statements and actions made by Treasury Secretary Gabriel Makhlouf​ concerning the Treasury “hack” last week.

I have little confidence in this inquiry.  For one, the inquiry is supposed to look into Makhlouf’s handling of last week’s events, but recall that the SSC made themselves an active player in those events when they agreed to a coordinated statement with Treasury on Thursday morning.  They are, at least in part, inquiring into themselves.  And then there is line from yesterday’s statement

State Services Commissioner Peter Hughes said the questions that had been raised were of considerable public interest and should be addressed.
“It’s my job to get to the bottom of this and that’s what I’m going to do,” Hughes said.
“Mr Makhlouf believes that at all times he acted in good faith.”
“Nonetheless, he and I agree that it is in everyone’s interests that the facts are established before he leaves his role on 27 June if possible. Mr Makhlouf is happy to cooperate fully to achieve that. I ask people to step back and let this process be completed.”

What have Makhlouf’s preferences got to do with it?  It all has a rather too-cosy feel to it, and the likelihood of this being wrapped up any time materially earlier than 27 June seems very low (any draft report will surely be given to Makhlouf and other affected parties to review, and perhaps have their lawyers comment on, before release).

Add to the cosy sense, the fact that Makhlouf hasn’t been suspended, but continues to work as normal –  with the full support in that of the Prime Minister.   This isn’t an inquiry into some obscure aspect of past administration, or even to details of how he was appointed, it is about his personal choices, words and judgements within the last week.    If it is serious enough to have a serious inquiry, it is serious enough for Makhlouf to be stood aside until the report comes in.  If it is a serious inquiry that is.

What of the authority under which Makhlouf is hired and fired?  That is the State Sector Act.  Government department chief executives are not standard employees, but hold a statutory office, appointed by the Cabinet on the recommendation of the State Services Commissioner.  The Commissioner them becomes the employer.  What of dismissal?  Section 39 covers that.

SSA

On the face of it, it is as simple as that.  So long as Cabinet agrees, a departmental chief executive can be removed.  It isn’t the famed “at-will employment” of the US, but it isn’t standard employment law either.  To a lay reader –  and there probably isn’t any case law in this specific context –  “just cause or excuse” really does look at though it should cover failings like misleading the Minister, repeatedly misleading the public, making flamboyant statements that the facts (known to him at the time) don’t support,  (arguably perhaps) wasting Police time, and refusing to offer any contrition when those facts emerged.

In that earlier quote, Peter Hughes reports that

“Mr Makhlouf believes that at all times he acted in good faith.”

I’m happy to believe that, but what of it?   That is no sort of standard –  a 16 year old placed in charge of The Treasury probably would have acted in good faith too, but simply wouldn’t have been up to the demands of the job, and would have been exposed sooner or later.   Makhlouf isn’t 16, but his conduct over the last week suggests that if he was acting in good faith, he simply didn’t display the judgement,temperament, and character that should be required to hold such office in New Zealand (let alone Ireland, but that is their problem).

Perhaps one can debate whether section 39 should be invoked to dismiss Makhlouf (although it is now clear that it won’t be).  One reason to hesitate might be that provision should not be used lightly, and has not been used previously.     I’m not in a position to know whether there have been more serious breaches of acceptable standards from departmental chief executives over the 30 years since the law was enacted –  most of what departmental CEs do happens behind closed doors, away from the public eye.   But of things that have come to public view, it is hard to think of any (departmental chief executive) episodes that plumb the low standards on display by Makhlouf in the last week (not just a single choice, word, or act but the accumulation of words, actions, choices over several days, each compounding the other, with no sign or act of any contrition).  He should go, and if he won’t resign, he should have been dismissed (yesterday’s Cabinet would have been the opportunity).

Matthew Hooton has a sustained Twitter thread this morning that is worth reading.  He is more focused on the political aspects, and the potential culpability of Grant Robertson (I’m ambivalent on that point, pending more evidence).  But his bottom line is one I strongly agree with:

hooton

And the State Services Commissioner is fully part of that same self-protecting establishment –  appointed by them, from among them, and now supposedly reporting independently on actions (of another member) that he himself was part of as recently as last Thursday morning.

This must not be the standard we settle for.

Economic failure: the reluctance to recognise the implications of extreme remoteness

Michael Reddell New Zealand economic history, New Zealand economic performance, OECD, Treasury

As regular readers know, I tend not to be particular upbeat about the New Zealand economic story.  For anyone new, there should be a hint in the very title of the blog.  If, by chance, you are still attracted to an upbeat take, only last week in a post here I critiqued a recent book chapter taking that sort of view.

And so I was a bit surprised when, more than a year ago now, I was asked to write a chapter for a forthcoming book on aspects of policymaking, and associated outcomes, in a small state (this one).  In principle, the book sounded potentially interesting, and they were approaching a bunch of pretty serious and senior people to contribute.  But it wasn’t clear there was much in it for me, and since the plan was for the introduction or foreword to have been written by the head of the Department of Prime Minister and Cabinet, it seemed likely that the thrust the organisers were looking for was a positive take on the New Zealand story.   So as not to mess people about, I declined the invitation, only to have my arm twisted, with assurances that there was no such agenda.  In the end I agreed to write something, and although the organisers/editors still seem keen on a more positive spin, by the time I discovered that I was committed.

The latest draft of my chapter, attempting to be positive where I can, is here.

An underperforming economy; the insufficiently recognised implications of distance (draft chapter)

I’ve had useful comments from various people on an earlier draft (none of them bear any responsibility for the current version though), but if any readers have comments you’d like to add to the mix, you can earlier leave them as comments to this post or email me directly (address in the “About Michael Reddell’s blog” tab).

The potential market for the book, as I understand it, is people like students of public policy, perhaps in parts of Asia.  Many of these potential readers, I’m given to understand, see New Zealand as a sucesss story.   Within the (severe) limitations of length, I’ve set out to provide a more balanced take on the economic story.  In a way, I guess, New Zealand is a sort of success story.  200 years ago on these islands there was not much more than a subsistence economy, and only recently had overseas trade resumed after the inhabitants had been isolated for several hundred years.  From that to one of the richest countries in the world in a hundred years was remarkable.  And even now, after a century of relative decline,  there is only a handful of countries in east Asia and the southwest Pacific with material living standards matching or exceeding our own (Australia, Japan, Singapore, Taiwan, with South Korea coming close).   And from a macroeconomic policy perspective, we’ve now had low and stable inflation again for 25 years, have had low and stable public debt, and a considerable measure of financial stability.  That isn’t nothing by any means.

But it doesn’t exactly mark us out.  What does mark us out is that century of relative decline: of course, we are much richer than we were 100 years or so ago, but then we were among the top three countries in the world (GDP per capita), and now we languish a long way down the advanced country rankings (especially on productivity measures).    With productivity levels not quite 60 per cent of those in the leading bunch of advanced economies, we are getting closer to the point where New Zealand could really only be described as an upper middle income country.

My story, as a regular readers know, is that our physical remoteness –  in an era where, internet notwithstanding, distance appears to be not much less of a constraint than ever in many respects – is the key issue in our underperformance.  It isn’t that –  as some models and sets of estimated equations suggest –  distant countries are inevitably poorer, but that distant countries seem to thrive (to the extent they do) mostly on natural resources, and industries building directly on those resources.  And with a limited stock of natural resources, there are limits to the number of people that such places can support top tier incomes for (a very different proposition than for economies –  eg those of northwest Europe – where most of the most productive economies are found) where natural resources are simply no longer that important, and where the advantages of proximity can be realised more readily.    The story is much the same for Australia as for New Zealand –  and Australia has also been in (less severe) relative decline over the last 100 years – with the difference that Australia found itself able to utilise whole new sets of natural resources, either unknown or uneconomic previously.  New Zealand has had nothing – that material – similar, and no big asymmetric technology shocks in our favour for a long time either.   Against that backdrop, using policy to drive population growth (rapid by advanced country standards) simply did not make sense –  putting more people in a fairly unpropitious location, albeit one with some reasonable economic institutions (rule of law etc).  It didn’t make sense decades ago –  before people fully appreciated the nature of New Zealand’s relative economic decline –  and it doesn’t now.   There was a valuable signal, that policymakers and their advisers simply chose to ignore, when New Zealanders –  who know New Zealand best –  starting leaving in numbers that (while cyclical variable) are really large by international or historical standards (absent a civil war or the like).

Perhaps the new bit to my story in this draft chapter – which was prompted by the way the initial specification was framed –  was to think about why the stark economic underperformance has been allowed to go on, not just by our politicians and political parties, but with no compelling remedies offered by our major economic policy advisory institutions (The Treasury in particular) or by international agencies that offer advice (notably the OECD).  I suggest a story in which it is simply difficult to identify that right comparator countries when thinking about economywide productivity and economic performance issues.  For many areas of policy –  monetary policy is an example, but it is probably true of health and education and welfare –  pretty much any advanced market economies can offer useful benchmarking, but if remoteness really does matter (not just to, say, defence, but) to the viable options and business opportunities available here, then the experiences of –  say –  Belgium or Denmark just aren’t likely to be that useful, even if Denmark has a similar population and was once the major competitor for UK dairy markets.

We may be able to learn something from reflecting on the differences, but it is typically much more compelling if one can point to another similar country (or 2 or 10 of them) and learn from them.   And thus I note an important difference between New Zealand and many of the (now fast) emerging advanced economies of central and eastern Europe.  Not only are they physically proximate to various highly productive economies (easy and cheap to meet fellow policymakers and analysts regularly, including in EU fora), but have a lot of similarities across each other (similar location, similar communist past, and so on).     I don’t claim to know Hungary, Slovenia, the Czech Republic or Slovakia in great detail, but if I were a policymaker in any of them, I’d be (almost obsessively) benchmarking my economic policies against those of the others, and of nearby rich and productive countries (eg Austria and Switzerland).  There are never exact parallels, but in New Zealand’s case it is hard to find good parallels at all. I suggest that Israel might be in some respects the best for New Zealand –  but it is little studied here (and its productivity performance is about as bad as ours –  partly, I’ve suggested, for similar reasons).

The lack of easy examples to benchmark ourselves against isn’t really an acceptable excuse, but I suspect it is part of the explanation.  It is long been a problem for the OECD in their advice to New Zealand: they’ve repeatedly brought a northern European mindset to a remote corner of the world, after early on investing quite a lot in the idea that the New Zealand reforms were exemplary, and almost sure to reverse our underperformance.  Places like the OECD work a lot on illustrating cross-country comparisons, but they simply never found the right ones for New Zealand (on these economywide issues) and have not shown much sign of trying.  It is particularly problematic because the OECD are full-on committed to high immigration, regardless of the experience of an individual country (see my post about the then OECD Chief Economist extraordinary performance when she launched their 2017 New Zealand report – there is a new report due out in a few weeks, and I’m not holding my breath).

Of course, New Zealand politicians no longer seem to have any appetite for trying to reverse the staggering decline in New Zealand’s relative performance.    But just possibly they might if their advisers were offering a compelling diagnosis and set of prescriptions.  As it, The Treasury seems to have no more idea than the OECD, and seems to have abandoned much interest in the productivity issue, in favour of the feel-goodism and smorgasbord of random indicators that makes up the Living Standards Framework, supporting the “wellbeing Budget”.  I was exchanging notes the other day with someone about the mystery as to who the next Secretary to the Treasury will be (there is a vacancy a month from now, and applications closed three months ago).  It is hard to be optimistic that it will make much difference who gets the job –  given the hoops they will have to have jumped through to get it –  but sadly it is a story of a low-level equilibrium: no political demand for answers and options to reverse our decades of relative decline. and no bureaucratic supply of such answers or the supporting analysis either.

Anyway, for anyone interested here are the concluding paragraphs.

Conclusion

After the bold reforming period of the 1980s and early 1990s, official and political economic policymaking in New Zealand appears to have been at sea, without a tiller or compass, for at least a couple of decades.   Much that was positive was done during the reform era, and various good institutional reforms were put in place.  Much needed to be done, and in some respects it was to the credit of a small country that so much – initially attracting considerable international admiration –  could have been put in place so quickly.    Seared by the experience of the quasi-crisis of 1984, and rapid escalation of official debt in the previous decade, New Zealand has since enjoyed an enviable degree of macroeconomic stability: low and stable public debt, low and stable inflation, and domestic financial stability (even amid severe policy-induced upward pressures on house prices and household debt).  Unemployment rates that are fairly low on average are another successful element.   In those areas of policy, meaningful international benchmarks have provided a routine check of policy, and the external advice sometimes provided has typically been drawn from countries (small floating exchange rate countries), where the comparisons are apt and insightful.

But if stability has been successfully regained and maintained, on the wider counts of economic performance only a “fail” mark could possibly be assigned.  Among the failures, policymakers managed to preside over reforms that have created artificial scarcity of urban land and sky-high housing prices, in common with many of their Anglo peers.  But the productivity failure is more stark, because it is more specific to New Zealand.   Despite numerous (de)regulatory steps taken to open the economy to international competition –  and a considerable increase in the real volume of exports and imports –  foreign trade as a share of GDP has shrunk and with it the relative size of the tradables sector.  The export sector itself remains heavily dominated by industries reliant on domestic natural resources (a fixed asset) – services exports have been shrinking as a share of GDP – and, despite rapid population growth, business investment has been modest at best.

To an outsider, perhaps the surprising feature of such an underperforming advanced economy is that population growth has nonetheless been quite rapid. Birth rates have been below long-term replacement rates for several decades now. But defying the revealed preferences of New Zealanders, who have left the country in huge (but cyclically variable) numbers over the last 50 years for 25 years now policy has been set to bring in one of the largest migrant flows (per capita) of any advanced country.   Regularly presented as a skills-focused approach, it has remained difficult to attract many really talented people to a small remote country with lagging incomes and productivity[1] and there have been few (apparent or realised) outward-oriented economic opportunities in New Zealand for either natives or migrants.

Advocates and defenders of New Zealand immigration policy often attempt to invoke arguments and indicative evidence from other countries.  Even then, the value of insights appears more limited than the champions believe: not one of the high immigration advanced economies (Canada, Australia, New Zealand, Israel – or the United States) has been at the forefront of productivity growth over the last 50 years, and only the US is now near the frontier in levels terms.  But even if those arguments might have some validity in some other countries, there has been too little serious engagement with the specifics of the New Zealand situation: remoteness, lack of newly-exploitable natural resources,  and the actual experience (lack of demonstrable gains for New Zealanders) following 25 years with a high level of (notionally) skills-based immigration.    As by far the most remote of any advanced country, it is perhaps the last place one might naturally expect to see policy actively working (encouraged by local officials and international agencies) to support rapid population growth.

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies)   Past experience –  1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand.  But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s –  it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

[1] OECD (2016) adult skills data suggest that although the gap between skills of natives and migrants is small, migrants to New Zealand are, on average, less skilled than natives.

There won’t be any posts for a few days as we are heading off this morning to attend the funeral for my wife’s (extremely aged) grandmother.  Back blogging on Tuesday.

Economics, economic policy, public policy

Michael Reddell Treasury

Yesterday afternoon I attended a forum at Victoria University arranged to discuss ideas in a paper written by Gabs Makhlouf, the outgoing Secretary to the Treasury, and one of his staff, Udayan Mukherjee (currently doing masters study at Cambridge).  The paper is still described as “draft for discussion”, but that apparently includes wider discussion (I checked and the authors didn’t mind it being more widely quoted).

The paper is under the title “Economic Policy in the Public Square: A Perspective from New Zealand”, and is 30 pages of reflections on a variety of issues around economics, economic policy, and public policy more generally.  I’m not quite sure what motivated the paper, although The Treasury has faced some criticism –  mostly justified in my view – in recent years around such things as an apparent de-emphasis on economics skills, and various aspects of the Living Standards Frameworks (including caricatured representations suggesting that some previous generation of advisers or policymakers had once thought GDP was everything).   At very least, some of that criticism must have been context for the Secretary to the Treasury to have devoted his scarce time to such a project.

The paper itself didn’t end getting that much attention in yesterday’s forum: Mukherjee gave a fairly brief introduction, and then we had three panellists (one foreign PhD student, and two of the eminent figures of New Zealand economics, Arthur Grimes and Gary Hawke), each of whom had their own hobbyhorses to pursue, and the discussion constantly seemed to veer towards universities and what they should teach, or which courses a budding economist should pursue.

There were bits of the paper I quite enjoyed. I’m a history buff and any time someone addresses the history of economic policymaking in New Zealand I’m interested (Mukherjee is apparently doing work in this area for his masters).  I quite like playing devil’s advocate (mostly because I think it is actually a correct interpretation) around the contribution to economic policy of Sir Robert Muldoon (quite a lot of liberalisation happened on his watch, in very challenging times, even as some very costly choices – especially around Think Big – were made late in his term), and so it was good to see Jim McAloon’s book on post-war economic policymaking cited.   I’m less persuaded by their suggestion to de-emphasise debates about the post-1984 reforms (that suggestion seemed, consciously or not, more likely to reflect the fact that one author wasn’t here at the time, and the other hadn’t yet been born).   The biggest upheaval in New Zealand policy (economic or otherwise) for generations is inevitably a key point of reference, especially as policy subsequently has largely descended into somnolence.

But if there are interesting snippets, the paper overall seemed to be a bit of a muddle, especially for a piece carrying the imprimatur and co-authorship of one of our most senior public servants and policy advisers.  If the paper is ever revised and finalised (and Makhlouf will soon have time on his hands) I think it could do with quite a bit more work.

Thus, you’ll notice the title of the paper.  The suggestion is that the paper is about “economic policy”.  They don’t define that term, but I think it wouldn’t be unreasonable to take it as including macroeconomic policy (overall fiscal policy, monetary policy, perhaps financial system regulation) and things that are directly focused on overall economic performance (whether economywide or sectorally).   One could think of (most of) immigration policy, R&D policy, policy around trade agreements, tourism policy or whatever.  On such important issues, it seems pretty unquestionable that we should form our public service expert advice, primarily (although of course not exclusively) from an economics perspective.  On some of those sorts of issues, international perspectives and literature will provide most of what is needed. On others, there will be some distinctive New Zealand perspectives and angles.  We need advisers who are able to draw on (substantially economic) theory, evidence, and experience, debate and distill what is relevant and what (probably) isn’t, and so on.   That is particularly so when The Treasury is offering a perspective on proposed policy initiatives or expenditure (you might expect individual sectoral agencies to have a wider range of skills and expertise).

But to the extent there is a debate, I don’t think it is about those areas, or the centrality of economics expertise in shaping policy analysis and advice on them.  The Treasury hasn’t been very active in generating serious advice on productivity –  they might say they’ve been underfunded, or had masters who weren’t interested –  but I doubt they’d seriously suggest that if they were going to do much work in this field that economics/economic history wouldn’t be the primarily relevant set of skills.  The review of the Reserve Bank Act is being led by people with a pretty strong economics background, and appropriately so.

There is also some lack of clarity in the paper about whether they are talking about policymaking, or policy advice and the analysis that informs it.  Often they talk about policy makers, but mostly (I think) they means advisers (like themselves, although not necessarily limited to the public service).   Policymaking is mostly done by ministers (and, to their credit, Makhlouf and Mukherjee push back against suggestions that more policymaking should be done by independent agencies) and no one thinks that a formal economics training should be some sort of prerequisite for getting to sit in Parliament, let alone the Cabinet (even serving as Minister of Finance).  For what it is worth, Donald Trump’s degree majored in economics.  (Margaret Thatcher did chemistry, Roger Douglas accounting.)

But perhaps the more worrying conflation is around what sort of policy we are talking about.  Specifically, the authors do not draw any sort of distinction between things we might more normally think of as “economic policy” (see above, and the title of their paper) and “public policy” more generally.

If, as a Cabinet minister (or a voter) I wanted public service advice on the appropriate specification of an inflation target, or on positioning New Zealand to cope best with the next serious economic downturn, it is advice informed by economics that I should want, and would benefit from.     There may be some other useful perspectives, but they will be peripheral in nature.

But if, as a Cabinet minister (or a voter), I wanted advice on the appropriate freedom of information legislation to adopt, economics isn’t the set of skills I would sensibly be first looking to.   Same might go for abortion policy, or policy around freedom of speech, or defence policy, whether New Zealand should be a republic, or policy on scandalising the court.  It isn’t that there are no relevant insights that economists might offer on such issues, or questions they might pose –  including the always-relevant issue of resource constraints and opportunity costs – but it is unlikely to be the most useful paradigm (or even set of paradigms) for informing and framing decisions ministers and MPs have to make in such areas.

A senior Treasury official recently mentioned to me a conversation with another public servant, who had posed the question “if I’m doing public policy [perhaps “doing public policy well”], am I doing economics?”      To which the answer surely has to be, and should be “not necessarily”, and “it depends”.  Top-notch senior public servants need to be able to discern which skills and experiences, and formal frameworks, are relevant to which issues, and hire (and contract in, and consult) accordingly.

Many of these issues seem to resolve to the staffing and role/clout of The Treasury.   I happen to think that huge spending departments (eg Health, Education, and MSD) would benefit from having a stronger economics perspective in their policy advice and evaluation activities, but I doubt anyone thinks the policy and research functions of such agencies should be stocked only with economists.   But is it reasonable to expect that a small central agency such as The Treasury will be able to maintain anything like critical mass in the sorts of disciplines central to the advice and practice of these spending ministries? (One could say the same about climate scientists for example.)  I doubt it.   And thus, it still seems likely that when Treasury is challenging and reviewing ministries’ spending or regulatory proposals, the discipline they can most usefully and consistently bring to bear is economics (and, perhaps, some basic accounting).  It should be a matter for ministers, meeting as a Cabinet, to determine what weight to put on a Treasury perspective, as opposed to the perspectives of other expert advisers, and their own wider “political” considerations.  If there was a brief period when The Treasury (and its paradigm) was in some sense “too dominant” that was, in the end, a political choice.

In the end, there is a great deal of straw-manness about the Makhlouf/Mukherjee paper.  The authors quote the line from the former Secretary to the Treasury, Henry Lang, about “a fine mind” being more important than any specific formal academic qualification in a particular discipline.    They also note the importance of communications skills.  And they repeat a great quote from Keynes

“the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician”

Has anyone ever argued that a narrow economics training is the only useful or appropriate qualification to be a good Treasury official, or a top public servant more generally?  I don’t believe so.  Of course, narrow expertise (of all sorts) has its place, and perhaps in a small country we are more at risk than larger countries of not even having those deep reservoirs of specialist expertise.

But isn’t Keynes’s conception –  although articulated as applying to a “master-economist” –  actually true to a considerable extent of what we should be wanting from the top-tier of public service policy advisers, whatever academic discipline they have taken their first degree in?   It is things about character, breadth, and depth, ongoing intellectual curiosity and sound judgement that are likely to be the key considerations (as distinct, say, from keeping on side with the State Services Commissioner).    I happen to think we should be recruiting as Secretary to the Treasury someone with credibility among economists, but it wouldn’t be close to the only thing I was looking for, and I can think of many senior economists who would be quite unsuitable for the role.  And there are plenty of people who took a broad range of papers at university, who have more or less given up on intellectual drive or curiousity by the age of 40, and are content to repeat (perhaps with some energy) current mantras and conventional wisdom in their middle age.    Trained in economics or not, such people are dangerous (if only because they fill spots which should be occupied by someone nearer that Keynesian vision –  if perhaps with a bit more humility, and awareness of the crooked timber of even the greatest official, than perhaps Keynes tended to foster, in himself or others.)

This post has gotten rather long and discursive.  Perhaps I would just end with one final point. The focus of the paper tended to be on the public service.  And yet a strong public service and effective policymaking is more likely when there is a strong academic contribution.    Unfortunately, there are not many academic economists making a prominent contribution to debate on economic issues (or an economic perspective on other issues) in New Zealand.  The incentives for them to do so are not particularly strong, and if there is one thing economists tend to agree on it is that incentives matter.  Perhaps the Treasury, in its stated desire for economics to play a bigger part (the Secretary talked in his closing remarks of this as “a moment in time” when economists “can really make a difference”), might look to their advice around incentives in the academic context. I’ve told before the story about the conference the Reserve Bank and Treasury hosted in 2011.  We were offering substantial amounts of money (by academic standards) for papers that might shed light on issues around (New Zealand)macroeconomic imbalances, productivity underperformance etc.   We managed to sign up the Irish academic who is shortly taking up the job of chief economist of the ECB.  We couldn’t find a single New Zealand academic willing to take up our offer.

 

Productivity: any hope from Treasury?

Michael Reddell Productivity, Treasury

In my post yesterday I noted briefly the dismal productivity record in New Zealand in recent years, nicely captured in this chart.

real GDP phw dec 18

That poor record builds on decades or underperformance, dating back to the 1950s.  In all the time since then, there has never more than a year or two at a time when New Zealand has outperformed other advanced countries, and mostly we’ve achieved less productivity growth than they have.  As a result, we’ve moved from being among the very richest and most productive economies in the world to one where the top-tier of OECD countries have rates of labour productivity about two-thirds higher than those in New Zealand (and countries like Turkey and various former eastern-bloc countries –  where market economies were unknown for decades –  are nipping at our heels).  This table is from a chapter on New Zealand economic performance in a forthcoming book (which I foolishly allowed myself to be persuaded to participate in)

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

You might have hoped that this shockingly poor performance would worry someone in office –  political or bureaucratic.  But there is no sign it ever does, for long anyway.  It occasionally provides a good line for Opposition parties (of whichever stripe), or even for incoming governments in the heady days when everything is the fault of the previous government and you’ve not yet been expected to produce results yourself.  Our current Prime Minister and Minister of Finance were occasionally heard to refer to the problem in 2017, but hardly at all since then.

Once upon a time it was something one might have expected The Treasury to care about, have views about, and be offering rigorous advice to the government of the day (of whichever party) on.  After all, productivity is the only secure foundation for material prosperity, and material prosperity allows societies to make all sorts of other choices with fewer constraints than otherwise.  But that isn’t today’s Treasury.  If there are people in the organisation who still think about these things, it certainly isn’t an issue that ever seems to trouble the senior management – the more so under the lamentable stewardship of Gabs Makhlouf over the last eight years.  As I noted late last year, when Treasury is forced to write down its view on the productivity outlook, results make it clear they have the wrong model.

After my post yesterday, a commenter observed

The only hope on the horizon is the appointment of a new Secretary to the Treasury who is given or [secretly] works on a single goal of devising policy to genuinely increasing productivity…..

The Treasury has lost its sparkle over the last 30 years and it is time it regained some lustre, it’s ‘reason for being’ and grew some courage.

I couldn’t disagree with the sentiment, even if I wasn’t optimistic that there was any hope at all.  But the comment prompted me to have a look at the documents on the SSC website supporting the current advertisement for a new Secretary to the Treasury.

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.  Thus, under the previous government it was ministers who fast-tracked citizenship for Gabs Makhlouf to allow him to be appointed. (And thus Bill English –  who later acquiesced in the reappointment of Makhlouf –  bears responsibility for the failures of The Treasury this decade –  including the complete absence now of any comprehensive analysis and advice on the productivity failure).

But what of the current search?  The advert and supporting documents will reflect the Minister of Finance’s own priorities and views of what The Treasury should be doing.

Even the short advertisement itself starts in an unpromising way.

The Treasury is the Government’s principal economic and financial advisor. Its work improves the wellbeing and prosperity of all New Zealanders by ensuring the nation’s macroeconomy is stable,

In fact, if anyone does macroeconomic stabilisation at all well it would be the Reserve Bank –  that is a key part of the Bank’s role.   Sure, The Treasury advises the government on policy around the Reserve Bank, but the Bank is both operationally independent and has a direct line to the Minister on the policy issues.  But not a mention of productivity –  lifting the level of economic performance –  or any of its cognates.

Later in the advert, I was briefly encouraged

The Secretary will be both an expert in financial and economic policy leadership and  state sector management and strategy.

Good luck finding a person with both sets of qualities, but I don’t want to cavil just yet –  an “expert in financial and economic policy leadership” would be good.   An expert in financial and economic policy itself might be even better –  someone who would command credibility among staff, ministers, and the wider policy community.

Three other documents accompany the advert.  One is purely process oriented, and I’m not commenting any further on it.

The second is the position description.  In the opening bumpf  about the organisation there is finally some welcome reference to Treasury’s responsibility for things around the level of economic performance (emphasis added)

The three key outcomes the Treasury works towards are improved economic performance and prosperity for all New Zealanders, macroeconomic stability, and a higher performing State sector.

But that’s it.  Once the document gets on to the specific position of Secretary to the Treasury, it is all lost once again.   There are the specific accountabilities for the Secretary, moving beyond the generic statutory responsibilities:

The Secretary of the Treasury is also accountable for:

• Leading and overseeing New Zealand’s public finance system;

• Working collaboratively with the State Services Commissioner and the Chief Executive of the Department of the Prime Minister and Cabinet to ensure a consistent and aligned approach to State sector system leadership;

• Advising on, and implementing strategies for, managing the Crown’s balance sheet including debt; risks; contingent liabilities; and the government’s investment in companies and other entities;

• Advising and reporting on fiscal management for the Crown and monitoring departmental operating and capital expenditure; and

• Building succession for the Treasury’s leadership team and working with colleagues to leverage the Treasury’s talent for system benefit while building a diverse and inclusive organisation where staff have career pathways.

Nothing about economic performance (level or variability) –  advice thereon – at all.

And these are policy-related “critical success priorities”

• Leading, organising and managing the Treasury so it delivers on the Government’s goal of a shared prosperity where all New Zealanders benefit from the wealth that growth in the economy provides;

• Refreshing the macroeconomic framework (fiscal, monetary and financial stability) to ensure it is fit for purpose for the next twenty years, including driving the further development of a wellbeing approach;

• Promoting greater transparency and understanding of the Government’s economic goals through supporting the embedding of wellbeing measures in the Public Finance Act and through the Secretary’s and other Treasury communications and engagements;

• Providing advice to assist the Government to meet its policy priorities within its Budget Responsibility Rules;

• Working collaboratively with others, including Māori, to collectively develop and deliver creative solutions to resolve long-term challenges including child poverty, housing, climate change, and freshwater;

The first of those is about distribution (not “growing the pie”), and the second is about some odd mix of stability and the wellbeing approach.  The third is about transparency, the fourth about fiscal policy, and the fifth perhaps illustrates the government’s priorities.  Productivity appears not to be one of them, from the agency styled as the government’s principal economic advisers.    I’m not necesssarily suggesting there is much wrong with what is on the list –  one can debate the vacuity of the wellbeing approach another day –  but what isn’t there is telling.

The third document is the application form, which is useful because it sets out the capabilities SSC (on behalf of the Minister) says it will be assessing applicants on.  These are the capabilities applicants are required to demonstrate (in writing)

Think, plan and act strategically; to engage others in the vision, and position teams, organisations and sectors to meet current and future needs.

Lead and communicate in a clear, persuasive, and impactful way; to convince others to embrace change and take action.

Work collectively across boundaries to deliver sustainable and long-term improvements to system and customer outcomes.

Drive innovation and continuous improvement to sustainably strengthen long-term organisational performance and improve outcomes for customers.

Bridge the interface between Government and the Public Sector to engage political representatives and shape and implement the Government’s policy priorities.

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.

To revert to my commenter’s hope, 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.

As was the situation eight years ago, there are few obvious strong contenders for the role –  at least among people with any serious economic or financial expertise.    Looking through the list of current Treasury senior management, there are some capable people (although part of a leadership team that appears more interested in, say, diversity than in productivity), but really only one of those people could conceivably offer that level of expertise at this stage.   Around the rest of the public sector, I wonder if Geoff Bascand (Deputy Governor at the Reserve Bank, who was open about the fact that he applied to be Governor and missed out) might be interested.  Perhaps there are ambitious people at MBIE – an agency better known for delivering on ministers’ priorities than for serious analysis.   One can’t help thinking that applicants who are female will, all else equal, have something of an edge. But none of the names that spring to mind seem any better than the likely underwhelming field of male applicants.

Then again, Grant Robertson isn’t serious about dealing with the country’s most important economic failing, so perhaps it doesn’t really matter much who oversees the playground where analysts divert themselves thinking about concepts of wellbeing, while New Zealand is likely to keep drifting further behind.

Productivity failure: Treasury clearly has the wrong model

Michael Reddell New Zealand economic performance, Productivity, Treasury

In various commentaries on yesterday’s GDP data, I saw suggestions that the revisions to recent years’ data suggested that the New Zealand economy had been growing “strongly” in recent years.

As context for that observation, and perhaps shedding a bit of light on the sadly diminished expectations that appear to have taken hold in New Zealand, consider this chart, of real GDP per capita growth.

real GDP aapc 18

After a deep and quite long recession, the peaks in growth in per capita real GDP were a pale shadow of what had been achieved in the previous two economic cycles.   2 per cent annual per capita growth over the long-term would be a reasonably impressive result, but when the growth rate peaks at 2 per cent, and recessions come along every decade or so, it is no more than mediocre at best.  For the last couple of years  (these are annual average numbers) per capita growth has been at levels only previously experienced –  last 25 years –  on the eve of a recession.

But my main interest in yesterday’s numbers was the productivity estimates derived from them.  As I’ve been pointing out for a couple of years now, there has been next to no productivity growth at all in New Zealand for some years.  But in making that observation one is always somewhat at the mercy of the major annual SNZ data revisions.  Sometimes what looked to be in the data gets revised away completely.

How about labour productivity?  Recall that SNZ does not publish economywide productivity estimates –  there is no obvious reason why, when their Australian and British peers do –  so I’ve calculated one, using an average of the two measures of GDP (production and expenditure) and the two measures of hours (QES and HLFS).   And this is the resulting chart.

real GDP phw dec 18

No labour productivity growth at all for the last three years, and a total of 1 per cent productivity growth in the past six years.  Productivity growth under the previous Labour government wasn’t spectacular, but in the six years to the end of 2007 (just prior to the recession) we managed 8 per cent productivity growth.  But only 1 per cent this time round.    It is dreadfully bad, and there are no acceptable excuses.  You’ll hear people talk about global productivity growth slowdowns, and that is true to some extent, but it is largely irrelevant here, given that we start so far behind the leading OECD countries –  those at or near the productivity frontiers.   We have so much room to catch-up, and yet if anything again we’ve been drifting further behind.

Sadly there is little prospect of much change for the better.    Neither the previous government nor the current one appear to take New Zealand’s appalling productivity record seriously, in the sense of doing anything much about it, or even commissioning expert analysis and advice (reluctant as I’d be to suggest another “working group”).   And in a sense they’ve been accommodated in that stance by their self-proclaimed lead economic advisers, The Treasury.   Treasury publishes their HYEFU forecasts each December and buried in the supporting tables are forecasts for labour productivity growth (on an hours basis).    I could only find those tables back for the last five years, but here is what they have been forecasting (I’ve shown the four complete forecast years for each set of projections).

HYEFU forecasts for labour productivity growth published in Dec
Forecasts for June yrs 2014 2015 2016 2017 2018
2016 2.2
2017 1.6 1.6
2018 1.1 2.1 2
2019 1.2 0.8 1.5 2
2020 0.7 1.3 1.7 1.1
2021 1.4 1.5 1.2
2022 1.3 1.2
2023 1.2

They seem to have become quite a bit more pessimistic about the medium-term outlook in their latest forecast, but they are still picking almost 5 per cent labour productivity growth in the next four years, when over the last four years we’ve had almost none.   Look at the first column in the table done at the end of 2014: Treasury was actually expecting quite strong productivity growth over that period.  It is pretty clear that they simply do not understand what is going on, and do not have even roughly the right model.  Their productivity projections are wrong, in material ways, year after year.   And if they might be getting a little less unrealistic in the latest set of forecasts, that is small consolation because there is no sign they are offering advice to the government that might turn around the disastrous underperformance.   Too busy with the feel-good “wellbeing Budget” perhaps?

It has been another poor year for New Zealanders at the hands of our policymakers and their lead advisors:

  • no serious action to address and reverse the house price disaster that successive governments have been inflicting on us now for 25+ years (house and land prices up again),
  • no action at all to address the decades-long productivity growth underperformance (particularly bad over the last few years) that now sees a country once among the most productive in the world languishing in the league tables among former eastern bloc states, far far behind our former peers among the leading group of OECD countries,
  • and no sign that either the government or the Opposition really care,
  • or that our Treasury really understands at all the factors that explain the utter (and ongoing) productivity failure.

Governments, of course, don’t create productivity.  But they can and do put roadblocks in the path, often initially unwittingly.    But over time every such roadblock comes with own vested interests.    There is the old line from Upton Sinclair about

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Perhaps that explains the resistance of many in the business community to the changes that are needed.   It can’t explain Treasury’s failure.  I suspect that for them, and perhaps for many of our politicians, it is more a matter of ideological commitments, and an unwillingness to shine the light on the issues and policies that really matter if we care at all about lifting economic performance for our fellow New Zealanders.

Whatever the explanation, it is well past time for a change of heart, and for beginning again to take seriously finally reversing the decades of (relative) failure.

 

Looking back to the deposit guarantee

Michael Reddell Financial stabilty, New Zealand economic history, Reserve Bank, Treasury

12 October 2008 was a frantic day.  It was a Sunday, and I never work Sundays (well, two financial crises, one in Zambia, one in New Zealand, in 30+ years).  There was a call in the middle of our church service summoning all hands to the pump, to put in place a retail deposit guarantee scheme that day.   We did it.  My diary later that night records that we’d “delivered a brand spanking new not very good deposit guarantee scheme”, announced a few hours earlier.   It was a joint effort of the Reserve Bank and The Treasury.

I had recently taken up a secondment at The Treasury.  I’d been becoming increasingly uneasy about the New Zealand financial situation for some months (flicking through my copy of Alan Bollard’s book on the crisis I found wedged inside a copy of an email exchange he and I had had a month or so earlier about Lender of Last Resort options for sound finance companies, potentially caught up in contagious runs) but I hadn’t had any material involvement in the unfolding sequence of finance company failures.   But it was the escalating international financial crisis – this was four weeks after Lehmans, 3.5 weeks after the AIG bailout, two weeks after the US House of Representatives initially voted down TARP, and two weeks after the Irish government surprised everyone by announcing comprehensive deposit guarantees –  that really accelerated interest in the question of what, if anything, New Zealand should do, or might eventually be more or less compelled to do.    The initiative for some more pro-active planning came from The Treasury, but with some parallel impetus  –  including around guarantees – from the then Minister of Finance, Michael Cullen (who, a few days out from Labour’s campaign launch, was also looking for pre-election fiscal stimulus measures).

On Tuesday 7 October, there was a long meeting at the Reserve Bank, attended by both the Secretary to the Treasury, John Whitehead, and the Governor of the Reserve Bank.  My memory – and my contemporary diary impression – is that the Governor was considerably more focused on the managing the Minister’s political concerns than on any sort of first-best response.    But the outcome of that meeting was agreement to quickly work up a joint paper for the Minister which would not, at that stage, recommend introducing a deposit guarantee scheme, but which would outline the relevant issues and operational parameters, giving us something to work from if the situation worsened.

Which it quickly did, both on international markets, and with the political pressure, with the Prime Minister signalling that she wanted to be able to announce something about guarantees in her campaign launch that coming Sunday afternoon.

I and a handful of others on both sides of The Terrace scurried round for the next few days.  I see that in my diary I wondered what the best approach was: do nothing, allow some risk of the crisis engulfing us, and then pick up the pieces afterwards, or be more pro-active and take the guarantee route.  My conclusion –  and even today I wince at the parallel (but this was a late-at-night comment) – “I suspect that if the pressures really come on, the Irish approach is best”.   As relevant context, although much of the finance company sector was in solvency trouble (many had already failed) there were no serious concerns about the solvency of the banking system.   (Liquidity was, potentially, another issue.)

At Treasury we had recognised the importance of the Australian connection –  most of our banks being Australian-owned.     I’m not sure of the date, but we had taken the initiative –  at Deputy Secretary level –  of approaching the Australian Treasury to see if they were interested in doing some joint contigency planning around deposit guarantees, and had been told that the Treasurer had no interest in such guarantees and so our suggestion/offer was declined.

But even Australian authorities could look out the window and see that the global situation was deteriorating rapidly, and by late in the week that recognition was being passed back to authorities on this side of the Tasman.  Alan Bollard always kept in close contact with his RBA counterpart Glenn Stevens, and on the Friday my diary records (presumably told by some RBNZ person I was working with) “apparently Glenn S[tevens[ told Alan this afternoon that the RBA/authorities might fairly soon have to consider a blanket guarantee”.     In the flurry and uncertainty, one other senior RBNZ person –  still holding a senior position there –  told me that in his view nothing should be done here unless there were queues outside New Zealand banks.

Between a handful of people on the two sides of the street, we got a paper on deposit guarantee scheme possibilities out to the Minister of Finance on the Friday afternoon.  It was a mad rush, with some uneasy negotiated compromises (and everyone’s particular hobbyhorse concern got its own mention). I was probably too close to it to tell, and noted I wasn’t that comfortable with it, but when I got Alan Bollard’s signature he indicated he was happy with it.  I noted “lots of small details to sort out next week –  we hope only that, not implementation”.     To this point, we were focused mostly  on retail deposits, but I see in my diary that in The Australian on the Saturday there was talk from bank CEOs of a possible need for a wholesale guarantee scheme.

The full, unredacted, paper we wrote is available on The Treasury’s website.   The thrust of the advice was that (a) action was not necessary immediately, but (b) that should conditions worsen a scheme could be put in place at quite short notice.  The rest of the paper outlined the relevant issues, and the recommended features of any such scheme, and we advised against announcing a scheme until the remaining operational details had been sorted out, something we suggested could be done in the folllowing week.

These were the key features we suggested, largely accepted by the Minister.

dgs 1

One thing that puzzles me looking back now is why we were focused on guarantee options, rather than lender of last resort options.  The latter would have involved lending on acceptable collateral to institutions that we judged to be solvent, perhaps at a penal rate.  It was the classic response to the idea of a contagious run –  troubles elsewhere in the financial system spark concerns about other institutions, and people “run” –  cashing in deposits, retail or wholesale –  just in case.  A sound institution could, in principle, be brought down very quickly by such a run (empirically there are few such examples –  most actual runs end up being on institutions that prove to be at-best borderline solvent).

In the paper we sent to the Minister on 10 October we don’t seem to address that option at all.  I presume the reason we didn’t was twofold.  First, guarantees were beginning to proliferate globally.  And second, there probably is a pretty strong argument that if (a) you are convinced your banking system is sound, and (b) there are nonetheless doubts in the wider environment (in this case, a full scale global crisis, and a domestic recession), a guarantee is likely to be considerably more effective in underpinning confidence.  Not so much depositor confidence, as the confidence of bankers (and their boards).    Even if lender of last resort funding, on decent collateral, had been available without question, few bankers would have been happy to rely on that, and many would have been very keen to cut exposures, pull in loans, and reduce their dependence on the good nature of the Reserve Bank Governor.   A guarantee –  where the Crown’s money is at stake –  is a much stronger signal than a loan secured on the institution’s very best assets.   On the other hand, as the paper does note, once given a guarantee may not leave one with much leverage over the guaranteed institution.

Almost all of the subsequent controversy around the deposit guarantee scheme related in one form or another to one key choice.

All the systemically significant financial institutions in New Zealand were banks (not that all banks were systemically significant).  But they were not, by any means, the only deposit-taking institutions, and we were in the midst at the time of a finance company in which many companies were proving to be insolvent and failing.  Other finance companies appeared –  not just to the Reserve Bank, but to the market, and to ratings agencies – just fine.

Treasury and the Reserve Bank jointly recommended to the Minister that any deposit guarantee scheme include finance companies.  Why did we do that?

The simple reason was one of both fairness and efficiency.  Had we proposed to offer a guarantee only to banks (let alone only the big banks) then in a climate of uncertainty and heightened risk, there would have been an extremely high risk that such an action would have been a near-immediate death sentence for the other deposit-taking institutions, including ones with investment grade ratings, and in full compliance with their trust deeds.    We knew that finance companies (while small in aggregate) were riskier than our banks, but that was no good reason to recommend to the government a model that would have killed off apparently viable private businesses.  It still seeems, with the information we had at the time, an unimpeachable argument.  Classic lender of last resort models, for example, don’t differentiate by the size of the borrowing institution.

We weren’t naive about the risks –  including that there was still no prudential supervision of finance companies and the like –  and we explicitly recommended that risk-based fees (tied to ratings) be adopted, and the maximum coverage per depositor be much lower for unrated entities.   We included in the table an indicative fee scale, based credit default swap pricing for AA-rated banks in normal times, scaling up (quite dramatically) based on the much higher default probabilities of lower-rated entities.

We even included a indicative, totally back of the envelope, guess as to potential fiscal losses –  drawing on the experience of the US S&L crisis.  As it happens, actual losses were to be less than that number, even though the scheme as adopted by the Minister of Finance was less good than the one we recommended.  (Treasury provided some other –  but lower – loss estimates a few days after the actual announcement, but I can’t see those on the Treasury website and can’t now recall the approximate numbers.)

But all that was just warm up.   We’d been under the impression that the Prime Minister was going to announce, in her campaign launch speech, that preparatory work was underway on a deposit guarantee scheme.  That was probably her intention.  But that didn’t allow for the Rudd effect.  The Australian Prime Minister decided that he was going to announce an actual retail guarantee scheme for Australia that day –  the Sunday.  And so it was concluded that New Zealand had little choice but to follow suit.   As a matter of economics, there probably was little real choice but to follow the Australian lead.  But the timing was all about politics.  Neither economic nor financial stability would have been jeopardised if we hadn’t had a deposit guarantee scheme announced before the banks opened on Monday morning.  We’d have been much better to have taken a bit more time and hashed out some of the details with the Minister in his office in Wellington, not at campaign launches and then, as the day went on, airport lounges (at one point late that afternoon I –  who’d talked to the Minister perhaps twice in my life previously –  was deputed to ring Dr Cullen and get his approval or some detail or other of the scheme).   But I guess it might have left open a brief window in which critics might have suggested that New Zealand politicians were doing less for their citizens and their economy than their Australian counterparts.

The main, and important, area in which Dr Cullen departed from official advice was around the matter of fees.   We’d recommended that the risk-based fees would apply from the first dollar of covered deposits (as in any other sort of insurance).     The Minister’s approach was transparently political –  he was happy to charge fees to big Australian banks (who represented the lowest risks) but not to New Zealand institutions (including Kiwibank).  And so an arbitrary line was drawn that fees would be charged only on deposits in excess of $5 billion.   Apart from any other considerations, that gave up a lot of the potential revenue that would have partly offset expected losses.  The initial decision was insane, and a few days later we got him to agree to a regime where really lowly-rated (or unrated) institutions would have to pay a (too low) fee on any material increases in their deposits. A few days later again an attenuated pricing schedule was applied to deposit-growth in all covered entities.   But the seeds of the subsequent problems were sown in that initial set of decisions.

The weeks after the initial announcement were intense.  We rushed to get appropriate deed documents drawn up, dealt with endless request from institutional vehicles not covered who sought inclusion (property trust, money market funds etc), and set up a monitoring regime.  In parallel, we quickly realised that the way wholesale funding markets were freezing up suggested that a wholesale guarantee scheme was appropriate, and got something announced in a matter of weeks –  a much more tightly-designed, better priced scheme, operating only on new borrowing (but I’m biased as that scheme was mostly my baby).  As it happens, that scheme provided the leverage to actually get the big banks into the deposit guarantee scheme.  Once the government had announced the retail scheme the big banks had little incentive to get in –  they probably thought of themselves (no doubt rightly) as sound and as too big to fail –  and the scheme was an opt-in one (we couldn’t just by decree compel banks to pay large fees).   But the Minister of Finance –  probably reasonably enough –  insisted that if banks wanted a wholesale scheme (which they really did) it would be a condition that they first sign up to (and pay for) the retail scheme.  Perhaps less defensible was the Minister’s insistence that any bank signing up to the guarantee scheme indicate that it would avoid mortgagee sales of home owners in negative equity but still servicing their debt (the ability of banks to do so is a standard provision of mortgage documentation).

After the first few weeks of the retail scheme I had only relatively limited ongoing involvement, and so I’m not going to get into litigating or relitigating the South Canterbury Finance failure, and whether –  even the constraints the Minister put on –  and how that could by then have been avoided (the Auditor-General report some years ago looked at some of those issues).   The outcome was highly unfortunate, and expensive.  Nonetheless, it is worth remembering that the total cost of all the guarantee schemes – retail and wholesale – was considerably less than officials had warned was possible.  And it is simply not possible to know the counterfactual –  how things might have unfolded here had either no guarantees been offered, or if the finance companies and building societies had been excluded from day one.  Personally, I think neither would have provided politically tenable, but we’ll never know that, or how that alternative world played out.

But with the information we had at the time –  including, for example, the investment grade credit rating for SCF (which had outstanding wholesale debt issues abroad –  and actually my only meeting with SCF was about their interest, eventually not pursued, to try to use the wholesale guarantee scheme) –  the recommendation made on 10 October seem more or less right. Given the same information I’m not sure I’d advise something different now.  And once Australia had made the decision to guarantee retail deposits, there was little effective economic or political choice for New Zealand.   Had they not done so –  and there was real data, regarding increasing demand for physical cash in Australia, supporting Rudd’s action (rushed as timing was) – perhaps we could have got away with a well-designed wholesale guarantee only.   That would have been a first-best preferable world, but it wasn’t the set of facts we actually had to work with.

 

Race and the Living Standards Framework

Michael Reddell Treasury

The Treasury has been at work on its Living Standards Framework for some years now (since at least 2011).  When it was first dreamed up I recall remarking to various people that it seemed like preparation for a Labour/Greens government.  And so it has come to be, with the new government embracing the framework –  a substitute for actually doing anything about New Zealand’s dismal productivity record –  and talking endlessly about their forthcoming “wellbeing Budget”, plans for which must now be well underway.

There have been numerous papers published.  Among them were several playing identity politics:

Strangely, the Pacific paper emphasises that there is a wide variety of different Pacific cultures, but the Asian one talks repeatedly of “the Asian culture”.   This was the paper Gabs Makhlouf was touting in China a couple of weeks ago, talking up the “value” of “recognition of the hierarchical orderings of relationship.”

Personally, these papers strike me as largely a waste of public money.   But then so is the whole project, and I am very uneasy about The Treasury trying to analyse policy by loose race-based “preferences” or sets of values.  It has been notable, for example, that they have made no effort (to date) to look at perspectives on “wellbeing” by religion, for example –  where any differences may well be starker than those across race-based lines. Nothing either by political affiliation or ideology.  Only race.

Treasury were the ones who set off on the race-based path.  So I was curious –  and, okay, being slightly mischievous –  about what they’d done to look at the perspectives on the issue of European New Zealanders?   I didn’t actually expect they’d have done anything –  maybe they just assumed that their British CEO could adequately represent a (or the likely wide range of) European perspective(s)?   But I lodged the OIA request, and had a response this afternoon.

This was my request

Dear Sir/Madam,
I have noticed that Treasury has recently released papers on Maori, Pacific and Asian New Zealanders” “wellbeing” and the Living Standards Framework.  This is to request any similar work on European New Zealanders’ wellbeing, and if no such work exists any explanations why, and copies of any papers/emails relevant to the decision not to prepare such a paper.
Thanks in anticipation.
and this was the response,  provided on the very last of the standard 20 working days, and certainly not (as the Act requires) as soon as reasonably practicable.
The request is being declined under section 18(e) because the document/s requested do not exist.

In other words, it seems it never even occurred to them to think about the distinctive perspectives of the largest ethnic group in New Zealand.

Telling really, about the tokenism and identity politics that seems to infest this project.

 

The IDI and government data linking

Michael Reddell Statistics, Treasury, Uncategorized

Browsing on The Treasury’s website the other day, it was the title that caught my eye: “Talkin’ about a revolution”.   I’m rather wary of revolutions.  Even when –  not always, or perhaps even often –  good and noble ideas help inspire them, the outcomes all too often leave a great deal to be desired.   There are various, quite different, reasons for that, but one is about the failure to think through, or care about, things –  themselves initially small or seemingly unimportant – that the revolution opens the way to.

This particular “revolution” – billed as “a quiet and sedate revolution, but a revolution nonetheless” – was sparked by Statistics New Zealand’s Integrated Data Infrastructure (IDI).   Here is the Treasury author

The creation of Stats NZ’s IDI (or Integrated Data Infrastructure), a treasure trove of linked data, sparked the revolution, and its ongoing development drives it along. The IDI doesn’t collect anything new. Instead it gathers together data that is already collected, links it together at a person level, anonymises it, and makes it available to researchers in government, academia, and beyond.

The author goes on

Since 2013, its growth has been far more rapid. From a handful of users in its early years, there are now hundreds of people using IDI data to help answer thorny questions across the full range of social and economic research domains. The IDI is incredibly powerful for research, and has a number of important strengths.

  • Longitudinal – Providing a picture of people’s lives over time, crucial for understanding the effect of policies and services.
  • A full enumeration – Incorporating administrative data for almost all New Zealanders, enabling a focus on minority groups and small geographic areas.
  • Accessible – By making data available to researchers at relatively low cost, agencies are no longer gatekeepers of the data they collect, and a culture of sharing in the research community is encouraged.
  • Cross-sectoral – Allowing researchers to explore the relationships between different aspects of people’s lives that may be invisible to individual agencies.

There is a breathless enthusiasm about it all.

Stats NZ’s new online research database highlights the huge breadth of research underway for the benefit of all.

It is never made clear quite how the Treasury author gets to his conclusion that all this research benefits us all.

And here is the SNZ graphic illustrating the range of data they have put together (and linked)

IDI

I’m a bit torn about the IDI (and its business companion, the LBD).   As an economist and policy geek, I’m fascinated by some of results researchers have been able to come up with using this new database.  A few months ago I wrote (positively) here about how Treasury staff had been able to derive new estimates on internal migration.   Here is a chart I showed then on the various databases linked together that enabled those estimates.

tsy popn
And here is a more-detailed SNZ graphic on what data are in the IDI at present (and more series are still being added).

IDI 2

More details are here.

Note that it is not even all government data –  for example, the Auckland City Mission is providing data on people it assists.  Specifically

Auckland City Mission data

Source: Auckland City Mission
Time: From 1996
What the data is about:  Income, expenses, housing status, and household composition of Auckland City Mission clients, and the services these clients use. Auckland City Mission is a social service provider in Auckland CBD, that helps Aucklanders in need by providing effective integrated services and advocacy. Note: data dictionary available on the IDI Wiki in the Data Lab.
Application code: ACM

Even if in 1996 those individuals gave their consent for their (anonymised) data to be used, few people in 1996 would have had any idea of the practical linking possibilities in 2018.   (And at a point of vulnerability how much ability did they have to decline consent anyway?)

It is researcher heaven.  But it is also planner’s heaven.

Statistics New Zealand sings the praises of the IDI (as does Treasury –  and any other agency that uses the database).  I gather it is regarded as world-leading, offering more linked data than is available in most (or all) other advanced democracies –  and that that is regarded as a plus.   SNZ (and Treasury) make much of the anonymised nature of the data, and here I take them at their word.  A Treasury researcher (say) cannot use the database to piece together the life of some named individual (and nor would I imagine Treasury would want to).   The system protections seem to be quite robust –  some argue too much so – and if I don’t have much confidence in Statistics New Zealand generally (people who can’t even conduct the latest Census competently), this isn’t one of the areas I have concerns about at present.

But who really wants government agencies to have all this data about them, and for them to be able link it all up?   Perhaps privacy doesn’t count as a value in the Treasury/government Living Standards Framework, but while I don’t mind providing a limited amount of data to the local school when I enrol my child (although even they seem to collect more than they need) but I don’t see why anyone should be free to connect that up to my use of the Auckland City Mission (nil), my parking ticket from the Dunedin City Council (one), or (say) my tiny handful of lifetime claims on ACC.  And I have those objections even if no individual bureaucrat can get to the full details of the Michael Reddell story.

The IDI would not be feasible, at least on anything like its current scale, if the role of central government in our lives were smaller.   Thus, the database doesn’t have life insurance data (private), but it does have ACC data.  It has data on schooling, and medical conditions, but not on (say) food purchases, since supermarkets aren’t a government agency.   I’m not opposed to ACC, or even to state schools (although I would favour full effective choice), but just because in some sense there is a common ultimate “owner”, the state, is no reason to allow this sort of extensive data-sharing and data-linking (even when, for research purposes, the resulting data are anonymised).   There is a mentality being created in which our lives (and the information about our lives) is not our own, and can’t even be stored in carefully segregated silos, but is the joined-up property of the state (and enthusiastic, often idealistic, researchers working for it).   We see it even in things like the Census where we are now required by law to tell the state if we have trouble “washing all over or dressing” or, in the General Social Survey, whether we take reusable bags with us when we go shopping.    And the whole point of the IDI is that it allows all this information to be joined up and used by governments –  they would argue “for us”, but governments view of what is in our good and our own are not necessarily or inevitably well-aligned.

In truth my unease is less about where the project has got to so far, but as to the future possibilities it opens up.  What can be done is likely, eventually, to be done.   As I noted, Auckland City Mission is providing detailed data for the IDI.  We had a controversy a couple of years ago in which the then government was putting pressure on NGOs (receiving government funding) to provide detailed personal data on those they were helping –  data which, in time, would presumably have found its way into the IDI.   There was a strong pushback then, but it is not hard to imagine the bureaucrats getting their way in a few years’ time.  After all, evaluation is (in many respects rightly) an important element in what governments are looking for when public money is being spent.

Precisely because the data are anonymised at present, to the extent that policy is based on IDI research results it reflects analysis of population groups (rather than specific individuals).  But that analysis can get quite fine-grained, in ways that represent a double-edged sword: opening the way to more effective targeting, and yet opening the way to more effective targeting.  The repetition is deliberate: governments won’t (and don’t) always target for the good.  It can be a tool for facilitation, and a tool for control, and there doesn’t seem to be much serious discussion about the risks, amid the breathless enunciation of the opportunities.

Where, after all, will it end?   If NGO data can be acquired, semi-voluntarily or by standover tactics (your data orno contract), perhaps it is only a matter of time before the pressure mounts to use statutory powers to compel the inclusion of private sector data? Surely the public health zealots would love to be able to get individualised data on supermarket purchases (eg New World Club Card data), others might want Kiwisaver data, Netflix (or similar) viewing data, library borrowing (and overdue) data, or domestic air travel data, (or road travel data, if and when automated tolling systems are implemented), CCTV camera footage, or even banking data.  All with (initial) promises of anonymisation –  and public benefit – of course.  And all, no doubt, with individually plausible cases about the real “public” benefits that might flow from having such data.  And supported by a “those who’ve done nothing wrong, have nothing to fear” mantra.

After all, here the Treasury author’s concluding vision

Innovative use of a combination of survey and administrative data in the IDI will be a critical contributor to realising the current Government’s wellbeing vision, and to successfully applying the Treasury’s Living Standards Framework to practical investment decisions. Vive la révolution!

Count me rather more nervous and sceptical.  Our lives aren’t, or shouldn’t be, data for government researchers, instruments on which officials –  often with the best of intentions –  can play.

And all this is before one starts to worry about the potential for convergence with the sort of “social credit” monitoring and control system being rolled out in the People’s Republic of China.    Defenders of the PRC system sometimes argue –  probably sometimes even with a straight face –  that the broad direction of their system isn’t so different from where the West is heading (credit scores, travel watchlists and so).   That is still, mostly, rubbish, but the bigger question is whether our societies will be able to (or will even choose to) resist the same trends.  The technological challenge was about collecting and linking all this data,  and in principle that isn’t a great deal different whether at SNZ or party-central in Beijing.   The difference –  and it is a really important difference –  is what is done with the data, but there is a relentless logic that will push erstwhile free societies in a similar direction  –  if perhaps less overtly – to China.  When something can be done, it will be hard to resist eventually being done.    And how will people compellingly object when it is shown –  by robust research –  that those households who feed their kids Cocopops and let them watch two hours of daytime TV, while never ever recycling do all sort of (government defined –  perhaps even real – hard), and thus specialist targeted compulsory state interventions are made, for their sake, for the sake of the kids, and the sake of the nation?

Not everything that can be done ends up being done.  But it is hard to maintain those boundaries, and doing so requires hard conversation, solid shared values etc, not just breathless enthusiasm for the merits of more and more linked data.

As I said earlier in the post, I’m torn.  There is some genuinely useful research emerging, which probably poses no threat to anyone individually, or freedom more generally.   And those of you who are Facebook users might tell me you have already given away all this data (for joining up) anyway –  which, even if true, should be little comfort if we think about the potential uses and abuses down the track.   Others might reasonably note that in old traditional societies (peasant villages) there was little effective privacy anyway –  which might be true, but at least those to whom your life was pretty much an open book were those who shared your experience and destiny (those who lived in the same village).   But when powerful and distant governments get hold of so much data, and can link it up so readily, I’m more uneasy than many researchers (government or private, whose interests are well-aligned with citizens) about the possibilities and risks it opens up.

So while Treasury is cheering the “revolution” on, I hope somewhere people are thinking harder about where all this risks taking us and our societies.