Uncategorized

NZSF: from bad to worse

Michael Reddell NZSF, Uncategorized

I’ve written various posts here about the conduct of the New Zealand Superannuation Fund when Adrian Orr was CEO.    Their investment returns have been no better than one might have hoped for given the amount of risk they (force taxpayers collectively to) take.  Formally, they will argue that their strategies are risky enough that one can really only judge based on 20 year runs of performance (the Fund is only 15 years old).   But they talk themselves up endlessly, making dubious claims about their contribution, and playing politics more often than sound economics.  We had the big call last year to reduce their carbon exposures, allegedly on the grounds that risk-return considerations didn’t support such investments any longer, but then they implemented the decision in a way that makes it impossible to see whether this big active management call was well-judged on financial grounds, or not.  As I say, they play politics more than good policy, good economics, or good finance.

Since Adrian Orr moved on, the Fund has been led by Matt Whineray, now confirmed as CEO.    From him we’ve seen the unsolicited bid to be owner or part-owner of the government’s planned new light rail projects.     As I noted when that news came out

I’m sure the government is delighted.  As their predecessors were when the NZSF and ACC teamed up –  off-market of course – to take part-ownership of Kiwibank, without actually providing any fresh expertise, and in the process reducing the transparency and accountability around (what is still 100% state-owned) Kiwibank.  But in the end these are votes of confidence from public servants, who know which side their bread is buttered on.

As I’ve written about here previously, NZSF aren’t great investment gurus.  They’ve made quite a lot of money taking big risks in a strongly rising global market, but the returns relative to risk, or to taxpayer’s cost of capital haven’t been particularly attractive and –  as even NZSF will acknowledge –  markets go down as well as up.   As for light-rail projects, the NZSF statement noted that around 2 per cent of the Fund is in infrastructure assets worldwide.  That doesn’t suggest any particular expertise in light-rail –  and they don’t point to any in the statement.   And almost any government project can be made viable for an investor if the associated contracts are skewed sufficiently favourably in the investor’s direction.

Perhaps a good deal can be constructed for NZSF (with appropriate pricing and risk shifting, silk purses for some parties can be created almost anywhere), but it doesn’t have the feel of NZSF doing its core job.  It has the feel of NZSF continuing to degrade the  New Zealand policy process, using its (our) moneypots to serve political ends.

This last week I see NZSF has had a press release out.

The NZ Super Fund has congratulated Bloom Energy on its initial public offering on the New York Stock Exchange.

“The public listing is a significant milestone for Bloom Energy as it works to deliver sustainable on-site electricity to organisations around the world,” said Acting Chief Investment Officer Mark Fennell. “We look forward to supporting Bloom Energy as a listed entity for mutual benefit.”

Bloom Energy appears to be fairly new company NZSF had invested in.   Unfortunately, it is one that NZSF has already lost money on.

Mr Fennell acknowledged that Bloom Energy, while performing strongly on listing (up 67%), was currently priced below the level at which the NZ Super Fund initially invested in the company.

But no matter.  Just stick the investment in the bottom drawer for long enough and hope it comes right…..

“As a long-term investor the NZ Super Fund’s primary focus is on what we buy an asset for and the value we ultimately realise. Our investment returns will only crystallise when we sell our stake. What our investment is worth at various interim time periods is not as important to the NZ Super Fund as it is to investors with a shorter investment horizon.”

Typically, the best estimate of what someone will see an asset for is closely related to the current market price for that asset.  I’m not sure why NZSF felt it necessary or appropriate to put out a press release on this occasion, but I’m quite uneasy about an organisation –  managing our money, not their own –  that thinks that in rising global markets, a mark to market loss is just irrelevant, and made so because somehow NZSF can take a longer view than some other investors.   Even NZSF should recognise that it would have been rather better for them to have paid the IPO price (had they done so, they’d already have been up 67 per cent), not whatever loss-making price they actually did pay.

And then, in this morning’s newspaper, comes news that NZSF is lobbying (via the Tax Working Group) for tax concessions –  subsidies and corporate welfare programmes –  for infrastructure businesses it wants to get involved it.  The full (quite short) submission is here, but the gist is that they want cut-price company tax rates (no more than half the company tax rate) for “nationally significant infrastructure projects” (one of the criteria for such projects would be “Alignment with the Treasury’s living standards framework”), protection against any changes in tax rates over the (multi-decade) life of the project, and exemptions from standard RMA, immigration etc procedures.

I’m all in favour of lower company (and capital income) taxes more generally.  Standard economic analysis supports that sort of policy, and all of us would be expected to benefit from adopting such a policy approach.  But that isn’t what is proposed by NZSF; it is just a lobbying effort to skew capital towards particular sectors they happen to favour.  It is a pretty reprehensible bid to degrade the quality of our tax system.  There is no economic analysis advanced in support of their proposal –  so little it almost defies belief –  no sense of considerations of economic efficiency, just the success of lobbying efforts in a few other countries (including two struggling middle income countries not known for the efficiency of capital allocation or quality of governance, and the United States –  which not only has plenty of poor infrastructure, but a corporate tax code  riddled with exemptions and distortions).

NZSF is clearly in favour with the new government.  But the cause of good policymaking and the cause of efficient allocation of capital would, almost certainly, be advanced if it were simply wound up and the proceeds used to repay debt.  We should also stop the pretence –  advanced repeatedly by Fund spokespeople –  that we have a “sovereign wealth fund”.  What we have is a speculative investment fund, financed with borrowed money, producing no better than respectable, high risk returns, making no real difference to important questions around state-funded age pensions, and increasingly at risk of being used to skew capital allocation towards favoured political ends, backed by threadbare (or non-existent) economic analysis.

 

Debating the Reserve Bank bill

Michael Reddell Reserve Bank Act reforms, Uncategorized

The first reading debate yesterday on the Reserve Bank amendment bill wasn’t exactly Parliament at its finest.    There was plenty of courtesy on display (with one exception, which I’ll come to below) but not much rigour, and not much regard for the importance of building strong and robust, open and transparent, institutions.

The National Party voted against the first reading.  According to the party’s finance spokesperson, Amy Adams, they support the move to establish a statutory Monetary Policy Committee

I want to deal reasonably briefly with the monetary policy committee, because that is an area where we see a lot of merit in what has been proposed. Of course we want to go to select committee and see what comes in, and we may well find issues that need exploring, but, at this stage, I think the monetary policy committee makes good sense.

but they oppose the change to the statutory goal of monetary policy.  It isn’t entirely clear from her speech read together with those of her colleagues whether they oppose the change because it will make no difference, simply reflecting what the Bank already does, or because they think it will make a difference, and they don’t like the difference it might make.    The former seems a very weak ground on which to oppose legislation: it is a good thing, not a bad thing, to ensure that legislation and practice are kept in line (arguably, for example, the Reserve Bank of Australia’s and the Federal Reserve’s legislation should have been updated long ago).

As I noted in yesterday’s post, I don’t much like the formulation of the statutory objective for monetary policy contained in the bill.  That isn’t because I think it will be deeply damaging, just that the government and their advisers haven’t done a very good job in capturing what it is that we should expect from an active discretionary monetary policy.  National Party members were at pains to point out that there is no long-term tradeoff between price stability on the one hand and employment/unemployment on the other hand.  And, of course, that is quite right.  It has been well-known for decades.   But equally well-known –  and for even more decades –  is that there is a relationship in the shorter-term.  It is why we have an active monetary policy.     But there is no sense of that distinction in the drafting the government has brought before Parliament.

Thus, I repeat the suggested wording I included in yesterday’s post

“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”

or the sort of wording I proposed last year when I was a discussant at the seminar where Labour launched its policy.

To promote and safeguard price stability and the highest degree of employment [or lowest degree of unemployment] that can be achieved by monetary policy

That drew heavily on the language used in the Reserve Bank Act in the 1950s, introduced by a National Party finance minister.

One wants the Reserve Bank to do all it can to keep unemployment low, but only to the point where that is not in conflict with medium-term price stability.  In severe recessions –  mostly what we worry about, since these are human lives that are scarred –  “all it can” is quite a lot.  I don’t think the government has the wording right, and the National Party is right to push back, but if they are as serious as they say about working constructively in the select committee, it should be possible to find better wording which reflects the signicant short-run potential of monetary policy, and the very limited medium to long-term potential to do anything other than maintain price stability (or some similar nominal goal).

The complacency of the National Party probably shouldn’t have surprised me, just coming off nine years in government, but it did.    There were ludicrous claims –  from one backbencher old enough to know better – that for 30 years “the economy has gone incredibly well”, odd suggestions that the inflation target and price stability were themselves in conflict, and more specific ones about about the excellence of the Reserve Bank’s stewardship, even the suggestion that the new Governor will do a “superb job”.  Perhaps they have forgotten already that it is only a few weeks since the Opposition leader had a press statement out criticising the Governor?   Perhaps they are unbothered by past debacles like the MCI, or more recent episodes where the single decisionmaking Governor started lashing out at his critics, while refusing to ever substantively engage on issues?

But perhaps the most disconcerting claim was that there had never been an issue around unemployment and monetary policy in New Zealand.   On the Reserve Bank’s own numbers New Zealand went through seven years of a negative output gap (2008 to 2015), core inflation has been below the target focal point for eight years now, and the unemployment rate was above the Bank’s own estimate of a NAIRU for eight years (only dropping down to around that level in the last year or so).    Now clearly that was a failure in terms of the objectives set for the Bank, even without any sort of explicit employment/unemployment objective; on average monetary policy should have been run with lower real interest rates over much of that period.  But it seems to me that there is a reasonable argument to be made that had the Bank been obliged to, say, use monetary policy to keep the unemployment rate as low as possible, consistent with medium-term price stability, we might have had slightly better outcomes –  notably for those people who were involuntary unemployed, a scarring experience, during that period.

Oddly, the Minister of Finance never makes this argument –  consistent with his refusal ever to disagree with, or criticise, the Governor when he himself was in Opposition.  He should.   The experience of the last decade isn’t greatly to the credit of the Reserve Bank.  Perhaps they mostly had the best of intentions.  But they did poorly, and real people suffered as a result.    A reorientation of the target, focusing a bit more on the short-term stabilisation aspects, without sacrificing medium-term nominal stability, with strong reporting requirements –  and the right people –  could have made some useful difference.   (And, to stress that I’m not going to be tarred as some inflationista, in my ideal world the inflation target itself would be lower than it is.)

I wanted to pick up comments from two other speeches.  The first was from Chloe Swarbrick of the Green Party.  Whatever my differences with the Green Party, they deserve considerable credit for being the first party to call for a statutory Monetary Policy Committee, and historically they have also put a lot of emphasis on securing greater openness and transparency from the Reserve Bank (and used to greatly annoy the Bank by regularly requesting copies of Reserve Bank Board minutes, inadequate as they are).

In the course of her speech yesterday she made this comment

I think this piece of legislation, this bill, is a fantastic starting point for providing greater transparency and accountability for one of our most fundamental institutions.  This is, ultimately, about democracy.

If only that were so.   At very best, in respect of the Monetary Policy Committee, it is a baby-step in the right direction.  More realistically, it is a step away from accountability, and towards more power for unelected people (not even technocrats) with no visibility, no public accountability, and a majority of whom will have been appointed by the previous government.

For all its weaknesses, one feature of the current system is that it is very clear who should be accountable when the Reserve Bank gets it wrong, or even makes a controversial call that reasonable people differ over.  It is the Governor.  Effective accountability isn’t very strong, since the Board is supine, Ministers typically afraid of openly disagreeing with Governors, and market economists often cowed (either by threats from the Governor –  as in the Toplis case –  or more generally by the need to maintain relationships, access, and so on to an entity that regulates their employer).  But responsibility –  credit and blame –  is clear.      The same goes for good monetary policy committee systems, such as those in the UK, the United States, or Sweden  (actually, the same goes for Parliament itself, or even your dysfunctional local council –  there is individual responsibility).   But recall that the Minister of Finance has already said that he wants decisionmaking to be by consensus, no public record of who is dissenting and why, no opportunity for MPC members to articulate their views publicly, and so on.  We’ll have published minutes, which looks on paper like a small step forward, but with the amount gagging the Minister seems to envisage, it is unlikely to be a material win for transparency.    It looks a lot like a fig-leaf.        Not only will accountability be diffused and weakened –  in a quite unnecessary way – but these closed systems weaken any incentive for anyone appointed as an external member to invest heavily in the process. Free-riding, going along with the Governor as much as possible, will offer the best risk-return strategy (after all, challenge the Governor and you could be sacked, or not reappointed, and there is no opportunity for your views –  in an area of huge uncertainty –  to get a public airing.

And what of democracy?   The Governor was appointed by the Board –  oh, the Minister took the name to Cabinet, but he could only take the name proposed by the Board (or tell them to go away and come back with another name of their choosing.   The Board –  when the Orr appointment was made –  had all been appointed by the previous government (clearly out of sympathy with any sort of employment focus).  The current Deputy Governor was appointed by the previous Governor –  him of silencing critics, undershooting inflation etc –  and his supine board.  Both these appointees will be members of the new MPC.   The one or two new internal appointees will be appointed by the Minister, but only on the recommendation of the Board, who in turn will be guided by the Governor.    As I noted yesterday, the external appointees will also be chosen by the Board and the Governor (and recall that the Governor is on the Board), subject to an effective gubernatorial veto.  These appointments won’t be made until next year, but even by early next year, a majority of the Board members –  shocking track record, no expertise in the field, no accountability or scrutiny at all – will have been appointed by the previous government.

That isn’t democracy.  You couldn’t even call it rule by technocrats or philosopher kings, since the Board members are themselves just a bunch of company directors, academics etc, with no expertise, no legitimacy, no mandate.  And yet the Labour Party thinks –  apparently with support from both National and the Greens –  that these people should decide who makes monetary policy, the principal lever of short-term stabilisation policy.  I believe in the importance of democracy.   This isn’t it.

It is simply normal practice to have major appointments made directly by the relevant minister (or Cabinet, or on advice by the Governor-General).  It is strikingly abnormal to have appointments to major discretionary roles –  in central banks, or elsewhere in government –  so much out of the hands of elected politicians.  It would be a material step backwards, especially given the weakened accountability the government is proposing.  The National Party spokesperson is apparently worried that external members might be political hacks or under political pressure.  On the one hand, the Governor (at present) is probably much more susceptible to pressure, since he has lots of other battles to fight, including around his financial stability responsibilities. But perhaps more importantly, the dominance of politically-appointed decisionmakers is the norm in central banks abroad.  Those countries manage macroeconomic stability just fine.  It is also the norm in New Zealand –  I devoted a whole post to go through other roles.  Politicians appoint the Police Commissioner, members of the Commerce Commission, the Parole Board, the Governor-General herself, and all individual judges.    There is no good reason why appointments to key, powerful, Reserve Bank roles should be different: ministers should appoint directly, and thus be fully accountable for, people who wield such power on our behalf.

The final contribution to the debate that I wanted to comment on was that of the ACT Party, David Seymour.   Whenever I’m tempted to consider supporting ACT, all I need do is listen to one of Seymour’s speeches.  Here are some lines from his speech yesterday.

Thank you, Madam Assistant Speaker. I rise, on behalf of the ACT Party, in opposition to this bill—this piece of ministerial vanity and economic vandalism.

…..

Could it be that this is not just dumb policy; this is actually evil policy. This is an erosion of the independence of the central bank. This is the current Government attempting to take control of the printing presses—not quite Venezuelan style; just in a sort of smaller capacity than they’re used to. It is a way that this Government will be able to influence the supply of money, and I bet this House that, when this is place, and when their committee is making the decisions, we will no longer have independent monetary policy; we will have a pattern that will be detectable in a few electoral cycles, which will tell us that the money supplied goes up and inflation goes up and the economic sugar hit comes out right before an election, and then, once the election is gone, they take the punchbowl away and the New Zealanders get the economic instability that the Reserve Bank Act was designed to take away.

This is a black letter day in New Zealand lawmaking. The Minister either has no idea what he’s doing or he has every idea what he’s doing.

Reasonable people can debate the merits of altering the statutory objective.  Reasonable people can debate the design of a committee system.  Perhaps reasonable people can even debate whether a committee is a good idea, although we use them in almost every other aspect of public (and private –  company boards, tennis club committees, church synods etc) life.  But a contribution like this says more about the speaker than it does about the issues.    And, rightly or wrongly, there is just no sign in market pricing (eg gaps between conventional and indexed bonds) that the market shares Mr Seymour’s fears.

One hopes that Finance and Expenditure Committee deliberations will prove constructive, and that the government will be open to amendments.  Given that the chair and deputy chair of the committee are both part of the government (both holding Under-Secretary positions), I’m not that optimistic, but we’ll see.  I did notice one National Party speaker yesterday praising the committee chair (Michael Wood), and Wood’s speech in the debate was probably the best of them, so time will tell.

Reserve Bank of New Zealand (Monetary Policy) Amendment Bill

Michael Reddell Reserve Bank Act reforms, Uncategorized

The first reading of the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill is on Parliament’s order paper for today.      This bill is designed primarily to give effect to the policy decisions the Minister of Finance announced a few months ago, to change the statutory objective of monetary policy, and to create a statutory Monetary Policy Committee responsible for the conduct of monetary policy (details of which were set out here and here).

There are, however, some other changes proposed.  In particular, there seems to have been –  at last –  a recognition that the process used last year to appoint Grant Spencer as “acting Governor” was probably not lawful.   The proposed amendments would deal with any similar situation (created by the timing of an election) by allowing the extension of the term of an incumbent by (or a temporary appointment for) up to six months.   The ability to extend terms seems sensible (provided it can be done only once), although I’m less sure about the proposal to appoint a new person as Governor for six months.  But individual vacancies should matter less under the new model (at least as regards monetary policy) because of the move to a statutory committee.

In addition, the bill sensibly proposes to remove the age limit (age 70) for the Governor.   There was a strong case for some age limit with a single decisionmaker (given the extensive powers and the extreme practical difficulty of removing someone who was in clear mental decline) even if age 70 was probably now too young.  With a shift to a committee decisionmaking structure (at least for monetary policy) the issue becomes somewhat less important.  However, for now at least, the Governor still will wield enormous power around bank and non-bank financial regulation, so I’m not totally comfortable with the change.  Higher court judges, for example, must retire at 72.

There are lots of detailed provisions in the bill. some of which are sensible, and others fairly problematic. I will be making a submission to the select committee, and so will cover many of the issues in more detail then, with the benefit of a bit more time to reflect on how the specific provisions might work.

In the rest of this post, I wanted to come back to the two big changes that are being proposed.

I’ve been sympathetic for some time to the addition of a real economy dimension to the statutory objective for monetary policy.  The only case for active discretionary monetary policy is –  and always has been –  cyclical stabilisation.   We don’t need a Reserve Bank to deliver broadly stable price levels over the longer-term, and even if we have a Reserve Bank it doesn’t need to be active.  But there is a case for active monetary policy to limit the downsides from severe adverse shocks to money demand or aggregate demand –  the Great Depression was the most obvious example, and indeed the backdrop to the establishment of the Reserve Bank of New Zealand.  Monetary policy should do what it can, subject to a longer-term nominal constraint (eg price stability).

I’m less keen on the specific formulation in the government’s new bill

The Bank, acting through the MPC, has the function of formulating a monetary policy directed to the economic objectives of—

(a) achieving and maintaining stability in the general level of prices over the medium term; and

(b) supporting maximum sustainable employment.

That formulation has a number of problems:

  • the whole concept of what monetary policy can do is to avoid (or keep to a minimum, consistent with price stability) periods of excess capacity.  Despite Treasury’s attempt to argue otherwise in the Explanatory Note to the bill, “maximum sustainable employment” is not a measure of excess capacity.  Unemployment is much closer to an excesss capacity measure.
  • the wording treats employment as good in itself, whereas labour is an input (a cost, including to those who supply it) and a high-performing high productivity economy might well be one in which people preferred  to work less not more.  Speaking personally, as a non-participant in the labour force I feel slightly judged by the wording –  as if, by not being a good Stakhanovite, I’m not doing my bit,
  • the wording makes no attempt to integrate the two dimensions of the goal,
  • it continues to suggest that active monetary policy is primarily about medium-term price stability.  As noted earlier, we don’t need monetary policy for that goal.  Instead, medium-term price stability is more like a constraint (a really important one) on the use of monetary policy to keep the economy operating close to capacity.

I’d prefer that the goal was specified as something like

“Monetary policy should aim to keep the rate of unemployment as low as possible, consistent with maintaining stability in the general level of prices over the medium-term.”

It isn’t anywhere near as radical as it might seem.  The working definition of “stability in the general level of prices over the medium-term” could be kept exactly as it now (ideally, lowered a bit once the lower bound issues are resolved).  But it is clearer, and better aligns with what we should look for from the Bank and the new MPC.

The Minister’s announcement a few months also (sensibly) proposed moving away from the current target-setting system (Governor and Minister agree before the Governor is appointed) to one where the Minister sets the objective and the MPC as a whole is responsible for implementing policy to give effect.

Currently, the PTA is an agreement between the Minister of Finance and the Governor. Looking forward, as the MPC will be collectively responsible for making monetary policy decisions, it would be inappropriate for the Governor to be the sole member of the MPC to agree the operational objectives for monetary policy. As a result, we are changing to a model where the Minister of Finance sets the operational objectives for monetary policy. These objectives will be set after nonbinding advice from the Reserve Bank and the Treasury (as the Minister’s advisor) is released publicly.

Unfortunately, the bill before Parliament today materially waters down the (very welcome) promise in the last sentence.    Under that statement from the Minister, the operational objectives would be set only after both the Reserve Bank and the Treasury had provided advice, and that advice had been made publicly available.

In the bill itself, there is no reference to advice from Treasury, and no commitment that any such advice they proferred would be made public (although no doubt eventually an OIA request would bring it to light).   The Bank is required to give advice, but that advice remains specifically that of the Governor himself.  The Governor must consult with the other MPC members (but is not even specifically required to “have regard” to their views), and the Governor’s advice is now only to be published after the Minister has published the new operational objectives.

Interestingly, the bill explicitly requires public consultation by the Bank before it submits its advice on the operational objectives (“remit”), and it is required to “have regard” to those comments.  But instead of the consultation requirement being cast broadly, the Bank is able to determine “the matters the Bank considers would assist it to prepare its advice”.   Used wisely by a good Governor it wouldn’t be a problem, but legislation is largely about protecting the system from bad or weak individuals: in the case of a bad, weak, or just overconfident Governor, that person could deliberately rule anything s/ he found awkward out of scope when inviting public submissions.  And there is no requirement that the submissions themselves should be made public –  an omission that really should be corrected.

Much of the bill is about keeping as much power with the Governor as possible, while still instituting a committee.  Sadly, it is probably a recipe for a fig-leaf committee, rather than for the sort of real and positive change that is needed.    As just one example, although future Monetary Policy Statements will have to be approved by the MPC, the bill introduces (something I’ve previously suggested) a requirement that at least once every five years a longer-term report on the formulation and implementation of monetary policy be published.   But instead of, for example, mandating the commissioning of independent assessments and evaluations, this report will be the product of the Governor alone.   The Governor will be required to consult the other  MPC members and “consider” the “comments (if any) of the MPC on the draft”, but not even a majority of the committee can alter the direction of the report if the Governor doesn’t agree.   It is bizarre and inappropriate, but seems to reflect the Minister’s preference for a fig-leaf.   Based on some of his other comments, it is not obvious that the rest of the MPC could go public even if they disagreed strongly with the Governor’s assessment.

In previous posts, I have touched on the way in which the Minister’s proposals will effectively maintain the near-complete domination of monetary policy by the Governor.  Perhaps as disconcerting is that they also increase the power of the Bank’s Board –  that group of unaccountable company directors and academics who’ve proved totally useless in ever holding successive Governors to account, and who have backed Governors without exception even as they have seriously overstepped the mark.

The new MPC will comprise the Governor, a single Deputy Governor, 1-2 internals, and 2-3 externals (plus a non-voting Treasury observer).  By law, there must be a majority of internals.  All of these people will be appointed by the Minister of Finance, at least on paper, but in reality the Minister will continue to have almost no real say over the people who wield the most powerful short-term macro policy lever.    Recall that the Minister can only appoint as Governor someone whom the Board has recommended.  Board members themselves may have been mainly appointed by a previous government.  The same procedure will now apply to the appointment of the Deputy Governor, but in practice one would expect the Governor to have a major influence on the name put forward by the Board.   The internal candidates will also be appointed by the Minister on the recommendation of the Board.  The Board will be required to consult the Governor on these appointments to the MPC, but as the appointees are most likely to be people already appointed by the Governor as (say) Chief Economist or Head of Financial Markets), the Board will have not have much effective say at all.

So the Governor –  who sets working conditions, and sets pay and conditions for the internals –  already has his majority.  But his control on the composition of the committee doesn’t stop there.  Because the Minister can only appoint the handful of externals on the recommendation of the Board, the Governor himself is a member of the Board, and the Board –  being non-experts themselves – is likely to be highly deferential to the Governor’s views on who should (and shouldn’t) be nominated.  There is no way the Board is going to recommend someone the Governor is uncomfortable with.  Good Governors will welcome challenge and diversity etc, but legislation isn’t really needed for good Governors, but for poor, weak, or insecure ones.

It is simply the wrong model.  It is, as far I can see, pretty much without precedent, leaving the elected Minister of Finance no degrees of freedom over who is appointed to conduct the most important part of short-term economic management policy.  We can, after all, hold the Minister to account.  We do nothing about the Governor, the Deputy Governor, or the MPC members all appointed, in effect, by the unelected Governor and unelected Board.   This isn’t how open and democratic societies are supposed to work.  It isn’t how central banks work in other comparable democratic countries, and it isn’t how we handle appointments to other major crown entities.

I’ve argued previously that a much superior model would be:

  • all members, including Governor and Deputy, appointed directly by the Minister of Finance,
  • a requirement for a clear majority of external members, and
  • non-binding confirmation hearings by FEC on all (external) appointees before they take office (mirroring the practice now adopted in the UK for the Bank of England MPC).

The amendment bill Parliament will be considering today does not really deal with the communications procedures etc that are envisaged –  most of that is delegated to a charter to be determined later.  The Minister has, however, already indicated that his bias is towards a system where decisions are reached by consensus if possible, and that although minutes will have to published, there would be no identification of individual dissenting votes or any ability for MPC members to openly express their own views on monetary policy and economic issues.   That will suit the Governor, but won’t advance the cause of good policymaking or of an open and accountable central bank.    The charters are supposed to be agreed between the Minister and the MPC (recall that the Governor will almost always have a built-in majority) but the bill provides that the first such charter –  from which it will be hard to deviate much for a long time –  will be agreed not with the first MPC but just between the Governor and the Minister.   No doubt, the Governor will ensure his personal and institutional interests are served.  Will the Minister care enough to look to the interests of the wider process and of the public?  (And will the Governor still be able to talk openly about climate change policy, infrastructure, capital gains taxes etc, and if he, then what about the rest of the committee, for whom monetary policy won’t be a fulltime job.)

As I said, this bill further increases the power of the Board.    Another example –  extraordinarily so given the Board’s own shocking record –  is that the Board will be required to approve a code of conduct for MPC members.   But instead of discussing those arrangements and provisions with the first MPC members, the bill provides for the Governor and the Board to cook up the code of conduct themselves, no doubt reflecting the interests and preferences of the Governor.

As for Board’s capability and credibility in this area, well where do I start?  In just the last couple of years:

  • they’ve backed the Governor in attacking a member of the public who brought to light a leak in an OCR annoucement,
  • they’ve backed the Governor is his attack on, and attempt to muzzle, BNZ’s chief economist,
  • they’ve demonstrated a flagrant disregard for the provisions of the Public Records Act (maintaining no minutes of any meetings involving the appointment of the new Governor),
  • they confirmed that they had provided no written advice to the Governor in recent years at all,
  • they have shown no sign of interest in resolving serious misconduct issues in a superannuation scheme they have considerable legal responsibility for.
  • their own code of conduct, when finally revealed, proved to have no conflict of interest provisions at all,
  • they seem to have no interest in acting to keep the current Governor on reservation, and
  • just this week, their chair has attempted to assert that Chatham House rules trump the Official Information Act.

A supine, lawless group.  Just the sort of people you would look to for leadership in this area…..     But, no doubt, just the sort of people who can be relied on to do the Governor’s bidding and avoid any openness, challenge, or serious scrutiny.  In fact, who can be relied on the ensure that the new MPC is little more than a figleaf.   One has to wonder who will be willing to accept appointment, for anything other than the status, the pay or perhaps just academic curiousity.  Those aren’t the sort of motives we need in a revamped Reserve Bank.

All in all, this legislation falls far short of what could, and should, have been.   The Governor should be a CEO servicing and supporting (and chairing) an open and accountable, ministerially appointed committee.  Instead, his empire –  his dominance –  will be intact.   It cements in the victory for the Bank establishment, and for the Governor personally.  I haven’t yet written about Stage 2 of the review now underway, but the possibility of good outcomes from that process took a big step back when the Minister agreed that the review would be jointly done by the Bank and Treasury (which side is going to be more motivated to fight its corner?) reinforced when it emerged that the review process is being led by a (seconded) member of the Reserve Bank’s own senior management team, who will have his own future, working for the Governor, to look to.

 

 

 

The Governor as a Green

Michael Reddell Adrian Orr, Uncategorized

No doubt the Green Party has its place.  Some people –  a small minority generally, although rather a large minority around where I live –  vote for it.    Under our parliamentary system, that earns them some MPs, and at present –  a first –  they even have a few ministers outside Cabinet.     The critical point here is that those people were elected, and can be tossed out again if the voters get disillusioned.   They and their supporters champion their causes, as people on the other sides of politics pursue their own causes and views.

But if the contest of ideas and worldviews is integral to our political system, our system of government has also historically relied on senior public servants and holders of appointed public offices doing the specific job they were appointed to, and not using (unelected) public office as a platform, openly or covertly, for advancing their personal political or policy agendas in areas for which they have no responsibility.     Of course, many such people will have personal views on all manner of political and policy issues.   But we expect them (a) to keep those views to themselves, and (b) not to allow those personal views to influence the conduct of their professional responsibilities.   Historically, some holders of really senior public service or judicial positions have quietly chosen not to vote at all.   Respecting these sorts of self-denying conventions is all the more important the more power the holder of a specific office wields (the Deputy Secretary, Corporate in the Department of Internal Affairs –  say –  is a different matter than the Chief Justice, the Commissioner of Police, or the Governor of the Reserve Bank).  Keeping the personal and the professional separate is part of that ethos.

Why do these rules and conventions matter?   Because the office is supposed to be more important than the officeholder.   And one of the strengths of our system of government has been avoiding, to a large extent, the politicisation of the public service, or of that top tier of state appointments.    A capable Chief Justice, a capable Commissioner of Police (is there such a thing?), a capable Secretary to the Treasury should command confidence across the political spectrum, across the community, for their technical expertise, good judgement, shrewd advice (or whatever mix of skills is relevant to the particular position).  And part of that  should involve being able to be confident that the holder of any particular position is not using his or her office as a platform to advance personal and political views on matters quite unrelated to the role to which they have been appointed.  Apart from anything else, these officeholders are being paid, from your taxes and mine, to do a specific job.

And the alternative approach is pretty unappetising, especially in a small country with (typically) a pretty thin pool of talent.   Perhaps the US is big enough that it can comfortably turn over thousands of positions each time the President changes, and still mostly staff senior ranks with capable people.   We almost certainly can’t.  Or consider the unsightly spectacle of the US Supreme Court: all the nominees, from whichever party, seem highly capable, but no one on either side now views the Court as some impartial body, disinterestedly applying the law and constitution.  It has become largely an extension of ideological politics, but beyond the usual accountability mechanisms.  Fortunately, even in the United States, the central bank has been relatively immune from partisanship –  perhaps partly because of the self-restraint exercised by most incumbents, limiting the extent to which they stray off reservation in their speeches etc.

Our new Governor seems to understand none of this. Or if he does understand it, he seems to care not a fig about our system of government: there are ideological causes to fight, and institutional turf battles to win.  In the first month or two in office we saw him talking openly about all manner of things that were simply nothing to do with his current job –  sustainable agriculture, climate change, infrastructure financing, capital gains taxes (and both sides of the bank conduct issues –  neither of them being a prudential issue).  A charitable person might have seen these as rookie errors –  a new appointee revelling in the spotlight and not quite sure where the limits were.  In Orr’s case, he has been around long enough that that never seemed very likely, and it is now clear that the way he started is the way he means to go on.  In the process he is destroying the institutional capital built up around the Reserve Bank –  as surely, and perhaps more damagingly, than his predecessor did by other means.

And for all his (stated) enthusiasm for openness, transparency, “demystifying” the Reserve Bank, and cartoons to aid communications, the Governor has not given a single speech on any of his core responsibilities during his now four months in office.  The Bank’s website tells us none is scheduled either. Nothing on monetary policy, nothing on the state of the economy, nothing on governance of the institution, nothing on financial regulation, nothing on financial stability.  Just nothing.

That doesn’t stop him sounding off on all manner of other topics.  There have been two more examples just recently.

I don’t usually follow Tagata Pasifika, but a reader yesterday sent me link to an interview that outlet had recently done with the new Governor.  I guess the Governor isn’t responsible for the headlines (“The Cook Islander keeping our economy afloat”) but, whatever his background, one had thought of the Governor as a New Zealander (unlike, say, the British Secretary to the Treasury), and perhaps more importantly, the Reserve Bank doesn’t “keep our economy afloat”.

Much of the interview was fairly heartwarming innocuous stuff about that one strand of Orr’s ancestry that is from the Cook Islands.  But as it went on, it became more troubling.  Interviewed as Governor, from the Reserve Bank premises, he was offering his thoughts on what “we” (Pacific people in New Zealand) could do to overcome poor outcomes (incomes, home ownership etc).  There was strange rhetoric about how people had sought to divide and conquer them, and that everyone needed to “work together”.  Predictably (perhaps even appropriately given his role), there was no suggestion that (for example) low home ownership rates might be improved if only the government freed up land markets, but weirdly there was talk about subsidised loans (I think from within the community) to get into housing –  which might seem a little at odds with the Governor’s day job (where he wields regulatory powers to stop willing borrowers and willing lenders getting together to take on a housing mortgage).

Even that mightn’t have been too bothersome.  But as we got towards the end of the interview, the left-wing rhetoric was really unleashed.  We were, listeners were told, facing challenges of “societal sustainability”: we can’t have, so the Governor told us, haves and have nots and all expect to get along together.  In such a world, said the Governor, one group will be locked in, and the other group locked out.

It would make great – if largely empty –  election rhetoric from, say, the Green Party (Metiria Turei’s proxy now governs the Reserve Bank?).  But it has nothing, repeat nothing, to do with the job the Governor is paid to do, and in which capacity he was conducting this interview.   It wasn’t even backed by any suggestion of serious analysis, but I guess it sounded good at the time.  It is hardly the sort of stuff that is going to command general respect for the Governor in his important day job.

“Doing stuff” about climate change seems to be one of the Governor’s personal causes, nay crusades.  It was there in some of those earlier interviews I wrote about previously, but it was on full, and prepared, display a couple of weeks ago, when the Governor was a panellist at the launch of something called the Climate Leaders Coalition.    They advertise themselves as 60 CEOs whose businesses, in some sense or other, allegedly account for nearly 50 per cent of New Zealand’s emissions –  a claim which seems like a bit of stretch, since (for example) although Fonterra is part of it, the farmer shareholders (who actually own the cows) aren’t.   Buried a bit further down the website, we find that these firms actually account for 8 per cent of employment in New Zealand.   I found it hard to take the grouping very seriously –  it seemed to involve a great deal of virtue-signalling and keeping on side with the new government –  even before I looked down the list and found that the Wellington City Council zoo was a member.

I guess virtue-signalling, lobbying, and generally kowtowing is what CEOs have to do in the regulatory state.  Here is what all the hullabaloo was about

We take climate change seriously in our business:
*We measure our greenhouse gas emissions and publicly report on them
*We set a public emissions reduction target consistent with keeping within 2° of warming
*We work with our suppliers to reduce their greenhouse gas emissions

We believe the transition to a low emissions economy is an opportunity to improve New Zealand’s prosperity:
*We support the Paris Agreement & New Zealand’s commitment to it
*We support introduction of a climate commission and carbon budgets enshrined in law

All of which is pretty devoid of content or, arguably, demonstrably untrue.  The cause of a least-cost adjustment towards a lower-emissions economy –  economic efficiency – isn’t helped by every individual firm proposing some emissions reductions target that is somehow “consistent with” keeping within 2 degrees of warming –  one wants price signals and individual firms reacting based on the specifics of their own businesses and markets.  Some firms and industries might actually increase gross emissions, others might close down completely.  Then, of course, there is the claim that the transition to a low emissions economy is an opportunity to improve New Zealand’s prosperity: the government’s own consultative document suggests that a net-zero target by 2050 could come at a cost to GDP of 10-22 per cent, and no credible argument has been advanced as to how prosperity and productivity will be boosted by this big adverse shock (in a country still heavily reliant on animal emissions –  let alone international aviation emissions, not included in the official numbers.

In other words it was mostly feel-good stuff, worth some headlines on the day, but amounting to almost nothing.   It was self-interest on display (perhaps defensive self-interest, but self-interest nonetheless) –  which is fine; it is what businesses do, especially in face of looming regulatory constraints.

But what was the Governor of the Reserve Bank doing participating in this function, celebrating the event, cheering them on, all without adding a shred of economic analysis to the discussion?

You can watch the Governor’s part in the panel discussion (about an hour in at this link).  There was no sign from the Governor suggesting that he was participating simply in some sort of personal capacity – if that is even possible for high officials.  In fact, apparently rather the contrary: his speaking notes are available on the Reserve Bank website as his first and (so far) only gubernatorial speech.

Even the published text is like something from a crusade rally:

To see so many companies agree to the following is a moment of rejoice.

and

The best time to start this process is 30 years ago, or today. So I am privileged and proud to be a Kiwi sitting on this stage with so many New Zealand companies involved.

We are told that consumers will want “intergenerational justice” –  although I suspect most of the businesses present know that consumers typically want a decent product at a low price.

We are told that

Climate change, if not addressed, will create unforeseen social disruption and displacement.

I’m not sure how a public servant can state with such confidence that ‘unforeseen” things will in fact happen.

New Zealand can’t change the world. But, the world expects New Zealand to lead.
What do we have at risk?

Apparently almost nothing

We have less embedded costs and risks associated with making change (e.g., very limited fossil fuel production and dependency). We have least to lose and most to gain.

and

We can be a brand leader on climate change in the world given our starting point.

Surprisingly –  or perhaps not –  there is no mention of those animal emissions, and the absence as yet of economic ways of reducing emissions without eliminating the animals.  No mention of us having among the very highest per capita emissions in the advanced world, no mention of the importance of international shipping and aviation to the New Zealand economy, no mention of the policy-induced rapid population growth which drives hard against any other policy efforts to reduce emissions.  And, of course, no mention at all of the NZIER modelling featuring in the government’s own consultative document suggesting a very large real economic cost of adjustment, or of the Infometrics modelling featuring in the same document suggesting that the costs of adjustment will fall disproportionately on lower decile New Zealanders, and not very much at all on the highly paid like Mr Orr and the Climate Leaders Coalition members.

Orr never cites any evidence for his bizarre claim that the world expects New Zealand to lead in this area (in fact, given our size and different economic structure, it would be a sign of profound cynicism and unseriousness if “the world” actually did have such expectations.   But he does provide what he considers as evidence for why “we” can lead.

I have been fortunate to have witnessed great transformation in thinking and behaviours – such as the business commitment today – related to responsible investing.   My own experiences include involvement in:

  • The UN’s Carbon Disclosure Project (which the New Zealand Super Fund (NZSF) led and had pushed back at us by so many New Zealand businesses – there is no ‘I’ in denial);
  • Our leadership of the International Forum of Sovereign Wealth Funds (IFSWF) on responsible investing, and the ‘One-Planet’ initiative that the NZ Super Fund only last week promoted and signed;
  • The NZSF’s own courage in reducing their carbon exposure and engaging companies and searching for new alternative energy uses; and

In other words, not a single private sector entity, and no real economic adjustment (no actual reductions in emissions) just various different gatherings of government agencies around the world.  As for the claim that the NZSF portfolio reallocation took “courage” –  and isn’t it bad form to boast of your own “courage” anyway? – whose money was on the line?  It certainly wasn’t the Governor’s –  and as I’ve pointed out before the change was done in such a non-transparent way that we can’t even keep track of how much money this reallocation will have made (Orr’s claim had in any case been that it was hard-headed business decision, justified by expected risk/return considerations).

There is, in the published speaking notes, some rather strained attempt to connect the Reserve Bank’s financial stability role to the climate change discussion, but almost all of that was missing from the version he actually delivered, and none of it is compelling in the New Zealand context.  Perhaps there is some story to be told about dairy debt exposures, if emissions prices are pushed up too quickly undermining farm profitability and driving down rural land prices –  but there was none of that even hinted at in the Governor’s notes. I guess it would have disturbed the feel-good mood of the day.  It might have suggested an economic cost, rather than the nonsensical claims the Governor associated himself with about the opportunity to improve prosperity.

It was the sort of stuff you might expect at a Green Party rally –  although probably at least some of them might be more honest about the likely cost of the hairshirt.

And all that was just the Governor’s published text.  In his actual comments (viewable at the link above) we saw the schoolboy clownish side of the Governor on display, flippantly suggesting that the Bank wouldn’t raise the OCR until carbon had been reduced to zero.  I don’t suppose anyone took him remotely seriously –  a problem in itself, since Governors (like Presidents of the United States) really should be able to be taken seriously –  but it displayed none of the gravitas and seriousness one might hope for in the holder of such a high office.   That isn’t just me getting old and pompous: here was the relevant line from the Board’s advertisement for the position of Governor

Personal style will be consistent with the national importance and gravitas of the role.

And then we had this nonsense

“Let’s have our moment of glory, but we are lagging behing the world. And today we’re leap-frogging at least back to the frontier on one part of it,”

“Moment of glory” or “leap-frogging at least back to the frontier” from that lot of not very specific commitments, Wellington Zoo leading the way to save the world?

It went on.  We were told that “social cohesion would be truly truly challenged if we don’t do something about climate change” –  really, in New Zealand, which might just get a bit warmer and more pleasant?  The audience was warned of nation-state failures, thus presumably the imperative for New Zealand to “take the lead” – “we can do it, we should do it.  Lets do it”.   It must have felt very good in that meeting that morning.

At least until the Governor began to denounce capitalism.    Modern-day capitalism, the audience was told, drives you to short-termism.  No sense that it might have contributed mightily – including sparking innovation to deal with costs, problems, and opportunities that arise – to the unrivalled material prosperity the world – in almost every corner –  enjoys today.  No, capitalism is the problem.  That must have been a bit awkward for the assembled CEOs –  or at least for their owners –  but no one seemed to challenge the Governor on that.   Which was probably just as well, as the Governor didn’t seem to have anything to back up his claims.   Rereading his published speaking notes, it was striking that not once did he identify any problems, costs, risks, or failures in government interventions.   Wise governments, wise central banks, wise regulators will save us………

It isn’t as if this sort of rhetoric is new.    A month or two back the Governor was sounding off nearer to his own territory, claiming that financial markets (lenders, borrowers, and all) were myopic and therefore regulation was needed.  But when I asked for any research or analysis done by or for the Bank in support of this proposition, it turned out there was none.  It was just off the top of his head.  But it must have sounded good at the time.

Reflecting on all this, I have a number of concerns.  Perhaps the least of them is the lightweight nature of the Governor’s contribution, which too often sound more like campaign speeches than the considered thoughts of a serious senior public official.   If this is how he comments when we do see or hear him, what must things be like in private?  If this is the standard we now get from top public servants, what must the rest of government be like (all those CEOs we –  rightly –  never hear from)?

A good test is always whether one would have the same reaction if someone you are criticising was saying things you agreed with.  In this case, I can unambiguously say yes.  I’d be embarrassed to have such lightweight crusading perspectives from someone so senior for any cause I supported.  And it is simply inappropriate for the central bank Governor to be weighing in on such issues at all –  whether climate change policy, infrastructure. taxation policy, immigration policy, welfare reform, land supply or whatever.  It isn’t his job, and we need to be able to have confidence that the Governor has just one agenda –  doing his job –  not using his pulpit to champion personal agendas.  If the Governor wants to pursue those causes, he should set up a think-tank or run for Parliament.

I don’t suppose that Adrian Orr is setting out to advance the cause of any particular political party.  And no doubt the views he expresses –  flippantly and more seriously –  are all his own.  But he only gets away with it because he is mostly advancing causes the current government and its support parties happen to agree with.  Imagine the outrage if he were attacking –  especially in a similarly lightweight way –  causes dear to the heart of the government?  I’m not, of course, suggesting he should do so –  whatever private views he might have on such things, neither we nor the government should know them.  The Governor is paid well, and given enormous power, to do a quite specific job, and he needs to learn to stick to his knitting.

Idly, one might suggest that the Reserve Bank Board should do its job.  Not only did they lay down that requirement for gravitas, but they added this criterion

The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

Sounding off loudly (and lightly) in support of all manner of contentious causes represents a real threat to the sustainability of effective independence.  If this behaviour is tolerated, only politically-acceptable lackeys need apply for the Governor’s role in future, and incumbent Governors are likely to find it quite difficult to work with a different colour of government.  Both would be most unfortunate outcomes.

As I say, one might idly hope that the Reserve Bank Board would do its job, and pull the Governor back into line.  Then again, when has the Board ever done that?  They seem to see their role as being to have the back of the Governor –  whoever he is, whatever he does –  added to a sense that the law itself doesn’t really apply to them.

I’m no fan of the Green Party. But at least they put themselves to the people and got elected. They face the electorate again in two years.  The Governor has no such mandate, no such legitimacy, for running Green Party like rhetoric from his well-paid public bully pulpit.

 

Unpicking the inflation numbers

Michael Reddell inflation, Monetary policy, Uncategorized

On the face of it, the CPI numbers released earlier in the week seemed quite noteworthy.  The Reserve Bank’s preferred sectoral core measure of CPI inflation is still clearly below the 2 per cent the Bank has been told to focus on, and was last at 2 per cent in the year to December 2009, almost a decade ago.  But the sectoral core measure has increased again, now up to 1.7 per cent, having averaged about 1.4 per cent (without a lot of short-term noise) for the previous five years.   If the trends suggested by this series continue, sectoral core inflation could be back to 2 per cent some time next year.

sec core infl to june 18

That would, all else equal, represent good news not bad (after all, three successive governments now have taken the view that a target midpoint of 2 per cent inflation is best for New Zealand).

But even on this series alone there is still some reason for caution.  The sectoral factor model filters the data, and the nature of the filter means the endpoint estimates (in particular) are prone to revision, and as the paper I just linked to illustrates there are margins of error around any of these estimates.  I’m reluctant to back away from the sectoral factor model numbers –  it has generally been quite a good guide in the years since it was introduced, and tells plausible stories about history.  But, equally, it doesn’t make sense to focus only on this one series.

For example, the CPI ex-petrol is a very simple core measure.  Petrol prices are quite volatile.

CPI ex petrol to June 18

And yet the latest observation in this series is still a touch below the average inflation rate for the previous five years (and at 1.2 per cent well below the target midpoint).  And that is so even though the exchange rate has been unusually high in the last 12-18 months (headline CPI is sensitive to changes in the exchange rate).

There isn’t much sign of rising core inflation being an issue abroad either.  Here is the OECD data on CPI inflation ex food and energy, for the G7 grouping as a whole, and the median of the countries/areas with their own currencies (thus the euro area, like the US, is just one observation).

OECD core inflation jul 18

Both series bounce around a bit, but there isn’t much sign of any sort of breakout to a consistently higher rate of inflation.  Even among the G7, the latest observations suggest that if US core inflation is edging up a bit, that in the UK and the euro-area is falling back a bit (Japan’s June numbers aren’t available yet).

New Zealand might be different of course.  It isn’t obvious why we would be – eg our unemployment rate hasn’t fallen away further or faster than those in most other OECD countries –  but we might.   Here is the NZ version of the same series: CPI inflation ex food, vehicle fuels, and household energy.

cpi ex nz jul 18 2

Indirect taxes and government charges also complicate the interpretation of the inflation numbers.  Weirdly, SNZ still does not publish a straightforward series excluding these effects, to give us a clean read on market prices.  It is not as if these are trivial issues either –  there was the GST increase a few years ago, there are large increases in tobacco taxes every year (which have had the effect of materially increasing the tobacco weight in the CPI), and there are changes in things like ACC levies and (this year) in government subsidies for tertiary fees.

Here are some individual exclusion measures.

cpi ex jul 18

And here is a series SNZ does publish: non-tradables inflation excluding both central and local government charges and tobacco.

NT ex govt and tobacco jul 18

That might suggest a moderately encouraging story, of core non-tradables picking up.  But even if so, it would be the third pick-up in the past five or six years, and neither of the previous ones amounted to much.   Perhaps this time will be different?

One reason to think it might be a little different is developments in housing inflation: construction costs and rents make up quite a substantial proportion of non-tradables.

housing components

Rents are a much larger component of the CPI (9.2 per cent) than construction costs of new houses (5.5 per cent) but most of the cyclical fluctuations are in the construction cost component.   Construction cost inflation has been dropping away quite markedly since the start of last year (and for all the talk of renewed waves of housebuilding –  which I rather doubt will happen) there isn’t any obvious reason to think that phase of the cycle will reverse soon.   Some of the earlier increases in core non-tradables inflation will have reflected increasingly high inflation in construction costs, but since construction costs have been slowing for the last 18 months, the latest pick-up can’t be simply written off as a construction story.  But, whatever the story, core non-tradables inflation of only around 2.4 per cent is simply not going to be high enough to be consistent with core CPI inflation getting back to 2 per cent.  We’d need to see further increases in core non-tradables inflation from here, and with the rate of growth of demand having weakened it isn’t yet obvious that that is the most likely outcome.

And what do the bond markets make of the situation?  Recall that there are two indexed bond maturities either side of the 10 year nominal bond.

IIB breakevens jul 18

There has been some drift high in the inflation breakevens, or implied inflation expectations, over the last 12 months or so.  But however one looks at things, it is hard to see the market pricing average inflation for the next decade much higher than about 1.6 per cent.  That is still a long way from the target midpoint of 2 per cent.

So where does all that leave me?    At very least, there is no sign that core inflation is falling and perhaps some reason to be encouraged, and to think it is picking up.   But however one looks at the numbers, current core inflation isn’t even close to 2 per cent, and by this stage of a long-running cycle (especially one characterised by weak productivity growth) one might have hoped –  even expected –  that core inflation might be running a bit above any target midpoint.   Notwithstanding the sectoral core measure, it seems too early for too much encouragement –  perhaps things are finally on course for a return to 2 per cent, but there are conflicting signs, and not too many compelling reasons to yet think that this time will be different.

What of the outlook?   With ebbing population pressures, weak business confidence, no fixes for the over-regulated and dysfunctional urban land markets, and various policy proposals that not only engender uncertainty but could act as considerable drag on actual and potential growth (eg net zero emissions targets), it isn’t obvious why core inflation is likely to rise from here.   Headline measures will, as always, be tossed around by oil prices developments (and petrol taxes), and a weakening exchange rate will push prices up a little.    Some might argue that public sector wage pressures, and higher minimum wage rates, will themselves contribute to higher domestic inflation.   Perhaps so, although I remain a bit sceptical that they will amount to much (even if there are some material relative price changes).   And, although no one knows when, the next recession is coming –  here and abroad.  From an inflation perspective, including positioning ourselves for the next downturn, we’d have been better off if the OCR had been a bit lower over the last couple of years

Official corruption, there and here

Michael Reddell Uncategorized

On holiday in the (remarkably for mid-July) sunny South Island, I was reading Dictatorland: The Men Who Stole Africa, by British journalist Paul Kenyon.  It is well-worth reading for anyone with an interest in Africa, or indeed in economic (under)development. Over 400 or so pages, it is a series of accounts of leaders of post-colonial African countries who enriched themselves –  typically almost obscenely so –  from the vast natural wealth of the continent.    There are exceptions of course; notably well-governed Botswana.   And there were countries where idealistic disastrous policies impaired the material wellbeing of the citizenry without any great personal enrichment of the leaders (Tanzania and Zambia under Nyerere and Kaunda are two examples).  But Kenyon’s focus is on a series of countries with abundant natural resources (oil or very fertile land in his particular examples), one or more brutal leaders, and, at very best, mediocre material living standards for their people –  think Congo, Zimbabwe, Nigeria, Equatorial Guinea, Libya, Ivory Coast (with the rather different, but equally bleak, Eritrea thrown in for good measure).  Eritrea may – the author reports – have abundant oil and gas, but the regime simply refuses to allow any exploration.   Looting by leaders and their cronies was too often a big part of the story –  billions in foreign banks, fancy houses in Paris, London and the like.  The way various Western companies –  oil companies notably –  acted as enablers of this evil is pretty unedifying too.

Many many books and learned articles have been written on failures of post-colonial Africa.  I’m not sure that any of the stories really persuade me, except perhaps in the most reduced-form sense: there were weak institutions for sure, but they needn’t have stayed weak; the boundaries of many countries were artificial at best, but a strongman (arguably necessary to hold some countries together) could have lived modestly, governed wisely, and so on.   And if one were to blame the colonial predecessors –  in some cases dreadful (think Leopold of the Belgians), in others not much better than indifferent – much of east Asia also emerged from (relatively shortlived) colonial rule at around the same time, and the small Pacific countries emerged even later.  Much of the Middle East emerged from Ottoman rule only a little earlier.   And if, indeed, there is a “natural resource curse” of sorts –  at least in the presence of weak institutions – there are places like Brunei or Norway (independent since 1905).

I spent a couple of years in Zambia, working as the economic adviser to the central bank.  Kenneth Kaunda hadn’t been overly brutal, and hadn’t much enriched himself.  But under his watch, his country’s economy and material living standards had been severely impaired nonetheless.  In the midst of the liberalisation/disinflation shakeout in the early-mid 1990s, per capita GDP is estimated to have been more than a third lower than it had been at independence in 1964.  In the “what might have been” file, the story was often told of how at independence Zambia –  rich in copper, and with abundant agricultural land and a small population – had had per capita GDP similar to (or a bit higher than) those in Taiwan or South Korea.   Zimbabwe had also been about as well-off as those two east Asian states, which themselves had only emerged from fairly brutal decades of Japanese occupation in 1945.   These days, Zambia and Zimbabwe “enjoy” per capita GDP between 5 and 10 per cent of those of Taiwan and South Korea.

Another way to look at Africa’s economic failure is to compare the growth performance with New Zealand. In 1960, New Zealand was still among the richer of the advanced countries of the world. Nowhere in Africa had estimated per capita incomes more than about half of New Zealand’s (South Africa and Algeria), and most had incomes not much more than a tenth of New Zealand’s.  As readers know, over the subsequent decades we have been among the worst performing of the advanced countries.  So beating New Zealand’s growth record over the decades since 1960, should have been easy.  But of the 25 African countries for which the Conference Board database had data (in PPP terms), only 7 did.   Taken as a whole, the continent couldn’t even manage to make gains relative to the advanced country laggard New Zealand.  Of the 18 east Asian countries in  the Conference Board database, every single one grew faster than New Zealand over the period since 1960.   Looting by Africa’s leaders is far from the only story, but at very least it was symptomatic of the wider failure –  as well as being morally inexcusable.

Official looting isn’t, of course, confined to post-colonial Africa. It is mercifully rare in New Zealand, but in the course of my holiday I stumbled on an extraordinary example from the early days of settlement,  In Nelson, we stayed in Blackmore Cottage, (the warmer version of) a house first built in the early 1850s for Edward Blackmore, who had been appointed by Governor Grey as Collector of Customs and sub-treasurer in Nelson.  The owner was keen to tell us the story.  Blackmore had started by lying about his qualifications –  claiming an Oxford degree when he’d done no more than qualified to matriculate (never even attending) – but that was just the start.  He appears to have collected customs duties (at the time, the bulk of regular government revenue other than land sales) and simply never passed the revenue to the government.  At the time, it appears, people appointed customs collector had to provide sureties or guarantors, but Blackmore never provided these either.  Questions were soon asked, repeatedly, but the mails were slow, and it appears that Governor Grey himself took Blackmore under his wing (when senior public servants started pursuing him).  By the time the incident came to a head a year or two later, Blackmore owed the Crown around 2000 pounds.   That mightn’t seem like much, but total customs revenue for the entire country in 1855 was 105000 pounds.

No one seems quite clear what Blackmore did with the money, but it was probably failed business ventures.  He’d even bought a couple of islands.  But whatever he did with it, there wasn’t much left by the time things came to a head.  You might suppose that he’d have been arrested and served a considerable prison sentence –  defalcation is no trivial crime. But, astonishingly, there were no legal consequences at all.   Instead, someone in the Nelson community apparently gave Blackmore ten shillings, and took over whatever assets were left, apparently with the intention of liquidating them and paying any proceeds to the Crown.  Ten shillings (or perhaps it was in addition to the fare) seems to have been enough for the Blackmore family to leave for Sydney, whence the law did not pursue them.  Blackmore was, reportedly, no more successful in Australia, running for a time (before it failed) a private school, at which two of Australia’s earliest Prime Ministers were educated.

The Blackmore affair seemed to create quite a stir.  There was a near-unanimous resolution in Parliament that Blackmore should be arrested, wherever he was.  There was a parliamentary inquiry into the failures of senior civil servants in dealing with Blackmore (the question was whether those civil servants should have their pensions docked.  But Blackmore was never arrested, never prosecuted. never punished.  Perhaps it was simply too embarrassing for some senior people?  Whatever the latter day failings of our leaders –  and they are many –  looting in office is almost unknown.

And with that post-holiday whimsy, I’ll start to get back to the regular round of posts.

The real exchange rate mattered in 1985, and it still does

Michael Reddell Exchange rate, New Zealand economic performance, Uncategorized

In Christchurch tomorrow evening, Anne Krueger is giving the 2018 Condliffe Lecture.

Krueger is an eminent figure in economics, now in her 80s.  She had a distinguished academic career, specialising mostly in trade and development issues, and she also spent time as first Chief Economist at the World Bank, and then later (until 2006) as first deputy managing director of the International Monetary Fund.   (My lasting impression of her, as an international bureaucrat, was the day she declaimed at a Board retreat about the challenges the IMF faced as a small organisation –  at the time staff numbers totalled about 3000.)

According to Canterbury University

In the University of Canterbury’s 2018 Condliffe Lecture, Anne Krueger will explore the topic: “Is it harder or easier to develop rapidly than it was a half century ago?” in her talk on development and economic growth.

She will argue, we are told

“In this lecture, I shall argue that while the future is never entirely foreseeable, there are a number of considerations that point to greater ease of development now than in the past. These include: the diminishing rate of increase in populations in most low income countries; the fact that much more is understood now (albeit still imperfectly) about development (and especially how not to achieve it); that global markets are much larger; and obtaining information of all kinds is much easier.”

There are also some technological advances that make development easier: mobile phones; continuing discoveries of improved technology in agriculture; advances in materials sciences; and so on.

I hope a copy of her text is made available.

I’m not sure how often Professor Krueger has been to New Zealand, but there is a record of a visit in 1985, when she was at the World Bank.  She delivered a lecture under Treasury’s Public Information Programme, under the heading Economic Liberalization Experiences – The Costs and Benefits (if anyone wants a copy, it appears to be held in the University of Auckland library, but isn’t online anywhere).

As she noted

As a newcomer to the New Zealand scene, it would be foolhardy of me to attempt any assessment of the policies implemented in support of the New Zealand quest for economic liberalization.  It may be useful, however, to discuss what liberalization more generally is usually about, and to attempt to draw on the experience of other countries for lessons and insights that may potentially be applicable –  by those of you more knowledgeable about the situation here than I – in evaluating the progress of liberalization in New Zealand.

It is a very substantial lecture (18 pages of text), drawing on the experiences in previous decades of a wide range of other countries grappling with twin challenges of stabilisation (inflation, fiscal etc) and liberalisation..   The small bit I wanted to highlight –  which saddened me when I first read it a few years ago, and still does, from a “what might have been” perspective –  was about the exchange rate.

Two important lessons emerge from the Southern Cone [of Latin America] experience: failure to maintain the real exchange rate during and after liberalisation is an almost sure-fire formula for major difficulties and the defeat of the effort.  The reason for this is that a liberalization effort aimed at opening up the economy must induce more international trade; it is not enough that there be more imports, there must be more exports.  Since the exchange rate is the most powerful policy instrument with which to provide incentives for exporters, its maintenance at realistic levels which provide an incentive to producers to export is crucial to success.

and a few pages later she returns to the theme

“In particular, the exchange rate regime must provide an adequate return to producers of tradable goods, particularly to exporters”

At the time, this would have resonated strongly with senior New Zealand officials.  One of the starkest memories of my first year at the Reserve Bank, fresh out of university, was being minute secretary to a meeting in late 1984 attended by the top tiers of the Reserve Bank and The Treasury.  It was a just a few months after the big devaluation that ushered in the reform programme: senior officials were explicitly united in emphasising how vital it was to “bed-in” the lower exchange rate, and ensure that the real exchange rate stayed low.

You can see that 1984 devaluation in this chart of the real exchange rate I ran a few weeks ago.

ULC jun 18

In fact, the gains from the devaluation were swallowed up very quickly by inflation.    When we finally got on top of inflation, the real exchange rate did average lower for some time –  and during those years the tradables sector of the economy (and export and import shares) were growing relatively strongly.  But for the last 15 years, the real exchange rate has averaged even higher than it was prior to the start of the liberalisation programme.  It hasn’t been taken higher by a stellar productivity performance.

It shouldn’t be any surprise that the export and import shares of GDP have fallen back, and that there has been no growth at all in per capita tradables sector GDP this century.    Successful sustained catch-up growth –  of the sort New Zealand desperately needs – doesn’t come about that way.

Perhaps some attendee might ask Professor Krueger for any reflections on her 1985 comments about the importance of the real exchange rate in light of New Zealand’s disappointing economic experience since then.  And linking back to the topic of her 2018 lecture, can we now catch-up fast, having failed so badly to do for the last 30+ years?  Fixing the badly misaligned real exchange rate, a symptom of imbalances but which is skewing incentives all over the economy, seems likely to be imperative.  New Zealand just isn’t that different: wasn’t then, isn’t now.

 

 

Free speech, even for odd or obnoxious views

Michael Reddell Uncategorized

Last week the Mayor of Auckland, Phil Goff, announced –  using what powers isn’t clear –  that no venue owned or managed by the Auckland Council would be made available for hire by organisers for an event involving a couple of controversial Canadian speakers, who had been planning to visit New Zealand next month.

I’d never previously heard of the speakers, or the organisers.    When I looked them up, some of the views one or other has apparently propounded seemed, frankly, kooky.  Here, for example, is a (unverified) report of some of Stefan Molyneux’s views.

According to Jessica Roy of Time magazine, Molyneux argued that violence in the world is the result of how women treat their children, and that “If we could just get people to be nice to their babies for five years straight, that would be it for war, drug abuse, addiction, promiscuity, sexually transmitted diseases, … Almost all would be completely eliminated, because they all arise from dysfunctional early childhood experiences, which are all run by women.”

Odd, or even obnxious, as some or many of their views might be, they are quite at liberty to hold them, or express them.  And New Zealand audiences should be free to listen to them, whether to cheer, to heckle, or just out of curiosity.

No owner of a private venue should be under any obligation to rent out a venue –  or provide a media outlet – but councils should be a different matter altogether.   Council property is paid for by all the local residents and ratepayers, and when such venues are available for hire or use by private groups, there should be a strong and clear commitment that the political views of those who happen to be councillors, mayors, or council staff at the time won’t influence which groups are allowed to use such facilities for their functions/meetings.  There are plenty of causes around that individual people will count as obnoxious –  stances on a contentious issues such as abortion law is a good example, where either side tends to view the other in a very deeply hostile light –  and it isn’t for those who happen to hold office at a particular time to impose some sort of ideological litmus test on views that can be uttered in public facilities.    Such an approach would smack of the sort of authoritarian semi-democracies of Turkey, Russia, or Hungary –  where elections still take place, but those in power stack the field by denying access to the public square to views/people they find awkward, disagreeable or threatening.

The stance taken by Auckland Council staff and the mayor shouldn’t be tolerated, no matter how odd or obnoxious many of us might find most of views of Lauren Southern and Stefan Molyneux.  And plenty of views now regarded as mainstream, almost obligatory in “polite society”, would have been regarded as threatening or obnoxious only a few decades back.

A group of concerned people have got together to challenge the Auckland Council’s right to deny use of their venues.  It appears to breach the Human Rights Act, and is inconsistent with the (non-binding) New Zealand Bill of Rights.  I’ve pledged to donate to the fund being raised to seek a judicial review of the Council’s action.  I’d encourage you to think of doing so to, whatever your view (or none) of the substantive views held by Southern and Molyneux.  This issue –  effective freedom of speech –  should be one of those issues that unites people from left and right (and people in open support of this cause range from Don Brash to Chris Trotter), and nowhere in particular on the political spectrum, who care about a functioning democracy, robust debate, and who believe that ideas –  even obnxious ones –  are best debated, not suppressed by government agencies.

The website is……https://freespeechcoalition.nz

I have also encouraged the organisers to consider working with a sympathetic member of Parliament to seek to introduce, via the ballot, a private members bill, to require all local authorities and similar public entities (eg school boards of trustees) to adopt a hiring or facilities use policy that does not use judgements about whether those in control of deciding on facilities use happen to agree with any views that would be expressed or not. These are community facilities, and when made available for outside use, it should be clear that no ideological litmus tests can be applied.

Choices: New Zealand and the PRC

Michael Reddell China, Uncategorized

There was an article on interest.co.nz the other day from the New Zealand resident American geopolitical and strategic affairs consultant, Paul Buchanan.  In his column –  well actually even in the headline –  he argues that

New Zealand is facing a very tough choice between our security interests and our economic interests, and that choice may have to be made very soon.

This is, as he sees it, a choice between the PRC and that of the United States (and our traditional allies).

Perhaps, but I reckon Buchanan misunderstands the nature of New Zealand’s economic exposure to the PRC.  The economic interests involved aren’t those of the country as whole –  countries make their own prosperity – but rather of a relative handful of, perhaps politically influential, businesses (and universities)  And if there is a choice it is more likely to be between the sort of values and friendships that have guided this country for the last 100 years and more, and those of one of the most brutal aggressive regimes on the planet; a regime which, as this article highlights, is becoming worse –  more threatening to its own and others –  not better.  It should be no choice at all, unless our politicians are now quite without shame.  Values and beliefs –  the things that unite people, communities, countries, beyond just common material interests –  don’t appear in Buchanan’s story.

Buchanan sets up his article noting that New Zealand`s trade and security relationships had diverged.   He seems to present it as a matter of active choice, whereas I would see it –  at least on the trade side –  as a natural evolution.  There was no conceivable world in which the bulk of our firms` overseas trade (and it is firms that trade, not governments) would continue to be with UK counterparts, or even with Australian or US firms.   That is true in respect of both imports and exports.   Our previous position –  buying and selling from firms in a single dominant country –  was historically not the norm.   These days –  though you wouldn’t know it from Buchanan’s article –  our foreign trade is relatively unusually widely spread.  No single country’s firms –  not even the very largest or the very closest –  take or provides more than a quarter of our foreign trade.  And, unfortunately, our foreign trade is rather smaller, as a share of GDP, than it would be if our economy were more successful.   To the extent that one worries about trade with the PRC –  and some individual firms clearly should, having chosen to sup so large with the “devil – a much larger share of Australia’s trade is with PRC counterparts than New Zealand’s.

Buchanan presents New Zealand as caught on the horns of a dilemma, or as he puts it

…that makes the New Zealand’s stance more akin to straddling a barbed wire fence while standing on ice blocks rather than balancing between competing great power interests.

It seems he sees it as a choice because he has bought into the narrative, often promoted by the previous government, that somehow our (so-called) prosperity (weak productivity, shrinking tradables sector etc) owes much to the PRC.

On the one hand, the Chinese presence in New Zealand has been materially beneficial. But that has come with strings attached that are believed to compromise the integrity of New Zealand institutions. For its part, New Zealand’s Anglophone orientation has not recently paid similar material dividends even though it gives it a seat at the table in security meetings with our traditional partners.

But where is the evidence that, in anything other than a willing buyer/willing seller sense, New Zealanders as a whole have particularly profited from the relationship with the PRC?   Is there reason to suppose that more milk powder would have been produced, if PRC buyers hadn`t purchased it from New Zealand sellers?  It is a globally-traded product, and what isn`t sold in one place is sold in another. In that respect, it is a little like oil.   The same goes for many of our exports, which aren`t specifically designed from the Chinese market.  And no one supposes that the PRC is about to impose export bans on the sort of stuff New Zealand firms purchase from the PRC.

Trade is, generally, mutually beneficial, and so things that disrupt trade patterns are generally costly.  But the cost of any particular disruption can easily be overstated, especially in a bilateral relationship where total exports to a particular country (in this case, New Zealand to the PRC) total only around 5 per cent of GDP.   Dairy prices fluctuate from week to week and, quite a lot, from season to season.  On the other side, so do oil prices.  But economies have a lot of capacity to adapt, and instruments like monetary policy and a flexible exchange rate that help smooth the adjustment.  It isn’t always easy for particular firms –  but they’ve made choices about their exposures, and the failure to manage them effectively – but the focus of policymakers needs to be on the economy, and country, as a whole.

Buchanan sets up a looming almost inevitable choice, about rising US/PRC tensions (economic, but even more so strategic)

The question is therefore not a matter of if but of when and for/against who?

He offers this scenario of “going with” the PRC (although it isn’t entirely clear what specifically he thinks this choice would involve doing, or not).

Should New Zealand choose China, it will lose the security umbrella and suffer the diplomatic wrath of our most traditional and closest international partners. The consequences will be felt in a loss of trade and diplomatic ostracism, but most acutely in damaged security relations with other Western democracies. The Five Eyes listening posts in New Zealand will be dismantled and all of the highly sensitive equipment, to say nothing of archived records and stored data, will be removed under duress. This could prompt a revolt within the New Zealand intelligence community given its Anglophone orientation, and when coupled with “dark” influence operations by former allies could cause civil unrest amongst those disinclined to cast their lot with the Chinese. It could even lead to covert and overt hostile responses from jilted partners, who will likely discontinue military relations with New Zealand, including sale and supply of equipment. There will be a moment of national reckoning.

I`d certainly join any protests against such a choice – utterly morally reprehensible as it would be.  It would be akin to Marshall Petain treating with Hitler, with less excuse. It isn`t entirely clear why Buchanan thinks this opting for the PRC option is a realistic possibility though.   All he offers is economic coercion initiated by the PRC.

Should New Zealand opt to side with the US and its security allies, it will suffer serious economic losses as a result of Chinese retaliation. This has already been presaged by the PRC response to New Zealand’s support for the International Court of Arbitration’s ruling in favour of the Philippines in its dispute with China over island-building in contested waters, where state-controlled media editorials warned New Zealand over the consequences of siding against China (including in trade). More broadly, there is ample record of Chinese economic retaliation against countries that do not toe its preferred line on a number of issues, so New Zealand has both immediate and contextual reasons to see the writing on the wall.

This is all rather overwrought.   I’ve written previously about PRC attempts at economic coercion.   In a case that will have bothered the PRC far more than anything New Zealand could do, and where the PRC authorities had far more effective leverage, –  missile defence system being installed very close to the PRC – the central bank of Korea estimated an effect from PRC coercive measures of perhaps 0.4 per cent of GDP.

As I noted in that earlier post, a couple of industries –  one government-owned anyway (the universities) – have made themselves overly-dependent on the PRC.  A sudden stop on PRC students or tourists coming to New Zealand (the option that would hurt here and do least harm to PRC people themselves), would be very disruptive to those industries.  But those are risks they need to be managing –  and not just by persuading governments never to see anything upsetting to Beijing.     No matter what the PRC did, there is no sense in which the “writing is on the wall” for the New Zealand economy.   The next international recession –  whatever its cause – is more of an issue to worry about (especially as our authorities aren’t that well prepared).

So we can choose to abandon traditional allies, and abandon any interest in supporting democratic countries in the east Asia region, and in doing so abandon any sort of self-respect as a nation.  Or we could summon some self-respect, and perhaps give some lead (moral if not military) in pushing back against PRC intrusions abroad (including here specifically), and abuses at home.  But whichever choice our leaders ended up making –  and it should be no choice at all –  it isn’t one that seriously threatens our (rather attenuated) economic prosperity (let alone our physical security).

On which note, it was interesting to see that in a week the government had moved from being unwilling to name the villain in the South China Sea, to being a bit more explicit in the Strategic Defence Policy Statement released on Friday.  Even then, they can barely bring themselves to disapprove, and cloak there concerns in all sorts of rather laughable diplospeak such as the suggestion that “China is deeply integrated into the rules-based order”.  When it suits perhaps, but that is not at all the same thing –  what matters is the choices made when it doesn’t suit.  And those aren’t encouraging.

Also interesting to note the contrasts in the comments of two senior officials, one from New Zealand and one from Australia.  Our outgoing ambassador to the PRC, John McKinnon, was profiled in the Dominion-Post on Saturday.

Some have expressed unease over China’s expanding influence in the Asia-Pacific region. Canada’s Security Intelligence Service has claimed China is busy “co-opting political and economic elites” in New Zealand.

…

McKinnon makes it clear it is not a topic he will comment on; nor will he discuss current government policy towards China or the policies of the ministers he has served while in Beijing.

He also does not want to venture an opinion on whether China will move towards a more Western-style democracy.

“To understand the dynamic of what’s driving China now you have to understand where they’re coming from. It’s something they have to make their own decisions about and I can’t foreshadow what will happen.”

I’m enough of a bureaucrat to not encourage officials to speak out-of-turn openly. But clearly his masters also had no interest in him ruffling any feathers at all, even as the defence strategy document was being released.

And on the other hand, in his final days in his role, the outgoing head of the Australian defence forces comments thus

Defence chief Mark Binskin says Beijing’s broken promise not to militarise the South China Sea means it has squandered the trust of its neighbours and undermined its aspirations to regional leadership.

and

Asked about China’s trajectory since he took over in 2014, Air Chief Marshal Binskin agreed “it has changed” and cited the “very, very concerning” militarisation of features as well as “the influence of some nations starting to come down into the south west Pacific”.

Chinese President Xi Jinping said during a 2015 visit to Washington that his country had “no intention to militarise” the artificial islands it had built in the strategically important South China Sea.

Air Chief Marshal Binskin dismissed Beijing’s claims that its placement of weapons on built-up features in the Paracel and Spratly archipelagoes were purely defensive and said other countries around those waters were entitled to stand up for their legal and territorial rights.

 “I don’t think there is trust there … because [according to] all the reports that you see, they are militarising,” he said. “They’ll put a spin on that and say it’s only for defensive reasons. But … if you didn’t build an island, you wouldn’t need to defend it. If there are weapons on those islands, they are militarised.”

Asked what the militarisation was for, he said: “I think that they are looking to expand into there and I think it is quite obvious what their approach is.”

Not, sadly, the sort of thing one hears from New Zealand ministers or their senior officials.  But then, why would they, when they seem unbothered by Jian Yang as a member of Parliament, and where the parties seem to compete over which president can offer the most laudatory praise of Xi Jinping and the PRC.

Do our leaders –  National, Labour, New Zealand First, or Green –  care any longer about anything but the quiet life, and the next trade transaction? Do they feel no shame at all about associating with such a heinous regime?  If so, how would we know?  Thank goodness that wasn’t the approach of people like Michael Joseph Savage, Peter Fraser or their then Opposition counterparts.

Are things better or worse than 50 years ago?

Michael Reddell Uncategorized

I saw reference the other day to a new(ish) multi-country survey conducted by the Pew Research Center last year, asking people in 38 countries whether life in their country was better, worse, or not much different for people like them than it had been 50 years previously.  Among the people I saw tweeting a link to the survey results, there seemed to be general incredulity that anyone could not think things were better now than they had been 50 years previously.  The focus of those comments was particularly on the US results, where 41 per cent of respondents thought things were worse, and 37 per cent though things were better.

But, as it happens, the US results were close to the middle of the field.

pew

At the extremes, the results are not remotely surprising. In 1967 Vietnam had been in the midst of a longrunning war, and now is relatively prosperous and stable, even if not free.  And in 1967 Venezuela was pretty prosperous, whereas now it is poor and chaotic.

And if it is mostly rich countries above the median line, and mostly poor countries below it, that picture isn’t uniform.

New Zealand wasn’t covered by the survey, but Australia, the UK, and the US were.  Australian and British respondents were net positive, while US respondents were slightly net negative.   To the extent that overall economic performance is a material part of what shapes respondents’ answers to such a question, I suspect that New Zealand answers would be less positive than those for the US and the UK.  After all, over that half century almost a million New Zealanders net left the country in pursuit of better opportunities abroad, mostly in Australia.

In a bit over half the countries covered in the survey (but not, for example, in Australia), there was a statistically significant difference in which those with a higher education were more likely than the less educated to say that things had improved.

pew 2

Without being aware of this survey, I wrote about the 2017 vs 1967 question on another blog a few months ago.   I came to the conclusion that, taken as a whole, I’d answer “worse” if asked this particular survey question about New Zealand (even though transplanted 50 years back, this blog would have been impossible, and I’d have been grinding out an existence in some public sector job, probably longing for retirement).

Here is how, in that earlier post, I described some of the things I would put on the positive side of any such assessment.

For sure, there are things to be thankful for –  that favour 2017 over 1967.   Real per capita GDP, for example, is around twice what it was 50 years ago –  that is the ability to consume more stuff.  “More stuff” encompasses “better stuff” –  cars that are better-built, that are air-conditioned; TVs that offer (in NZ) more than a single channel; a rich array of eating-out options; much more affordable overseas travel, and smartphones with the resources of the internet in our pocket.   And yet in 1967 New Zealand most people had fridges, ovens, washing machines, TVs and radios, cars, and it is far from obvious how much real gain new and better gadgets have brought.  Some no doubt, but much?   People like to talk, for example, of the immediacy of news via the internet.  But how many of us really need that immediacy that much?  I look at some copies of Time magazine on my shelves from the late 1960s –  sure it was only weekly, but the content was generally far superior to that in today’s newspapers or news magazines.  I’m not suggesting I’d prefer the 1967 model in this respect, but how large is the gain?  (In some ways, this is  economist Robert Gordon’s point)  After all, in 1969 I heard the broadcast of the moon landing live, played out into our school playground.

Life expectancy is quite a bit longer than it was too –  infant mortality has dropped further, and life expectancy among the old has also improved considerably.    And there are more work options for women in particular –  if most discriminatory laws had gone by 1967, old models in which married women were typically out of the workforce either permanently or for long periods while children were around still prevailed.  In many more-formal ways, options for Maori have considerably improved –  witness the number of Maori MPs as just one small example.  In 1967 people like me couldn’t find an audience with something like a blog.

And on the other hand, specific to New Zealand:

  • so many New Zealanders have left (a regrettable thing in itself, for community and family relationships/networks etc),
  • the house price disaster.  Just prior to 1967, my parents bought a (new) first house on a single (not especially high) income.  Few have that opportunity now,
  • rates of imprisonment are so much higher now than then,
  • rates of welfare dependency are so much higher now than then,
  • a far smaller percentage of children are growing up in two-parent families,
  • the normalisation of drug use (my 13 year old niece told me the other day of recently being offered marijuana in the playground in a nice middle class New Zealand high school),
  • pervasive access to, and use of, pornography,
  • more social isolation and higher rates of mental illness,
  • the growth of the regulatory (and surveillance) state,
  • the deference paid by our elites to one of the most brutal states on earth, in contrast say to New Zealand attitudes to the Soviet Union in 1967.

I could go on to include things more specific to the decline of Christianity in the west, and in New Zealand specifically, but I won’t belabour that point here.  As a parent, my impression is that it is harder to raise children well now than then.

In the Pew results, there was not a statistically significant difference between attitudes of young and old respondents in most countries, but among those where the young were more upbeat were the UK, the US, and Australisa.  Most probably, one would find such a difference in New Zealand.

When we discussed these results around the dinner table, it was suggested that woman might be more inclined to answer positively than men.  I am not sure I share that prior, but unfortunately no results were reported by gender (perhaps suggesting that there were not any consistent or interesting differences, given the typically fairly comprehensive nature of Pew analysis).   Sadly, there also was not any analysis of differences by political inclination (liberal vs conservative), which one would expect to explain some of the differences in responses within, and perhaps between, countries.

I can see how some people would answer that things were better now (many liberals –  depending on the components of the liberal agenda emphasised – would be expected to), and economists seem often to weight most heavily income measures (undoubtedly higher than half a century ago), available technology, and life expectancy.   But these results suggest that to people around the world the answer is not clear cut.  Perhaps in some cases those negative answers involve people just looking at the past with nostalgic rose-tinted glasses, but the diversity of results across countries suggests something more is at work than that.