Renting and buying

Michael Reddell Housing

In his Sunday Star-Times column this week, economist Shamubeel Eaqub announced that “I’ve bought a house at last” .   He and his wife had had quite a lot of coverage for their choice to stay renting, even though they could readily have purchased a house in Auckland.    As they noted in their book Generation Rent, their decision to rent had been both a lifestyle and a financial one.

Economists have form in this area.  Most people want to own their own house sooner or later, and in the longer-term those who don’t are usually those who can’t.   When economists don’t buy it is usually a choice.

The most prominent New Zealand economist who once chose not to buy was the then new Governor of the Reserve Bank, Don Brash.    Taking up his role as Governor in 1988 involved shifting from Auckland to Wellington.  At the time, after the break-up of his first marriage, Brash was on his own.  But he was also struck by just how high interest rates in New Zealand were.   To buy a house would involve paying mortgage interest rates that implicitly assumed inflation would not come down further, even though the mission Brash had been given was to keep on reducing inflation.   Renting looked a lot cheaper than buying, at least if inflation was going to be successfully reduced.   Brash pointed this out in the media and, even if there was a certain logic to his point, cartoonists had fun.  This was Tom Scott’s contribution.

Brash cartoon housingNot that long afterwards, Don remarried and they then had a child.   Like the Eaqubs, whatever the cold financial analysis might have shown, he bought a house.

I went through a similar phase.  In those far-flung days, Reserve Bank staff could get mortgages at 4.5 per cent.  I got a secondment to Papua New Guinea in 1985, and my father urged me to buy a house before I went.  I did the numbers and calmly talked him through the analysis demonstrating that if the inflation rate was going to be cut as the government and the Reserve Bank were suggesting then it wouldn’t be worthwhile to buy, even at 4.5 per cent (according to the RB website, private borrowers at the time were paying 17.5 per cent for a new first mortgage).  More fool me.  In the following few years one of New Zealand’s biggest credit booms ever happened, and with it a whole new last wave of high inflation.

There is nothing wrong with renting.  For anyone living in a city or town only temporarily, or newly arrived and not sure where they want to be long-term, it is usually the more sensible option.  Transactions costs, and the uncertainty, associated with buying and selling houses are quite a deterrent to doing it very often at all.  And there is the added advantage that maintenance etc is someone else’s problem.   For most people just starting out in the workforce, there aren’t serious alternatives even in well-functioning markets (ie without land use restrictions, or LVR controls).

But for most people in most places renting is a phase they want to get past.  Often, just as quickly as possible.    This chart shows home ownership rates for a bunch of OECD and EU countries.

home ownership rates

The median for these countries is 72.8 per cent. New Zealand was under 65 per cent at the last census, and probably falling further.

I’m not sure that home ownership is one of those things we want governments actively encouraging –  that way lies, for example, the sorts of credit misallocations that, in the US, contributed to the financial crisis of 2008/09.    But, equally, we don’t want governments standing in the way of people fulfilling a natural human aspiration for a place of their own (as governments do now, through some toxic mix of land use restrictions, together with policy-driven rapid population growth and credit controls).     Economists sometimes fret about people having “all their eggs in one basket” –  their biggest asset in the same location as their job etc –  but revealed preference internationally suggests that economists have it wrong.  People typically weigh the advantages of home ownership as outweighing any of the risks/costs that economists sometimes focus on.

It is sometimes claimed that the tax system materially favours owner-occupation, but it doesn’t really.   The tax system (arguably) favours those with a large amount of equity in their homes, but it bears down on most people buying a first home.  To be sure, they aren’t taxed on the imputed rental value of living in their own house.  But, unlike rental property owners, these (typically highly-indebted) owner-occupiers can’t deduct interest or other home ownership expenses.   Few/no first home buyers would be paying any more tax –  many would be paying less – even if the tax treatment of housing was put on what most economists would regard as a more neutral footing.

To my mind, the main policy priority should be fixing up the land supply issues (probably supported by reduced immigration and eased credit controls).  Do that –  all quite readily technically feasible, whatever the political failures of nerve –  and for most people renting will become a short-term proposition again.   Sure, there will always be a handful of people unable to buy, or to cope with having their own house, and in many cases state housing (or state-financed housing) is likely to be the solution.  But there shouldn’t be any reason why ordinary working people couldn’t buy their own house in their 20s, as used to happen.  After all, they’ll have another 40 years plus of working life to pay off a mortgage –  and it is quite rational for low income people to spread such a bulky purchase over a long working life.

So calls for various reforms of tenancy laws to facilitate longer-term renting seem mostly like a concession of failure –  a refusal by successive governments to sort out the housing supply market itself.    Shamubeel Eaqub and others sometimes talk up Germany and, to a lesser extent, Switzerland.    I see nothing appealing about the Swiss housing market –  hugely highly-priced (and accompanied by very high levels of –  probably tax-induced –  household debt), and with outcomes badly out-of-step with most other advanced countries.  Sure, one could make rental tenure more secure, but is there any evidence that most ordinary citizens would prefer that over owning a place of their own?

I’m not that familiar with the details of tenancy law, but it isn’t clear to me that there is any legal obstacle to long-term fixed tenancies, mutually agreed between owner and renter.  Perhaps if there is an issue it relates to the ownership patterns of the New Zealand rental stock.

One good feature of the New Zealand tax system is that it has treated individuals owning rental properties very similarly to institutional investors owning rental properties (although that has been changing over the last decade or so).  That isn’t the case in lots of other countries where, for example, rental properties owned by a tax-preferred retirement savings entity will be much more favourably treated than properties owned by an individual holder.  Perhaps partly as a result, most private rental properties in New Zealand have been owned by people with quite modest portfolios of properties.   That probably works fine for renters much of the time when most renters have quite short-term horizons.  If they have a longer horizon, it can become more problematic if the owner wants to rebalance or liquidate their modest portfolio of properties.  Those problems are much less likely for an institutional owner who, in principle, might have 1000 properties, and sees themselves in the rental business for the long-term.

Even so, I have wondered why we don’t see more institutional owners of rental properties.  At times, I’ve wondered whether it had to do with the nature of our housing stock –  mostly detached houses.  Perhaps institutional ownership was easier and more natural with, say, whole apartment blocks, or some of those squares in London all owned (but rented with long leases) by a single estate.   A big portfolio of detached houses might be harder to manage, maintain etc.

And so I was interested to see a lengthy article in the Wall St Journal the other day on private companies doing exactly that in the US on a large scale.

Those four companies and others like them have become big landlords in other Nashville suburbs, and in neighborhoods outside Atlanta, Phoenix and a couple dozen other metropolitan areas. All told, big investors have spent some $40 billion buying about 200,000 houses, renovating them and building rental-management businesses, estimates real-estate research firm Green Street Advisors LLC.

It is a fascinating article (google, “Meet your new landlord: Wall Street”).  It isn’t clear whether it will prove to be a viable model in the long-term, or whether it is largely a post-crisis phenomenon that might fade away again in a few years.     But if people are serious about a better-functioning long-term rental market in New Zealand –  if people are giving up, as they shouldn’t, on fixing the housing supply market, enabling a recovery in the home ownership rate –  it is the sort of business model they should be hoping to see develop in New Zealand.

In closing, I wanted to pick up just one specific point from Shamubeel Eaqub’s article.   Talking about the rent vs own choice he notes

we don’t hate home ownership at all. We just didn’t think it was the best use of our hard-earned money to spend it meeting ownership costs (such as house maintenance) that are much higher than rents, nor to deprive us of the opportunity to invest in businesses that will hopefully give us good financial returns and create jobs and prosperity for other New Zealanders.

Sadly, now that our money is tied up in one huge asset, it gives us shelter and security, but it no longer has the opportunity to be directly invested in New Zealand businesses to get them started, or to help them grow.

At an individual level, no doubt the logic seems fine.  The Eaqubs did have shares in businesses (or units in unit trusts which had shares in businesses) and now they own a house.     But their purchase of a house last week didn’t change, even slightly, the total number of houses in New Zealand, the number of people living in houses, or the number of companies with shares on issue.  All that happened was that ownership changed: the Eaqubs purchased a house and someone else sold one. The Eaqubs sold shares and others purchased them.    Renting rather than owning doesn’t change, by one iota, the volume of real resources in the economy devoted to housing.

I’m not sure there is anything particularly virtuous in preferring a smaller simpler house over a larger better-appointed house, but it would only be if people were consistently choosing smaller simpler accommodation  –  rather than just changing who owns those houses –  and were saving rather than spending the leftover money, that additional real resources might be available to the business sector.   Since the typical concern is that we have too few houses for the number of people in New Zealand,  and some often highlight that many of our houses aren’t of great quality (cold, drafty etc), it seems curious for someone who is on record as generally favouring our immigration programme to suggest that fewer resources in New Zealand should be devoted to housing.

Vision, measurement, and (lack of) achievement

Michael Reddell Reserve Bank

You might get the impression that I can be rather critical.  No doubt I can.  But one the thing the last couple of years has confirmed to me is that there is a still a sunny upbeat, naively optimistic, streak lurking within.    In particular, I keep being surprised by just how bad things really are at the Reserve Bank, and that despite having spent 32 (mostly quite enjoyable) years on the payroll.

A few weeks ago I wrote about the Reserve Bank’s (statutorily obligatory, but largely pointless –  given that the Governor is just about to leave, and the Governor makes all the decisions) Statement of Intent for the next three years.

Quite early in the document, in a section headed “Strategic direction”, I had come across this

The Reserve Bank’s purpose is to promote a sound and dynamic monetary and financial system. It seeks to achieve its vision – of being the best small central bank

As I noted then

It was a line one used to hear from the Governor from time to time when I worked at the Bank (somewhere I think I still have a copy of a paper that attempted to elaborate the vision), but it hasn’t been seen much outside the Bank, and if I’d given the matter any thought at all I guess I’d have assumed the goal had been quietly dropped.   Apparently not.

As an aspiration, it is one that has always puzzled me.

It is good to aim high I suppose, but isn’t it really for the owners to decide how high they want the Reserve Bank to aim? Then it is the manager’s responsibility to deliver.  I’ve not seen the Minister ask the Reserve Bank to be the “best small central bank”.    That isn’t just an idle point, because the ability to be the best will depend, at least in part, on the resources society chooses to make available to the Reserve Bank.  There are some gold-plated, extremely well-resourced, central banks around, particularly in countries that are richer than New Zealand.   I suspect New Zealand probably skimps a little on spending on quite a few core government functions including the Reserve Bank (but I’m probably somewhat biased, having spent my life as a bureaucrat), but that is a choice.    If we asked of the Reserve Bank what we ask of it now, but made available twice as many resources, we should expect better results.   As it is, there are limitations to what we should expect from 240 FTEs, covering a really wide range of responsibilities (the Swedish central bank, for example, appears to have about 40 per cent more staff, for a materially narrower range of responsibilities).

Given that the Governor has now restated the vision of having the Reserve Bank as the best small central bank, I assume he must have some benchmark comparators in mind, and assume they must have done some work to assess how they compare.  Since I assume any such documents would be readily to hand, I’ve lodged a request for them.

Specifically I asked as follows

I refer to the observation on p10 of the Bank’s new Statement of Intent, in which it is stated that the Bank’s vision is to be “the best small central bank”. I would be grateful if you could provide me with copies of any and all benchmarking exercises conducted since the vision was adopted (the start of the current Governor’s term?) indicating how the Reserve Bank is doing relative to other small central banks.

I’m not quite sure what I expected, but it wasn’t what I finally received this morning.

The Reserve Bank is declining your request under section 18(e) of the Official Information Act, because the document alleged to contain the information does not exist or cannot be found. Specifically to this ground, the Bank is declining your request as it has not conducted any benchmarking exercises since the vision was adopted indicating how the Bank is doing relative to other small central banks.

Not a thing.   No comparative tables.  Not a single paper for the Senior Management Committee or the Governing Committee.  Not a single paper for the Board, the body paid to hold the Governor to account, and to scrutinise and report on the Bank’s performance.

I’m still flabbergasted.  This is, so staff and the now the public are told, the Bank’s “vision”.  It was a distinctive emphasis introduced by the current Governor shortly after he took office, still being repeated front and centre in a key accountability document as the Governor gets ready to leave office.  And yet, he and they have apparently done nothing at all to assess where they stood at the start, and what if any progress they might have made since.   I’m sure that any junior manager at the Reserve Bank who articulated an ambitious vision for his or her own team would rightly have got pushback along the lines of “how will know you’ve achieved it?” and “who are you benchmarking yourself against”, or “what data collections processes will you put in place to enable us to assess whether you are making progress”.

Ambition is good.  Vision is good –  “where there is no vision, the people perish”.     But hand-wavy “visions” with little or nothing behind them, that apparently drive no decisions, and where there are no benchmarks, and no way of assessing progress, are worth almost nothing at all.   Within an agency, they just fuel staff cynicism.  Beyond the four walls of the institution concerned, they border on the deliberately dishonest – the sort of cheap and empty rhetoric (small beer in this case) that is corroding confidence is institutions and leaders across the Western world.     The pervasiveness of this sort of cheap rhetoric is presumably reflected in the fact that both the Minister of Finance and the Reserve Bank’s Board reviewed drafts of the Statement of Intent.  Did none of them ask: “Governor, this vision of being the ‘best small central bank’, where do you stand now, what progress have you been making, and how will we –  those charged with holding you to account – know?”?

Visions have their place.  But from independent government bureaucracies, I’d settle for consistently excellent delivery on the tasks Parliament has given them.  For too long now, we’ve not had that from the Reserve Bank, or from those charged with holding them to account on our behalf.  But when they met last week, applications for Governor’s job having closed, was the Reserve Bank Board even aware of the deficiencies?  And, even if so, did they care?

Tightening conditions impede inflation getting back to target

Michael Reddell inflation, Monetary policy

Five years ago, the then incoming Governor, Graeme Wheeler, signed a Policy Targets Agreement with the then Minister of Finance.  In that document, he committed to run monetary policy with a

focus on keeping future average inflation near the 2 per cent target midpoint.

Earlier this week the CPI  was published.  It was the last such release that will appear while the Governor is still in office.

On a chart showing the 2 per cent focal point the Governor willingly committed himself and the Bank to, here are (a) the actual CPI inflation rates and (b) the Governor’s preferred measure of core inflation (the sectoral factor model measure) for the last five years.

Wheeler inflation 17

Not once in five years has core inflation (on this measure) even come close to 2 per cent.  In only a single quarter –  one of 20 – did headline CPI inflation get to 2 per cent.

Of course, the Governor can’t really be held to account for inflation outcomes in the first year or so of his term –  those outcomes were determined by choices made by Alan Bollard.  And for the next year or so, it will be Graeme Wheeler’s policy choices that have the biggest policy influence.  Nonetheless, to be so consistently far away from the newly-adopted target isn’t a great legacy.  Perhaps (but probably not) the Bank’s Board will reflect on those outcomes in their forthcoming Annual Report?

The sectoral factor model is only one measure of core inflation, albeit the most stable of them (and so the dip down in the latest release should be a bit disconcerting).  Here is the table I’ve run previously, of six measures of core inflation.

Core inflation: year to June 2017
CPI ex petrol 1.7
Trimmed mean 1.8
Weighted median 2.0
Factor model 1.7
Sectoral factor model 1.4
CPI ex food and energy 1.6
Median 1.70

The poor track record on inflation might have been more tolerable if:

  • productivity growth was really strong, driving down costs and prices.  But it hasn’t been.  In fact, there has been no labour productivity growth at all in the Wheeler years (not the Bank’s fault), or
  • if the unemployment rate was exceptionally low.   But it hasn’t been.   The current unemployment rate (4.9 per cent) is still materially above most estimates of the NAIRU, and well above pre-recessionary levels.  For what it is worth, it is also now above the unemployment rates in a couple of Anglo countries with pretty flexible labour markets (the US and the UK), which had to grapple with having reached the limits of conventional monetary policy during the post-recessionary years.
  • core inflation was still rising now (mistakes happen, but fixing them promptly makes up for quite a lot).  But, for example, the sectoral core measure is back to the same level it was in September 2015, when the Bank was just beginning to unwind its ill-judged 2014 tightenings.

Mostly, monetary policy in the Wheeler years hasn’t been well run.    When Graeme Wheeler took office core inflation had fallen quite a bit over the previous year.  A sensible response would have been to have cut the OCR.   The OCR increases in 2014 were never necessary (I choose the word advisedly –  there was plenty of time to wait and see if core inflation was in fact just about to pick up strongly).  Those increases were then unwound only rather grudgingly.

Of course, in fairness to the Bank, it did rather less badly for most of the period than most of the market economists whose views are covered in the local media.    For most of the time, most (almost all) of them were forecasting higher inflation, and a higher OCR, than the Reserve Bank was delivering.   But it isn’t much consolation, since (a) the Reserve Bank has far more analytical resources at its disposal than the private banks, and (b) the Reserve Bank is paid to conduct monetary policy, and market economists aren’t.

We’ll see next month what the Reserve Bank makes of the latest inflation outcomes.   But the data must be quite disconcerting.     There are some specific pockets of inflationary pressure –  building costs notably (and not that surprisingly, given the population pressures).   But here is non-tradables inflation (quarterly) for the June quarters of the last nine years.  Non-tradables inflation is what the Reserve Bank has most influence over in the medium-term.

NT june quarters

Only in 2015 was June quarter non-tradables inflation lower than it has been this year. Annual non-tradables inflation has dipped slightly to 2.4 per cent.  That might not seem too bad –  after all the target midpoint is 2 per cent – but as even the typically-hawkish BNZ noted in their commentary the other day one would really expect non-tradables inflation to be quite a lot higher to be consistent with delivering overall CPI inflation near the target midpoint.    A simple approach to a core non-tradables inflation rate is the SNZ series that excludes government charges and the cigarettes and tobacco subgroup (where taxes are being raised substantially each year).

NT ex jun 17

An annual inflation rate in this series nearer 3 per cent would be more consistent with core CPI inflation settling around 2 per cent.  At present, it is nowhere near 3 per cent, and moving in the wrong direction.

So why is inflation still (a) quite a way from target, and (b) looking to be falling again?  Broadly speaking, I reckon the answer is about (a) an economy that continues to run below capacity, and (b) tightening monetary and financial conditions.   The Reserve Bank’s latest published estimate was that the output gap is around zero (roughly, a fully-employed economy).   I noticed one local bank published an estimate the other day suggesting they thought the output gap was more like +1 per cent of GDP.     With the unemployment hovering around 5 per cent –  and best estimates of the NAIRU somewhere around 4 per cent, and demographic reasons to think the NAIRU might be falling, that simply seems unlikely.  It is much more likely there is still some excess capacity in the system, and demand growth simply hasn’t been strong enough.     The job of monetary policy is to manage interest rates in ways that deliver enough demand to keep inflation near target.

The current state of excess capacity is a long-running difference of opinion.  But what isn’t really in much doubt is that monetary and financial conditions have been tightening quite substantially in the last few quarters.

The OCR was cut to the current level of 1.75 per cent last November.   We might have expected inflation to pick up a little further since.    But retail interest rates have been rising:

  • the Bank’s measure of SME overdraft rates troughed in January 2017, and had risen by 19 basis points by June,
  • the Bank’s measure of floating mortgage rates for new borrowers troughed in October 2016, and has risen 25 basis points since then,
  • the Bank’s six month term deposit rate measure troughed in July last year and has risen 15 basis points since then,
  • one and two year fixed mortgage interest rates are also up by around 20 basis points

These aren’t large moves, but with inflation having been consistently below target (and the Bank having been repeatedly surprised) there was no good reason for the Reserve Bank to have accommodated such tightenings.

It isn’t just retail interest rates.   Here is the trade-weighted exchange rate measure

TWI july 17

The exchange rate fell quite a long way in 2015, as dairy prices fell, and the Reserve Bank began cutting the OCR.  At the time, the Governor spun tales about how this would help get inflation back to 2 per cent.  Exchange rates are somewhat variable, but broadly speaking the trend has been upwards since then.    Yes, dairy prices and the terms of trade have improved, but it all adds up to another tightening of monetary conditions when inflation has been persistently below target.

And, of course, credit conditions have also tightened.  Some of that is the Reserve Bank’s own doing –  last year’s latest iteration of the LVR controls –  but much of it isn’t: it is lenders reassessing their own willingness to lend.  We don’t have good statistical indicators of credit conditions, but there is little doubt they’ve been tightening.

It all adds up to a picture in which shouldn’t really be very surprising at all: inflation isn’t rising and may well have begun falling again.  Of course, some surprises reinforce the more systematic elements.  Weaker oil prices (for example) probably will spill over to some extent into core measures of inflation.  And unlike the situation in 2010 and 2014, this isn’t a case where the Reserve Bank has gone out actively seeking to tighten monetary conditions –  indeed, the Governor has been commendably moderate, especially relative to most local market commentators.  But it does look a lot like another case where the Bank (and the Governor personally, as single legal decisionmaker) has been too invested in a story that the economy was strong, inflation was picking up, and would continue to pick up, that it missed the way in which monetary conditions were tightening, and continued to largely (and deliberately) ignore the signals coming from the labour market.  Instead of repeatedly talking –  as the Governor does –  about how accommodative (or even “highly accommodative”) monetary policy is, the Bank would be much better advised to treat the low level of interest rates as normal, for the time being (it has after all been more than 8 years now since they were sustainably higher), and put much more weight on seeing hard evidence that (a) inflation is settling back at around 2 per cent, and (b) unemployment is nearer credible estimates of the NAIRU, before acquiescing in any material tightening in monetary conditions.   After getting it so wrong for so long, they should be willing to run the risk of core inflation heading a bit above 2 per cent for a time –  after so many years of undershoots, no one is suddenly going to think the Bank is soft on inflation if core inflation is 2.2 or 2.3 per cent for a couple of years.

Looser monetary conditions now would, most likely, be more consistent with the Bank’s mandate.  I’m not sure it is good form for the Governor to take the market by surprise with a cut from the blue as he heads out the door. But the case for establishing an easing bias in next month’s Monetary Policy Statement is beginning to strengthen.    Hawks will, of course, cite the various business and consumer confidence measures.  None is any stronger now than they’ve been over the last couple of years, and over that period inflation simply failed to pick up anything like enough to get back to target.   Expecting something different now, when the background conditions haven’t changed, is either just wishful thinking, or something worse –  including an inexcusable indifference to the lingering high number of people unemployed.

 

Ruminating on Auckland

Michael Reddell Auckland

Perhaps not many other long-term residents of Wellington share my taste, but I’ve always been fond of Auckland.  Partly that might just be good memories from five years there in my youth, but there is also the great physical location, a better (and certainly warmer) climate, deciduous trees, flourishing citrus trees in so many suburban gardens, and so on.   We’ve just had a family holiday there, and I was reminded again of what I liked about our largest city.  By contrast, I’ve always regarded Wellington as the public’s revenge on the public service.

Of course, as holidaymakers we didn’t have to grapple with the horror of the housing market, and between reduced school holiday traffic, the new Waterview tunnel, and largely avoiding the rush hour, not even the traffic was too problematic for us.  Coming from cramped Wellington, we were staying just off a not-overly-busy road that seemed wide enough that a whole new subdivision could have been constructed down the middle of the road.   We were mostly being tourists, but a curious and analytical 14 year old prompted discussions around the absurdities of housing supply restrictions –  explaining the oddities of the isolated high rise apartment blocks on Jervois Road, or Stanley Point, or Remuera Road, sticking out now just as those same buildings did when I was his age in the 1970s.

But staying in an older part of town I was also reflecting more generally on both past and present Auckland. 100 years ago, Auckland was the largest city in one of the two or three wealthiest countries in the world.  By the standards of the day, it must have offered ordinary working people some of the best material living standards on offer anywhere.  And if Auckland was our largest city then, it certainly wasn’t a dominant one.   In the 1911 census, the total New Zealand population had just crept above 1000000 (1008468).  And here were the total populations of the main urban areas (encompassing surburban boroughs, not just the respective city council areas).

Greater Auckland 102,676
Greater Wellington 70,729
Greater Christchurch 80,193
Greater Dunedin 64,237

Auckland’s population was just 10 per cent of the total.  At the same time Hamilton borough had a population of 3500, and Tauranga a population of 1300.

These days, Auckland makes up almost 35 per cent of the total population.   These days, with New Zealand GDP per capita around 30th in the world (depending which list one uses), there are likely to be many many cities (perhaps 100 or more, given that big countries such as the US, Germany, Japan, France, and the United Kingdom are richer than us, as well as many small countries) offering better living standards to ordinary working people than can be found in Auckland.  That would be true even on metrics like GDP per capita, with the problems accentuated by the disastrously unaffordable housing market.

Of course Auckland’s relative decline is largely part of the overall stark relative decline of New Zealand.    I’m sure we’ll see plenty of bluster from the current government in the election campaign that is getting underway, but I dug out the Prime Minister’s campaign statement from the 1911 election campaign published in the Herald on 6 December 1911.  It is partisan of course, but when Joseph Ward asserted that

The Liberal Government can claim without fear of contradiction to have made New Zealand in every department of social activity the most advanced country in the world.

Present and Future. New Zealand’s prosperity is solid and beyond question. Its population today is greater by 400,000 people than in 1893 and obviously the work of the Government has greatly increased. In the history of every country there are periodical fluctuations, seasonable ups and downs. We are influenced by the conditions ruling in other parts of the world. We cannot be always on the crest of the wave. But look round on the other countries. Mark what vicissitudes and oppressions they have passed through. Familiarise yourselves with the facts regarding the rich and resourceful United States of America, and then decide whether I am not justified in my reiterated assertion that New Zealand to-day is the most prosperous country in the world.

It is hard not to think that, even with the benefit of hindsight and the best efforts economic historians can do to compare living standards across countries, Ward was speaking the truth.   (It didn’t do his party much good, as they lost office –  after 20 years –  shortly afterwards).

These days we get fatuous comparisons of growth rates across countries, rarely adjusted for rapid population growth, but no one dares to claim New Zealand is even close to the most prosperous country in the world.

Wandering around Auckland was also a reminder of the extent to which Auckland’s economy is largely about supporting its own rapid population growth.  Check out the names on the high rises in the central city and you’ll struggle to find many New Zealand owned brands or companies (the banks and insurance companies, eg are almost all foreign-owned), and especially not if one is looking for firms making it in the international markets.  I’m all for foreign investment, but in a thriving economy it would be a two-way street –  not only would we have much more inward foreign investment but there would be a lot more offshore foreign investment too, as successful New Zealand firms took themselves to the wider world.  The pictures are never entirely black and white.  There are success stories like Air New Zealand (although with majority state ownership and the constraints of that industry who knows if it would still be New Zealand owned and run in a fully competitive market).  On a (much) smaller scale, I noticed billboards for ACG, which has taken its educational offerings abroad.

And there is, of course, the export education industry.  But even the reputable bits of that industry have the ground skewed in their favour by “industry subsidies” –  whether it is cheap access to PhD programmes for foreign students, or the way export education is bundled with preferential access to work rights and residence options in New Zealand.  And then there are the less reputable bits.  We took the kids ice-skating in Aotea Square and while they skated I contemplated the prominent building across the street with the big Cornell name and crest.  Not, surely, we thought the top US university with an operation here?  And no, it was the Cornell Institute of Business and Technology about which the authorities (and former staff) seem to have some pretty serious questions.  It was the most prominent tradables sector building I noticed in Queen St.

And yet, this is the city in which the hopes and dreams of the New Zealand agglomerationists are invested.   If the strategy –  putting more and more people into Auckland, even as New Zealanders have been leaving –  was any sort of economic success, surely we’d be seeing a succession of strong outwardly-oriented private sector businesses increasingly dominating the Auckland skyline?   But there is simply no sign of it.   Perhaps these successful firms are skulking in the suburbs and industrial areas?  I’m sure there are some highly successful examples, but there is no sign of it happening on the sort of scale needed if a non-natural resource based economy, successfully taking on the world and winning, is to develop in ways that would support top tier living standards for many more people.    If the model were correct, Auckland should be leading the way.  But it isn’t.

Really successful cities internationally, in economies that have gravitated away from dependence on (fixed) natural resources, tend to have GDP per capita a long way above that in the rest of the country.  And, typically, that gap is widening.

I ran this chart last year

gdp pc cross EU city margins

Here is the Auckland chart for the years since the regional GDP data began in 2000.  It shows average GDP per capita in Auckland relative to that in the rest of New Zealand (so the margin is larger than in the chart above, which uses the relationship between the biggest city and the whole country –  the biggest city typically being a large chunk of the country).

Akld GDP pc

The ratio does appear to be somewhat cyclical.  Probably what is going on is that when there is a big surge of immigrants (as in the early 2000s and recently) there is a big increase in the activity required simply to accommodate the new arrivals (building houses, roads, schools etc), but the trend is downwards.  Average incomes in Auckland are higher than in the rest of the country, but the margin is small and has been shrinking.

In the annual regional GDP data, SNZ also provide an industry breakdown.  As regular readers know, I’ve highlighted previously the pretty dismal state of the New Zealand tradables sector –  the main bits (agriculture and mining, manufacturing, and exports of services (mostly tourism and export education)) that compete with the rest of the world.   In real per capita terms, there has been no growth in that measure since around 2000.

We can’t do that calculation at a regional level.  But here is another proxy.    In this chart, I’ve included agriculture, forestry, fishing, mining, manufacturing, and education and traning as a loose proxy for Auckland’s tradables sector.  Of course, lots of education is totally domestic-focused, but export education is probably the main export sector centred in Auckland.   It has grown quite a bit in recent years.

akld tradables

There will be successful internationally-oriented Auckland-based firms lurking in some of the other services sectors, but (I’d assert) not many and not very large.   This simply isn’t what one should be expecting to see if the Auckland-focused (de facto, since that is what a large immigration target amounts to in practice) Think Big policy were working for New Zealanders as a whole.

It is close to a tragedy.   A deeply misguided policy, however well-intentioned, has reduced what was once one of the richest cities in the world to a rather mediocre mess: with few industries successfully competing internationally (in a small country the only long-term basis for prosperity), economic activity doing well only when a lot has to be built to accommodate yet another huge surge of new people, and houses so expensive that ever-fewer of the inhabitants can afford to buy.   It is still a great location and a wonderful climate but think how much better material living standards Auckland might offer its ordinary working people if, say, in a country of 3.5 million people, we had an Auckland of perhaps 750000.  Quite plausibly, that is how things might have played out with less overall population pressures –  deferring to the wisdom of the New Zealanders leaving, rather than superimposing politicians’ and bureaucrats’ judgements –  and a much lower average real exchange rate.

It isn’t too late to fix up New Zealand, but it does require a pretty dramatic change of course.  Wouldn’t it be wonderful if in thirty years time some campaigning Prime Minister could once again honestly make the sorts of assertions about economic and social success that Joseph Ward was making in 1911?  Sadly, judging by the political rhetoric this year none of our politicians is interested.

 

Money: past and future

Michael Reddell Currency

On Monday 10 July 1967 New Zealand adopted decimal currency. Presumably the government chose a Monday because in those days shops in only a few areas were open on Saturdays and almost all shops and other businesses were closed on Sundays.  Nothing else very significant seems to have happened in the world that day, and no one very famous was born on it.    We adopted decimal currency a year after Australia did and four years before the United Kingdom did.

But of course the dollar isn’t what it used to be.   Here is a chart of the purchasing power of $100, based in June quarter of 1967.   By 1975, purchasing power had halved (prices doubled), by 1980 it had halved again, and even since the current Reserve Bank Act was passed in December 1989, mandating the Reserve Bank to achieve and maintain a stable general level of prices, consumer prices have increased by 76 per cent.   $100 today purchases what $5.60 purchased in 1967.

purchasing power

So much for price stability.   As I was typing this I noticed that the Reserve Bank had put out a press release to mark the 50th anniversary.  The Governor notes

“This milestone is a great opportunity to reflect on a point in time and see how our banking has evolved and how our money has changed over the years.

Perhaps also an opportunity to reflect on the declining value of that money?

Of course, shifting to decimal currency itself didn’t materially alter the average inflation rate.  What did that was the establishment of the Reserve Bank itself in 1934 (at which point private issuance of banknotes was also outlawed).

purchasing power 2

Prior to the creation of the Reserve Bank, the price level tended to be quite stable over long periods of time (but rather less so in the short-term).

There are good reasons for having a Reserve Bank (although the case is less overridingly compelling than the advocates sometimes claim), but it is worth being aware of what was lost when central banks and fiat money replaced earlier systems.   We lost, for example, any sense that money today will be worth roughly what it was in your grandparents’ time and what it will be in your grandchildrens’ time.  Does it matter?   On the one hand, we don’t mess around with, say, weights and measures that way.  A metre is what it was generations ago, and what it will be generations hence.   Weights and measures are social conventions too.    A reasonable counter is that very few people, other than governments, enter into long-term nominal contracts, but that might be partly because the future price level is so uncertain, while the future length of a metre isn’t.   In practice, there seem to be wider economic advantages in some circumstances is being able to generate unexpected changes in the price level (and alter the exchange rate), but whether they are worth the costs –  including the mismanagement by governments and central banks at other times –  is worth reflecting on from time to time.

When governments monopolised note issue (through the Reserve Bank) we also lost the opportunities for competitive innovation in hand-to-hand payments media, and left ourselves reliant on monopoly government suppliers.  Those sorts of suppliers usually don’t do a particularly good job in providing high quality goods and services in other areas of commerce, and it isn’t clear why we should expect much different in banking.  The state doesn’t monopolise the issuance of electronic payments media, and look at the innovation we’ve seen there.

Regrettable (and unnecessary, even if you wanted a central bank) as the statutory prohibition of private banknotes is, one might have supposed it was becoming increasingly less relevant.   If it is true in some countries, it isn’t here.  Here is a chart of the value of bank notes held by the public as a per cent of GDP.

bank notes

If bank notes are now being used for a smaller proportion of (licit) transactions, perhaps they are still being heavily used as a store of value (as the opportunity cost of holding cash has fallen, as interest rates have fallen) and for illicit transactions?

I was interested to see the outgoing Governor comment today on future prospects for physical cash.

Despite the growth in electronic payment systems, cash in circulation continues to grow and I expect cash, as a means of exchange, to be around for a long time yet.

The problem is that not only is cash becoming more popular, but we are getting nearer the point where it could either (a) become a great deal more popular indeed (if the Reserve Bank wanted to cut interest rates very much below zero),, or (b) where that option could severely limit the ability of the Reserve Bank to use monetary policy effectively in a severe downturn.  That ability is the main reason for having a Reserve Bank, and discretionary monetary policy, in the first place.

I noticed that the Governor did qualify his observation about the future of cash, noting that he expected it to be around “as a means of exchange” for a long time yet.   Did he mean to suggest it might not be around for long as a store of value?     It is the sort of the issue the Reserve Bank needs to address more extensively and openly.

The 50th anniversary of decimal currency is a good opportunity for some fun, looking back at what the country was like at the time of the changeover.    But after a few hours of looking back, it is probably rather more important for our officials –  in the Treasury and the Reserve Bank –  to be thinking hard about the constraints their statutory monopoly is coming closer to placing on our ability to use monetary policy for what is is designed for.    I’ve long favoured removing the statutory prohibition on private banks issuing bank notes.   Perhaps doing so wouldn’t come to much, but we can’t know if we keep the prohibition in place.  Perhaps they’d develop technologies combining the convenience of hand to hand currency with the potential for a variable rate of return?

But perhaps more immediately pressing now is a clear programme of work to ensure that when the next serious downturn comes we can have both the advantages of our existing physical cash as a payments medium (and even as an anonymous store of value) and the flexibility that discretionary monetary policy is supposed to have given us.  At present, we are drifting towards the rocks –  the next serious recession, whenever it happens –  with no sign that the Reserve Bank (and other relevant agencies/ministers) are taking the risks at all seriously.    It is another issue for the Reserve Bank Board to have in mind in assessing the applicants for Governor.  After all, one dimension of leadership is looking a little further ahead than other people, and charting directions.

 

(Not much) investment in New Zealand

Michael Reddell New Zealand economic performance, Population

A few days ago I ran a post on the cross-country relationships between population growth on the one hand, and residential, government, and business investment on the other.   Using OECD data, averaged for each country over a couple of decades, it was apparent that (a) as one would expect, residential investment makes up a larger share of GDP in countries with faster population growth (people want a roof over their head, but (b) business investment as a share of GDP was smaller the faster the population growth a country had experienced.   New Zealand’s experience was quite consistent with these relationships.  That should prompt some introspection on the part of those –  bureaucrats, politicians, and other lobby groups –  who champion our large-scale non-citizen immigration programme, the largest such active migration programme (at least for economic reasons) in per capita terms anywhere in the world.

But today, I justed wanted to look at New Zealand’s own data on investment, and particularly the experience in the current cycle.    My starting point is this chart, using the components of gross fixed capital formation (“fixed investment” in the national accounts), as a share of GDP, going back to the 1987 when the official quarterly national accounts begin.

GFCF components to Mar 17

As I noted the other day, “business investment” isn’t an official SNZ category –  it would be great if they actually started publishing one –  but instead follows the OECD practice of subtracting general government investment (schools, roads etc) and residential investment from total investment.     It isn’t fully accurate, to the extent that some residential investment is done directly for the government (so there is some double-counting) but (a) the effect should be small, and (b) it is a consistent treatment through time.

And in case anyone is wondering what the spikes in 1997 and 1999 are, they are navy frigates.

Three things struck me from this chart.

  • First, total investment as a share of GDP (the grey line) has been rising quite strongly from the trough in 2009 and 2010, but
  • Second, total investment ex residential investment (the orange line) has barely recovered at all, and
  • Third, business investment (as proxied by the blue line) has not only barely recovered, but is now smaller as a share of GDP than in every single quarter from 1992 to 2008.   And this even though our population growth rate has accelerated strongly, to the fastest rate experienced since the early 1970s

The difference between the orange and grey line is residential investment.   It has picked up a lot as a share of GDP, but then it would have been extremely worrying if that were not the case.  After all, we had a series of destructive earthquakes in Canterbury, and huge volume of resources had to be devoted to simply restoring the existing housing stock.  And we’ve had a big acceleration in population growth.    Residential investment as a share of GDP is now higher than at any time in thirty years, although house and land price developments suggest that residential land is still being held artificially scarce.

Businesses invest when they see opportunities and can raise the finance (internally or externally to take advantage of the opportunities).     There will always be some financing constraints –  firms that don’t have the retained earnings or can’t persuade someone else to provide additional debt or equity –  but it is a little hard to believe that, as this stage of the cycle, those financing constraints are much different than usual.  It suggests that firms just don’t see the investment opportunities in New Zealand to anything like the extent they once did, even though the population is growing as fast as it ever has in modern times.     It is at least suggestive that the persistently high real exchange rate might be an important part of the explanation.

New Zealand’s quarterly national accounts data go back only to 1987, but the annual national accounts data go back to the year to March 1972.    Here is business investment as a share of GDP right up to the year to March 2017.

business investment to mar 17

Not much above recessionary levels (1991 or 2009), and showing no sign whatever of picking up.   And that is even though the population (and employment) are now much higher than would have been foreseen just a few years ago.    Investment goods do appear to have got (relatively) cheaper over time, but that seems unlikely to adequately explain how firms saw investment opportunities of around 12 per cent of GDP in the two growth phases, but only around 10 per cent now  (especially as we know we’ve now had no productivity growth for five years).

Statistics New Zealand also produces annual estimates of the capital stock.  The latest observation is for the end of March 2016, but the earlier charts suggest there is little reason to think the story for the most recent year will be any more encouraging when the March 2017 data are released later this year.  This chart shows the annual growth rate is the estimated per capita real net capital stock (excluding residential dwellings).

cap stock growth

This indicator uses all the non-residential capital stock (ie including that belonging to the government sector).  As government investment has held up more strongly than business investment (see the first chart above) and as employment has been rising faster than population, the picture for business investment per employee would probably look even more disconcerting.

And, of course, all the official capital stock numbers use reproducible capital only.  In New Zealand, in particular, land is a major input to significant parts of business production.   The quantity of land is fixed (improvements to the land are included in the investment numbers above), and that fixed quantity is spread over ever more people.

Given our very serious housing situation, with house price to income ratios among the highest anywhere in the advanced world, it should be a bit troubling when really the least poor bit in the investment data is residential investment.   But lest I inadvertently comes across sounding upbeat on that score, here is annual growth in the SNZ real residential capital stock per capita.

res cap stcok

But perhaps this too is some sort of “sign of sucess” or “quality problem”?    Most people, I suspect, would settle for signs that if we are going to have rapid policy-driven population growth, that businesses would then find it remunerative to invest much more heavily, whether in building houses or producing other stuff to sell here or abroad.

 

 

 

Switzerland as our example – again

Michael Reddell New Zealand economic performance, New Zealand Initiative, Productivity, Switzerland

A month or two back, the New Zealand Initiative arranged a study tour (Go Swiss) for members (and a friendly journalist), “to learn more about their success story”.

I’ve written about this a few times, mostly because I’m genuinely perplexed that the smart people who run the Initiative really seem to think that Switzerland is much of an example for us, or even these days that much of a “success story”.

Sure, Switzerland is richer and more productive than we are.  Most advanced countries are.  But productivity levels in Switzerland now lag behind those of the leading OECD countries.  And over the last 45 years or so, Switzerland has had the lowest rate of productivity growth of any of the OECD countries for which there is a full run of data.  Just a little worse even than New Zealand.

switz 70 to 15

If I were sponsoring a study tour to places that had put in really strong performances in recent times, the Czech Republic, Slovenia or Slovakia look like they might be rather stronger contenders.     They’ve been catching up quite rapidly, not drifting back in the pack.       The Slovakia picture looks particularly impressive.  Here is the Conference Board data on real GDP per hour worked for each of New Zealand, Switzerland and Slovakia, relative to the average for France, Germany, Netherlands, and the United States (four of the higher productivity large OECD countries).

slovakia

Of course, New Zealand Initiative members are free to take their holidays wherever they like.   But it becomes of somewhat wider interest when they return trying to proselytise.

A few weeks ago the Herald’s Fran O’Sullivan provided a vehicle for some of that, relaying some rather questionable stories about the Swiss labour market (which does, among other things, feature a low youth unemployment rate), while ignoring such potentially relevant features as the absence of a generalised minimum wage in Switzerland.   Somewhat surprisingly, from a bunch of leading business people, Switzerland’s much lower company tax rate also wasn’t mentioned.  Then again, neither was its poor long-term productivity growth performance.

Sometimes the Initiative has been directly purveying the material.  Their chairman, Roger Partridge, had a piece in the Initiative’s newsletter recently extolling the contrasts between Italy and the Ticino, the Italian region of Switzerland.  “The secret to Swiss success”, so we are told, is down to “can solve”, reputedly the approach adopted by Swiss officials and politicians.    Now doing better than Italy isn’t such a great boast these days, but actually as the chart above shows, over the last 45 years Switzerland has done worse than Italy –  at least on productivity.  And then there are some of the summary indicators: on the World Bank’s ease of doing business index (not, of course, a perfect indicator of the state of regulation), Switzerland beats Italy by a substantial margin.  But Switzerland comes in at number 31.  New Zealand is number 1.

But what prompted this post was the editorial in the business section of this week’s Sunday Star-Times.   It doesn’t appear to be on the Stuff website, but if you go to this link to one of Initiative director Oliver Hartwich’s tweets, you can read an image of the whole piece.

Do you fancy living your lives more like the Swiss?…..It means entering into a radical experiment which could turn this country into another Switzerland.  A country with a high wage economy that manufactures and exports quality products, welcomes thousands of immigrants without any problems and has a fast and efficient public transport system

And, once again, we are told that

the ‘big picture” answer, according to the NZI, is in Switzerland’s decentralisation, where more than 2000 local councils have their own tax-raising powers.  Their argument is that it leads to greater pro-activity in devising strategies to attract business investment and power growth.

So, again, that would be the OECD country with the worst long-term productivity growth record?

And the other strand of the answer is, it is claimed, the education system.

Education is a dual system, which sees 80 per cent of young people enter vocational training, with only the remainder going to university.  But there is no stigma in that,

Then again, this is the OECD country with the worst productivity growth record over the last 45 years.  And, as OECD data I highlighted in the earlier post showed, actually a larger proportion of Swss 25-34 year olds have completed tertiary qualifications than in (a) most OECD countries, and (b) New Zealand.

One business leader is quoting waxing lyrical

As Fraser Whineray, boss of Mercury, said:  “an aluminium welder can be earning $150000 a year and living in a village like Queenstown”

I had no idea how much aluminium welders earn here, but this website suggests about $22.75 an hour.  That’s a bit under $50000 a year and given that Swiss GDP per capita is not even double New Zealand’s you’d have to be a little sceptical about that $150000 number (and this site offers some Swiss numbers).

But, picturesque as Switzerland is, what about the housing situation?

According to the New Zealand Initiative, as channelled by the Sunday Star-Times

Swiss house prices haven’t changed for three decades (inflation included) –  houses are still affordable compared to salaries.

The first part of that sentence is quite correct.    Real house prices (having had various ups and downs) haven’t changed much in 30 years.    But they were eye-wateringly expensive 30 years ago, and they still are today.   At the level of anecdote, I recall doing a course at the Swiss National Bank in 1990 and being told by our guides that prices in the capital Berne were so high that only senior managers at the central bank owned their own houses.

Good statistical data appears to be harder to come by: Switzerland is not, for example, in Demographia’s annual collection of house prices to median income data.   I stumbled across one website that offers data (of what quality I”m not sure) on rents and house prices in all sorts of cities.   Here is what they suggested for price to income ratios in various Swiss cities.

Zurich                                         9.5

Basle                                            9.2

Geneva                                       10.5

Lucerne                                      9.0

Berne                                        12.3

Whole country                       10.4

From what I could see, actual house prices don’t look any more “affordable” than those here (although, of course, interest rates are lower).  And, consistent with that, residential mortgage debt as a share of GDP is materially higher than that in New Zealand, in fact one of the highest ratios anywhere.

Oh, and how about home ownership rates?  Ours have been slipping, something that makes a lot of people uncomfortable (except a few –  economists mostly? –  who seem to have a vision that we’d be somehow better off if even more of us rented).  This chart is a subset of a table I found.  I’m sure not all the numbers are strictly comparable, and they are all for slightly different years, but I think most people will take New Zealand’s poor outcome over Switzerland’s any day.

home ownership

And, of course, none of this New Zealand Initiative material ever mentions the rather considerable advantages of location Switzerland enjoys –  at the heart of one of the wealthiest and most productive regions on earth, in an age when proximity and location seem to matter more than ever.    Or that, when international agencies look at Switzerland, one of the things they highlight most is the need for reforms to lift productivity growth.  The latest OECD report on Switzerland highlighted how relatively poor Switzerland’s productivity growth had been.  The press release for that report was headed “Focus on lifting productivity to guarantee future prosperity”, and part of the text read

The main objective has to be raising productivity, which will remain the key to boosting growth and maintaining a high quality of life and well-being.  The Survey suggests that Switzerland launch a new reform agenda to boost productivity, including renewed efforts to add flexibility to labour and product markets, improve public-sector efficiency, education and the business environment, and boost competition.  Increasing competition in the telecoms and energy sectors, including the privatisation of Swisscom, will be critical.

As I’ve said repeatedly, in many respects it would be nice to enjoy the material living standards the Swiss do, but……they are slipping backwards, and there is little sign that there is anything very systematic about how Switzerland does things that offers positive lessons for us, whether in beginning to reverse our dreadful productivity performance, or reverse our housing market disaster.

The mystery is why the New Zealand Initiative thinks otherwise.

But on a lighter note, I did find something from Switzerland that New Zealand could emulate.    I know Eric Crampton was one of those a bit upset about the loss of the rugby sevens tournament from Wellington.  Well, how about replacing it with office chair racing?  We spotted this on the BBC news the other night, and there is video footage here.  As the New Zealand capital of office workers, what better place than Wellington for a New Zealand leg of this sport.   Bowen Street looks as though it would offer a nice gradient, ending right in front of Parliament perhaps.  Think of the promotional opportunities.   It probably wouldn’t even take $5m of public money to get it going.

 

Who did Iain Rennie consult?

Michael Reddell Governance, Norway, Rennie review, Reserve Bank, Treasury

I’ve written a couple of times about the review former State Services Commissioner Iain Rennie has been conducting, at the request of the Minister of Finance, into two aspects of the governance of the Reserve Bank:

  • whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
  • whether the Reserve Bank should remain the “owner” of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.

An earlier OIA request from a journalist saw The Treasury refuse to release the terms of reference for the report, but they did release the terms of engagement.  I wrote about that here.    We learned from that release that the report had been delivered to Treasury in mid-April.    We also learned that

In completing the work, the author will engage with an agreed set of domestic and international experts.

and

The key deliverable is a report, which will be peer reviewed by a panel of international experts.

I was interested to know who these experts were, and lodged an OIA request with Treasury.  No doubt, they could readily have responded in a day or so, but after four weeks they did finally respond yesterday.

Anyway, this was the list of “agreed domestic and international experts”.

experts

and this was the list of reviewers

reviewers

It is a curious list in many ways.    Setting aside the SSC people, of whom I know nothing but who are presumably knowledgeable on issues of governance of New Zealand public sector institutions, not a single one of the central bank experts (first list) has any experience of, or exposure to New Zealand (let alone actually being a New Zealander).

And Rennie, with Treasury’s agreement, appears to have consulted only current serving central bankers.   No doubt several will have had useful perspectives to offer on their own central banks’ experiences.  But the world of central bankers is a fairly clubby (or collegial) one, and you would have to think it unlikely that Rennie would have heard anything from these people that would cast doubt on how the arrangements their New Zealand peers operated under were working.   And among those current central bankers only one (Poloz, the Canadian Governor) has any stature in his own right; the others appear to be “corporate bureaucrats”, able no doubt to pass on information about how things work in their own central banks, but not self-evidently qualifying as “international experts” on central bank governance etc.

One might have supposed that any number of other people (even from abroad) could have provided valuable perspectives and insights.  For example, retired Governors and former members of decisionmaking committees, who are freer to speak their mind.   Lars Svensson, the leading academic and former monetary policy board member, wrote a review of our Reserve Bank in 2001 for our then-government.   Having had extensive experience as an insider since then, and retaining an interest in New Zealand, he would have seemed like a natural person for Rennie to have consulted.    In fact, there is not one academic on the list.   Not, for example, Alan Blinder, former vice-chair of the Fed and author of academic work on decisionmaking by committee.   There are no private economists on the list.  Not, for example, Willem Buiter now chief economist of Citibank and a former academic and member of the Bank of England’s Monetary Policy Committee.  And no one from abroad with, say, a Treasury perspective, or the perspective of a Minister.  Bernie Fraser, for example, had been both Governor of the Reserve Bank of Australia, and Secretary to the (Australian) Treasury.

And not a single person from New Zealand made the expert list?  Not Arthur Grimes, who was heavily involved in the design of the current system and later chair of the Reserve Bank Board.  Not Don Brash, who was Governor under the current system for 12 years.  Not thoughtful former Board members such as (for example) Hugh Fletcher.  Not people who had been involved from a Treasury perspective (especially in the years since Rennie himself left Treasury).  And, of course, no one who has written on the issues domestically.

You might, incidentally, be wondering why people from the Bank of Canada and the Bank of Israel top the list of experts.  That is likely to be because Canada is the only other advanced country central bank with the Governor as (formally) single decisionmaker (Canada has quite old central banking legislation, and the Bank of Canada has much narrower responsibilities than our Reserve Bank).  And until relatively recently, Israel also had the Governor as a single decisionmaker, before the legislation was overhauled and a mixed committee (internals and externals) took over the monetary policy decisionmaking role.  The Israeli experience should be interesting, but again you have to wonder why Rennie didn’t consult Stan Fischer, former Governor of the Bank of Israel, and now vice-chair of the Federal Reserve.

What of the international peer reviewers?  There were three, and each will have been likely to have added something in commenting on Rennie’s draft.    But, again, there is a distinctly “let’s keep this inside the club” feel to it all.   Goodhart, for example, is a respected academic economist, and former staff member and Monetary Policy Committee member at the Bank of England.    But he is now rather elderly, and has had a very strong relationship with the Reserve Bank of New Zealand over the years –   including as guest speaker at the (rather extravagant) 50th anniversary celebrations of the Bank, and then someone used as an expert witness  by the Bank at the parliamentary select committee when the current Reserve Bank Act –  governance and all – was being legislated (rather controversially) in 1989.

Donald Kohn is pretty highly-respected in international central banking circles.  So much so that Treasury omit to note in their description that, having retired from a career at the Federal Reserve, he is now a member of the Bank of England Financial Policy Committee, so still entirely within the central banking club.  He has visited the Reserve Bank and, from memory, wrote up his experiences pretty positively.

The final reviewer is David Archer, former Assistant Governor and Head of Economics at the Reserve Bank (and sometimes mentioned on lists of potential future Governors). He now holds a senior position at the Bank for International Settlements, a body owned by central banks (including ours) which describes itself thus

The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

I worked with David closely over a long period, and he was usually pretty willing to speak his mind.  He certainly knew the Reserve Bank well –  at least in the days before financial regulation became so important, and before the Reserve Bank moved more back into the mainstream of central government as a major regulatory institution –  but you have to wonder quite how free he will have felt to offer views the Reserve Bank might be uncomfortable with – the Governor visits the BIS pretty frequently –  especially as those views will themselves presumably be discoverable in time.

So the offshore people consulted, or used as reviewers, seem as though they will have been a rather partial perspective on the issues at hand. No doubt, all provided some useful information and perspectives, but you can’t help thinking there could have been a lot more there if Rennie had sought it.  Then again, as State Services Commissioner his reputation was hardly that of someone keen on open government.  What is perhaps more troubling is that The Treasury was okay with all this.

Despite this published list, you have to wonder who else Rennie in fact consulted.  Why I do suppose there was anyone else?  Because, somewhat by chance, I also yesterday got a response from the Reserve Bank to an Official Information Act request for minutes of the Reserve Bank Board.

In the minutes of the Board meeting held on 30 March this appears

Rennie board

There follows almost three pages recording the details of the Board’s discussion with Rennie (and his supporting Treasury staff). every single word withheld (on somewhat questionable grounds).    Nothing else ever gets three pages of text in the Board minutes –  in fact, the process for appointing a new Governor is still not being minuted at all, even in this latest set of releases.

I don’t have any particular problem with Rennie consulting with the Bank’s Board.  They are likely to have some useful experiential perspectives to offer, but if the discussion covered almost three pages of minutes and –  according to Treasury –  no one else in New Zealand with any familiarity with central banking issues was consulted, it does all have the feel of an insiders’ job.  Perhaps that is what Steven Joyce wanted.  It isn’t what the situation requires.    Meanwhile, one can only hope that the report itself, along with the terms of reference, will be released before too long.

New Zealand isn’t the only country looking at these issues.  The Norwegian government just this week released an independent report they had commissioned looking at the future governance and mandate of their own central bank.  The summary report is very easy to read, and includes specific draft amendments to the law to give effect to the report’s recommendations.  Among those recommendations is a streamlined system of governance, with proposals for a monetary policy committee (40 per cent of whose members would be externals appointed by the government), and for a separate Board to which the Governor would be responsible in his role as chief executive of the Bank.    We can only hope that the completed Rennie report will be as clear and crisp.

 

 

Best small central bank?

Michael Reddell Reserve Bank

Earlier this week the Reserve Bank published a Statement of Intent for the next three years (starting tomorrow).     The preparation and publication of these documents is now a statutory requirement.  All manner of government agencies have to produce them.  In principle, such statements are part of a democratic accountability process.  In practice, they are mostly bureaucratic hoop-juumping exercises, containing very little that is both new and valuable, and one has to wonder if anyone in, say, Treasury has ever done a proper cost-benefit analysis to assess whether citizens are really getting value for money.

I haven’t put myself through the pain of reading any other agency’s Statement of Intent, so I have no idea whether the Reserve Bank’s SoI is better or worse than the average.  But on this particular occasion, the Reserve Bank’s effort is almost certainly more pointless than average.   The new SoI covers the three years to June 2020, and yet the Governor –  chief executive and sole decisionmaker at the bank, by statute, will be gone in three months’ time, and his deputy will follow him out the door a few months later.    Whatever the merits of Graeme Wheeler’s views on the priorities for the Bank over the next few years, they are really no more than (a) descriptions of what the Bank is doing at present, and (b) advisory opinions which his successor can simply ignore if s/he chooses.   When Cabinet ministers talk about the government’s plans for next year, there is at least (say) a 50/50 chance their party will be in office to carry those things through.  Graeme Wheeler won’t be.    Governance models shouldn’t be devised to fit bureaucratic practice and preferences, but an SoI might make a little more sense if the Bank were governed by a Board, the members of which don’t all change at one time (as most crown entities and similar agencies are).

I’m not going to bore myself, or you, with a detailed commentary on the SoI, but a couple of things did catch my eye (as well as an error on p34).

The first, perhaps trivial, one was under “People and culture”.   There we read

Embed the Bank’s high-performance culture

The Bank has largely established its high-performance frameworks. The priority now is to deliver stronger management performance and greater staff engagement. This will be achieved through the greater empowerment and skill development of staff, and accountability for results by managers.

Whatever a “high-performance framework” is, it doesn’t yet seem to be delivering results.  After almost five years as Governor, the most that appears to be able to be said is that the “frameworks” are in place, but the outcomes –  “stronger management performance and greater staff engagement” –  apparently are not.    Perhaps the Board will feel prompted to comment on that in their Annual Report on the Governor’s performance?

The second point I noted was something missing.  Whether in the list of strategic priorities for the next few years, or the list of what the Economics Department is working on this year, there is nothing at all about preparing for the next recession.     That is so even though the OCR is now 1.75 per cent, years into this growth phase.     They simply don’t seem to be taking seriously the limitations of conventional monetary policy, even though our central bank (and Treasury) have been forewarned and have had much more time than most to prepare.       It is an abdication of responsibility, and citizens (not central bankers) are the ones who risk paying the price.    There is no hint of looking again at the inflation target, or looking at whether  levels-targets might provide greater resilience, and no hint of any work looking at easing or removing the technological constraints that cause the near-zero lower bound on nominal interest rates, and which arise from the Bank’s statutory monopoly on note issuance.

The third point I noted was this

Policy Target Agreement renewal and governance review: engage effectively with external agencies on the upcoming renewal of the agreement and the review of the Bank’s monetary policy governance framework.

Unfortunately, there is no suggestion of engaging with the public on issues around the next PTA (unlike, say, the appproach taken in Canada), and no suggestion of any serious research programme around the appropriate specification of the target(s).    I was modestly encouraged to see the reference to “the review” of the monetary policy framework.  It suggests that the Reserve Bank has some work actively underway in this area, perhaps to complement or react to the, as yet unpublished, Rennie review.  On the other hand, nowhere in the SoI is there any recognition that the decisionmaking issues are at least as important around financial regulation (because there is nothing like the PTA to constrain gubernatorial choices and whims), and no suggestion of any review of the question Rennie was also asked to look at, as to whether the Bank should retain primary responsibility for advice on its own legislation (an unusual arrangements for an entity that isn’t a core government department).

The fourth item I noticed was something mentioned in the Minister of Finance’s annual Letter of Expectation to the Governor, also published this week.    In that, mostly, rather pedestrian letter, in which the Minister seems unbothered about the Governor’s repeated failure to keep core inflation close to target, the Minister does make a request

I expect the Statement of Intent to refer to the Bank’s plans to take forward its regulatory stewardship responsibilities over the coming years.

Regulatory stewardship has specific bureaucratic meaning.  From Treasury’s website

Regulatory stewardship is a responsibility of government regulatory agencies.  It involves them adopting a whole-of-system, lifecycle view of regulation, and taking a proactive, collaborative approach, to the monitoring and care of the regulatory system(s) within which they have policy or operational responsibilities.

If that sounds wordy and bureaucratic to you (as it does to me), there is a separate document –  only seven pages long –  outlining government expectations of regulatory agencies.    I liked this bit.

The government expects any regulatory system to be an asset for New Zealanders, not a liability.

By that we mean a regulatory system should deliver, over time, a stream of benefits or positive outcomes in excess of its costs or negative outcomes. We should not introduce a new regulatory system or system component unless we are satisfied it will deliver net benefits for New Zealanders. Similarly, we should seek to remove or redesign an existing regulatory system or system component if it is no longer delivering obvious net benefits.

But despite the Minister of Finance’s explicit request, there appears to be almost nothing in the Reserve Bank SoI on the Bank’s regulatory stewardship responsibilities.   At the end of a list of 12 initiatives in the regulatory area, suggesting it was added late after the Minister’s request, there is this

develop plans to take forward the Bank’s regulatory stewardship
responsibilities over the coming years.

But they currently appear to have no developed sense of how the Bank, as a major regulator (operating to considerable extent on what is, in effect, the whim of an individual), should operate in a way consistent with regulatory stewardship guidelines first put in place some years ago.  Consistent with that, the “success measures” they list bear little relationship to anything in the statement of expectations of good regulatory practice.   And, as far I can I could see, there was no suggestion anywhere of looking to get rid of redundant, or excessively costly, regulation.  The mindset doesn’t seem to encompass that possibility,

But in many ways what most interested me, and surprised me a little, was the Governor’s statement that the Bank’s vision is “of being the best small central bank”.    It was a line one used to hear from the Governor from time to time when I worked at the Bank (somewhere I think I still have a copy of a paper that attempted to elaborate the vision), but it hasn’t been seen much outside the Bank, and if I’d given the matter any thought at all I guess I’d have assumed the goal had been quietly dropped.   Apparently not.

As an aspiration, it is one that has always puzzled me.

It is good to aim high I suppose, but isn’t it really for the owners to decide how high they want the Reserve Bank to aim? Then it is the manager’s responsibility to deliver.  I’ve not seen the Minister ask the Reserve Bank to be the “best small central bank”.    That isn’t just an idle point, because the ability to be the best will depend, at least in part, on the resources society chooses to make available to the Reserve Bank.  There are some gold-plated, extremely well-resourced, central banks around, particularly in countries that are richer than New Zealand.   I suspect New Zealand probably skimps a little on spending on quite a few core government functions including the Reserve Bank (but I’m probably somewhat biased, having spent my life as a bureaucrat), but that is a choice.    If we asked of the Reserve Bank what we ask of it now, but made available twice as many resources, we should expect better results.   As it is, there are limitations to what we should expect from 240 FTEs, covering a really wide range of responsibilities (the Swedish central bank, for example, appears to have about 40 per cent more staff, for a materially narrower range of responsibilities).

And then I’ve been a bit mystified as to who the Governor proposes to benchmark the Reserve Bank against.    I was pretty sure the Reserve Bank of New Zealand excelled relative to, say, the Bank of Papua New Guinea or the Reserve Bank of Fiji.  But they are much poorer countries.   And so I tried to make a list of advanced country small central banks.     There was Norway, Sweden, Israel and the Czech Republic and then the list started to thin out rather quickly.    There was Iceland of course, but the population of Iceland is about 330000; in relation to our 4.8 million that is about how we compared with the UK.  The Bank of England is demonstrably better than our Reserve Bank, and on many dimensions our central bank really should do better than Iceland’s.   Of course, there are lots of small countries in the euro, but individually they don’t have much clout, and can’t really be meaningfully compared against central banks of countries that make policy for themselves.      There was also Singapore and Hungary  –  not too different in population from New Zealand, but neither are from countries  that represent liberal democracy at its finest.

Unfortunately I couldn’t think of a single dimension on which I would regard the Reserve Bank of New Zealand as being better than the Norwegian or Swedish central banks.  (The Swedish central bank is so transparent they even published the details of their staff engagement survey, in English, so that we know that 73 per cent of staff consider the Riksbank “close to being a perfect employer”).  Perhaps we  shouldn’t be surprised.  Norway, in particular, is much richer than us.  What of the Israeli or Czech central banks?  They are countries more similar to us in GDP per capita.  It is hard for outsiders to evaluate, but from what I’ve read of those central banks, and what I could find on their websites –  whether around governance, transparency, policy, or the range and depth of research – it wasn’t obvious why one would think our Reserve Bank was doing better.

Given that the Governor has now restated the vision of having the Reserve Bank as the best small central bank, I assume he must have some benchmark comparators in mind, and assume they must have done some work to assess how they compare.  Since I assume any such documents would be readily to hand, I’ve lodged a request for them.

I’m not sure that “best small central bank” is the appropriate aim.   But we should want an excellent one.  At present, unfortunately, we are a long way from that (not in all cases for reasons under the control of the Governor).  One could think of:

  • a governance model that is out of step with both international practice, and with New Zealand practice for other governent agencies.  Far too much vests in one person, no matter how good that person may be,
  • a Board, which exists (at least on paper) to hold the Governor and Bank to account, and yet which is practice seems to see its role primarily as providing cover for the Governor,
  • serious monetary policy misjudgements (eg 2014) and while misjudgements are an inevitable part of the game, very little evidence of self-critical scrutiny and evaluation,
  • an approach to transparency which emphasises what the Bank wants us to know, not what citizens might reasonably need to hold a powerful agency to account,
  • relatedly, an obstructive approach to compliance with the Official Information Act,
  • little or no published research or analysis on major areas of the Bank’s discretionary policy activities (prudential regulation),
  • infrequent, and mostly unenlightening, speeches,
  • and an approach to criticism that appears to have been exemplified recently in the sustained (apparently somewhat successful) campaign by the Governor and his senior staff to “silence” (materially alter and content and tone) of commentary by a leading economist who happens to work for an institution the Reserve Bank regulates.   Was that the collective wisdom of the much-vaunted Governing Committee working well?

It is the sort of list that candidates applying to become the next Governor –  applications close a week from now –  should be reflecting on pretty carefully.   We deserve something considerably better than we are getting.

Of course, it isn’t that the Reserve Bank is necessarily much different than many of our other policy agencies and institutions.  A very senior figure observed to me recently that the climate for good policymaking was now worse in New Zealand than that person had ever known it.  There may be isolated exceptions, but around too much of official Wellington there seems to be an unwillingness to ask hard questions or do hard analysis, or put up difficult options,  Instead, the incentives seem to reward a desire to simply go along, and fit in, or devise schemes that look good for some quick publicity, however little merit they have longer term.  And all the while our economic performance continues to disappoint,  But no one seems to much care, so long as the minister of the day is happy.  And there is little sign that ministers –  or their opposition counterparts –  care, or want anything much different.

I was reading yesterday an article about the current global political malaise.   Near the end was a quote from Edmund Burke, writing about the government of George III.  He wrote

“it was soon discovered that the forms of free, and the ends of an arbitrary Government, were things not altogether incompatible”

In some ways, it isn’t so unlike modern New Zealand.  On paper, many of our institutional arrangements look strong  –  thus, for example, the Reserve Bank can repeatedly boast how transparent it is –  but in too many cases the substance has been emptied out, and just the forms are left behind.

 

 

 

Global impact visas

Michael Reddell Immigration

Almost two years ago, in July 2015, the government announced that it was planning to introduce a new visa class.

Mr Woodhouse says the Government is also considering a new Global Impact Visa to attract high-impact entrepreneurs, investors and start-up teams to launch global ventures from New Zealand.

At the time, I noted

The Global Impact Visa idea sounds superficially promising. But my impression from the Pathways Conference last week was that existing entrepreneur visa schemes had not worked particularly well.  It will be interesting to see the analysis behind this proposal, including an assessment of how the risks around it will be managed and overcome.  I remain a little sceptical of the attraction of New Zealand to “younger, highly talented, successful and well-connected entrepreneurs from places like Silicon Valley”.  The flow of people in that sector would seem more naturally to be in other direction.  I hope it is not an example of the old derogatory adage used about Britons working in Hong Kong:  FILTH  (“failed in London, try Hong Kong”).

But since then I’d paid no more attention to the Global Impact Visa, until my son pointed out a large article in last Saturday’s Dominion-Post.   And it seems that I had missed the first part of what was actually a two-part series on the new visa, and the role two wealthy young Americans appear to be playing in determining who gets these visas.

The second article is really focused on the new visa scheme itself.  It begins this way

They’re young, rich, Silicon Valley idealists who want to change the world from New Zealand. How did the Monahan brothers come to influence our immigration policy – and what’s in it for us? In part two of our series, we look at how the Americans convinced Immigration NZ they should be the ones to pick the best entrepreneurial brains to come here.

In it there is lots of high-profile publicity for Nigel Bickle, the public servant who runs the Immigration New Zealand division of MBIE.  Bickle was last noted on this blog after he appeared on Nigel Latta’s advocacy TV programme championing large scale immigration thus

Bickle  –  that “front-line service delivery expert” –  argues that we need lots of immigration because a country “can’t get wealthy trading with ourselves”.  There seemed to be quite a bit of confusion there.  Of course, small countries (in particular) need to trade internationally, but that tells one simply nothing about the case for (or against) large scale immigration.  As it happens, and as I’ve pointed out before, most countries –  and especially most countries of our sort of size (population) –  export and import a much larger per cent of their GDP than New Zealand does.

Under the Global Impact Visa scheme (approved by Cabinet as a four year pilot), up to 400 visas (plus spouses/partners and families) will be granted.   As MBIE puts it

The policy is designed to attract those with the drive and capability to launch global ventures from New Zealand who may not be able to qualify for other visa categories. They will have the combination of drive, risk appetite and global connections which enables them to launch or significantly contribute to successful innovation-based ventures in New Zealand.

After three years, whether the ventures work out or not, recipients of global impact visas will be able to apply for residence visas.

Legally, of course, only government agencies can grant visas.  But MBIE will be granting these visas only to people who are recommended by their private sector partner, the Edmund Hillary Fellowship  (EHF).  EHF is itself a joint venture, again as MBIE puts it

between the Hillary Institute for International Leadership, a not-for-profit organisation that identifies and celebrates mid-career leaders from around the world; and Kiwi Connect, an organisation promoting and connecting high-impact entrepreneurship in New Zealand.

It isn’t quite clear what a non-profit that “identifies and celebrate mid-career leaders from around the world” has to bring to either (a) New Zealand immigration policy, or (b) New Zealand policies around innovation and technology, especially when this particular programme seems to be mostly fairly oriented towards young people (“early in their wealth cycle”).  It looks a lot like they just offer access to the Hillary name.

As for KiwiConnect, it doesn’t really seem to exist any more.  Their website says

Kiwi Connect originally set out to be a bridge between New Zealand and the world for impact-driven talent to be able to engage with the NZ startup and business ecosystem. We have succeeded in that mission with the creation of the Edmund Hillary Fellowship, and consequently have put Kiwi Connect into hibernation to focus our team’s efforts 100% on delivering a world-class Fellowship programme.

You can read their burble, on their transition, here.

We also identified that the ecosystem growth wasn’t matched with the necessary level of global connectivity for New Zealand to be internationally competitive. This connectivity is important in turning size and distance from what has been a disadvantage in more traditional industries, to a new advantage for innovation.

Since founding Kiwi Connect, we have focused on filling the gap to connect New Zealand with world-class talent, impact capital, and cutting edge innovation, so that NZ can create a critical mass of entrepreneurial activity within a thriving ecosystem. We started with more questions than answers, facilitating multi-disciplinary, global conversations on what it will take for New Zealand to lead in innovation.

It is a certainly a novel proposition that distance and remoteness will not just be overcome, but might apparently be “a new advantage for innovation”.    One would hope MBIE rigorously evaluated that propostion.

Anyway, the Edmund Hillary Fellowship it now is.

The Edmund Hillary Fellowship (EHF) is a global platform that brings together the best of humankind’s creative potential and entrepreneurial spirit in New Zealand, to create a lasting positive impact for the world.

They are being paid quite a lot of public money ($4m) to get the global impact visa programme going and, according to their website, the first visa approvals are expected to be granted next month.

The Fellowship has a very useful set of FAQs on their website, which I’m drawing from here.

What is it?

The Edmund Hillary Fellowship (EHF) is an end-to-end programme that gives impact-driven entrepreneurs, investors and startup teams a platform to incubate positive impact ventures from Aotearoa New Zealand, and contribute towards a thriving innovation ecosystem in the country. EHF offers exclusive access to Immigration New Zealand’s new Global Impact Visa.

Who is it for?

EHF is for entrepreneurs and investors who are innovating in the industry or sector they operate within, with the ambition to build or support globally scalable ventures to solve significant challenges and influence the course of humanity. This programme is for individuals who align with our values, and who have the skills, capabilities, relentless drive and desire to leverage the unique opportunities New Zealand offers, and make game-changing impact on the world.

Which is where things start getting a little troubling.  Little old New Zealand, keen to develop its “innovation eco-system”, actually puts official weight and money behind a focus on influencing the “course of humanity” and drawing people who will “make game-changing impact on the world”.    If the Monahan brothers, or any else, want to pursue such dreams, I wouldn’t want to stop them –  I’m sure we could all think of ways in which the world could be a better place.  But this is almost “on another planet” stuff, with no sign in any of the published material as to how they think this might actually come to something, let alone offer something worthwhile for the citizens of New Zealand.

They go on

What are the personal qualities you are looking for in candidates?

Model Fellows are highly capable and motivated individuals who view the problems in the world as opportunities to significantly improve it. They are big-picture thinkers at the top of their game, who are able to unpack complex problems to understand all the angles, and come up with holistic solutions that connect the dots. They have unwavering passion, relentless drive, and the ability to execute with excellence. Edmund Hillary Fellows also take advantage of the unique opportunities that New Zealand offers.

Walking on water looks as though it might almost qualify one.   But one has to wonder whether even Bill Gates would have qualified.

After all, when asked about proposed “impact” they write

What do you mean by impact?

We define “impact” as solving problems of significance to humanity in a way that creates positive lasting economic, social and environmental value.

All three at once.  It is a tall order.  Did Microsoft or Google, let alone Facebook, create “economic, social, and environmental value”?

And it doesn’t seem very likely that any card-carrying conservative would qualify for this programme.  Perhaps you noted earlier that the Fellowship is looking for people who “align with our values”.    Here are their values.

The first marker of the left-liberal orientation is the repeated use of “Aotearoa New Zealand”.  It might be old-fashioned and conservative to make the point, but the country is actually called New Zealand.

Much of the rest is the sort of babble that probably appears on any agency’s “values statement”.  But these ones caught my eye from the longer list.

Simplicity inspires us.

We value collaboration over competition to help raise the tide for all.

We strive to act with care for people and land, and to improve intergenerational wellbeing through creativity and entrepreneurship.

Our work is not about us but about those we serve. We actively strive to be better versions of ourselves

and while they talk about how “We love challenging assumptions”  a bit further down the page we read that their person described as “Candidate Attraction Lead”

believes that startups will solve the world’s problems only when they represent the diversity of the world’s people.

Perhaps she is right –  although actually for the last few hundred years most really useful innovations have come from a handful of cultures and countries –  I suspect she might not welcome a candidate challenging that proposition.

And this stuff matters because it isn’t just about getting accepted into the Edmund Hillary Fellowship in the first place.  To get a residence visa, you have to stay on good terms with the programme for three years.   I suspect there are many people who could genuinely make quite a difference, who would struggle to put up with the globalist waffle, and what social pressure goes with it, for three years.    Being able to put on a good front looks a highly valuable skill in this context.

And if you don’t already get the sense of what part of the political spectrum these people are coming from, I refer you back to the first of those Dominion-Post articles.   Take their annual innovation festival held near Wellington.

Every February since 2014, an eclectic bunch of people from around the world have descended on Whitemans Valley, an easy 30-minute drive from downtown Wellington, for a week-long “eco-innovation” festival called New Frontiers, a kind of techie’s version of Nevada’s Burning Man.

Think yoga, yurts, giant domes, composting toilets, campfires, more yoga, drum circles, dancing, vegan food and talking – lots of talking.

Guests have included film director James Cameron, Immigration NZ head Nigel Bickle, Conservation Department director-general Lou Sanson, regional mayors, US digital artist Android Jones and dating site guru Eben Pagan, poets, painters and inventors, as well as curious locals. It’s either a beautiful gathering of like minded thinkers or a weird cult, depending on your point of view. “There’s some freaky looking punters down there camping out in their domes, doing yoga and singing Kumbaya to the moon,” one local says.

Mike O’Donnell, a tech investor formerly of TradeMe who attended last year’s festival, was impressed by the diverse range of people and open exchange of ideas.
“They’re kind of 21st Century cyber hippies,” he says. “It’s a little bit overwhelming, but it’s quite cool. It’s a combination of 60s values, together with sustainable business models, truckloads of vegetarian food and exotic fruit juices.”

and then of the sorts of view championed

Matthew [Monahan] nominates Charles Eisenstein, who has spoken at New Frontiers, as his favourite author. That’s instructive of the brothers’ world outlook – Eisenstein is known as a proponent of “degrowth”, a movement based on “ecological economics” that rejects consumerism and capitalism.

Brian [Monahnan] raps about building a culture “not based on commerce, but on kindness”.

The brothers gave $4m to set up their non-profit Namaste Foundation, which has gifted money to everything from Black Lives Matter to climate change groups.

The Monahans’ philosophy is, of course, the polar opposite of Trumpism.
​”I’m definitely not a Trump supporter,” Matthew says. “I think the environmental challenges we have ahead of us are real. They are really giant problems that require all hands on deck.”

Doesn’t give a strong sense of a place with the Edmund Hillary Fellowship for, say, the large number of Americans with a different take on the world, politics and so on.

And all this is even aside from the bigger challenges a programme of this sort faces.    Adverse selection, notably.  Groucho Marx once famously remarked that he wouldn’t care to join a club that would have him as a member.  Realistically, why should we think that anyone who applies for this programme, to come and live in relatively poor remote (albeit non-Trumpian) New Zealand, is really likely to be the sort of person who can build a business that would “change the world”?        Take just the other OECD countries: every single one of them (even Chile) is closer to “the world” (markets, suppliers, knowledge clusters etc) than we are.   Most put on a pretty good show of democracy and the rule of law.   Quite a few have English as their first language –  and, of those, all look more attractive places in most respects than New Zealand does, for such transformative businesses (even Trump will be gone in, at most, seven years and seven months).   There  are isolated areas in which our regulatory provisions may be world-leading, but looking across the range of policy settings, we don’t really stand out.    And, frankly,  clusters of industries –  be it in Silicon Valley in tech, or London in finance, or wherever, exist for a reason.  The economics of agglomeration are real.

And when even venture capitalists, with their own money on the line, expect that relatively few of their investments will really pay off, why should we suppose that the Edmund Hillary Fellowship will manage even that sort of performance?  Is there any reason to suppose that they will successfully identify any people who will really turn out to “change the world”, or even add much sustained value to New Zealand?  Where are the focused incentives?   Perhaps there is such a basis, but it isn’t clear what it is.

As I noted a couple of years ago when the programme was first mooted, it would be “interesting to see the analysis behind this proposal, including an assessment of how the risks around it will be managed and overcome”.    As it happens, the government pro-actively released the Cabinet paper from last April on the proposed new programme.

But there was very little there.  There was no Regulatory Impact Statement, and although there is lots of talk about the scheme could be scaled up even before the pilot finished if the programme is “more successful than foreseen”, there is not a single indicator or marker in the entire paper that would have given Ministers (or now us, as citizens) any basis for knowing what counts as success, let alone whether any actual success is more than was foreseen.

There is lots of detail about the programme –  and the choice between MBIE running something directly or going with a private sector partner –  but almost no supporting analysis of the substance.   In putting the paper forward, the Minister of Immigration never touches at all on the incentive or potential adverse selection issues and risks.  There is lots of talk of the Business Growth Agenda, and aspirations to have New Zealand as an “innovation hub” (whatever that is), but nothing at all robust or rigorous on what MBIE thinks holds us back.   There is also really nothing on how a handful of people, focused on “changing the world” are really likely to favourably affect the economic performance of New Zealand and New Zealanders, including (in their strange words),  meeting “the entrepreneurial needs of New Zealand”.   Apart from anything else, if the rare one succeeds, are they likely to stay?

One’s confidence isn’t greatly enhanced when the Dominion-Post reports that one of the first proposals (and remember EHF provided this to the Dominion-Post, so they presumably thought it was one of the leading propositions) was “research into legal innovations that might arise from the recent granting of “person” status to the Whanganui River”.  World-changing?  Productivity-enhancing?

As the Dominion-Post article notes, there is plenty of disquiet about some aspects of the scheme in the immigration community.  Some of that may just be sour grapes and business rivalries –  the Monahans got the ear of the government when the critics didn’t.

I don’t have anything against the Monahans, although their much-vaunted respect for all seemed to run into a roadblock when they bought into Whitemans Valley –  named for a pioneer 1840s farming family –  and thought it was both a terribly amusing and  unsettling name, and decided to refer to the place as Aroha Valley instead.  But it isn’t hard, reading the MBIE material and the EHF material, to conclude that a bunch of idealistic, probably well-intentioned, Americans, ran into a government that wanted to look like it was “doing something” innovative, and out popped a programme with little hard-headed rigorous analysis to back it, not that much prospect of success, but which was good for some feel-good headlines for a while (note that back in 2015 even my initial comment was guardedly positive).

On the government’s side it looks a lot like another play from the MBIE “smart active government” playbook, which very rarely (and not surprisingly) seems to come to anything much.   I dug out a few articles last night about assistance to Sovereign Yachts –  lauded by a then Minister for Economic Development.  And there was a Simon Collins Herald article from 2003 on the “benefits of a helping hand” from the government

Most spectacularly, support for business and regional development jumped from $14.2 million to $100.5 million.

In the year to last June, Industry NZ handed out $7 million to 89 companies to help “significant expansion”, did business appraisals for 252 firms and helped 38 of them raise capital.

It gave $1.5 million in total to 15 business incubators and brought together 22 “clusters” ranging from organics to software.

It put $10.4 million into regional strategies, including $2 million each for four big projects – a technology park at Hamilton, forestry training in Rotorua, food processing research in Napier and wine research in Marlborough.

It gave a $500,000 “guarantee of assistance” to the American company Jack Links to build a meat snack factory in Mangere, another $500,000 to US company Media Lab for a research centre in Wellington and $50,000 to Hit Lab, a joint venture between Washington and Canterbury Universities.

Trade NZ’s investment arm helped expatriate yacht-builder Allen Jones set up in Whangarei, and this year gave $1.5 million to computer giant EDS to install call centres and researchers in Auckland and Wellington.

Less successfully, Industry NZ and Technology NZ promised $1.6 million to the Ericsson-Synergy software joint venture which closed late last year, and helped Sovereign Yachts to get land at Hobsonville, only to see it lay off staff last February.

Meanwhile, our productivity performance remained as weak as ever, and our tradables sector has been under even more pressure.  Why, one wonders, should this latest clever-sounding programme be so much different?  Why, for example, are the incentives right?

 There is a real reluctance in MBIE, and apparently among Ministers, to believe in New Zealanders.  OECD data tells us that New Zealanders are, on average, among the most skilled people, including in problem-solving skills, in the OECD.  And so many New Zealanders do impressively well abroad.      But still the cargo cult mentality seems to hold sway.  Nigel Bickle –  service delivery expert, in charge of Immigration New Zealand –  provides the concluding quote to the Dominion-Post series.  Matthew Monahan is quoted thus:
“Probably the best summation is the kaupapa set by Nigel [Bickle] at the outset,” he says. “Go get the world’s best people New Zealand needs to prosper.”

Plenty of foreigners have done well in New Zealand, and no doubt will continue to do so.  But New Zealand has the people to prosper –  the skills, the drive, the energy –  as it did 100 years ago.  Successful countries mostly make their own success, from their own people, institutions and cultures.   It isn’t clear why Michael Woodhouse, Bill English, and –  for that matter –  Nigel Bickle seem to think the answer lies in people over the water.