Boosting exports: the exchange rate really matters

Michael Reddell Exports, New Zealand economic performance

I noticed the other day a short piece on Treasury’s blog, written by one of their very able analysts, Mario di Maio, headed “How to get an export take-off“.  It appeared to be prompted by the government’s now long-standing target to raise the export share of GDP by 10 to 15 percentage points by 2025.  As I’ve noted before, the general sentiment behind the goal is probably broadly sensible –  successful economics typically trade more (imports and exports) with the rest of the world.  After all, the rest of the world is where the bulk of potential customers/suppliers are.  Of course, the problem with this particular goal is that (a) it doesn’t look as though it is going to achieve itself (good bureaucratic technique can include setting goals for things that were likely to happen anyway, and then claim the credit when they do), and (b) the government is doing absolutely nothing to bring about the sort of transformation of the economy that might reasonably be expected to lift the export (and import) share of GDP.  It is an old line, but no less true, that it is pretty crazy to keep on doing the same old thing, and expecting a different result.   So perhaps they don’t really expect a different result….and perhaps they don’t even care greatly, as by 2025 no doubt the government will have changed, perhaps more than once, and Key, Joyce and English will be doing something else (as Clark and Cullen –  who had similar vague aspirations –  are now).

The Treasury note is worth reading. It takes a quick look at some countries (all now advanced) that have achieved a 10 percentage point increase  in 10 years in the export share of GDP over the last 50 years or so.  The author finds 14 such countries, and has a quick look for any common factors.  Perhaps not surprisingly –  in a note of three pages of text – he doesn’t find many.  Indeed, he goes so far as to conclude

The diversity of the case studies cautions against drawing simple policy lessons from other countries for any New Zealand strategy to lift trade intensity. The diversity of approaches and circumstances means any single policy (or policy mix) would be misleading.

Personally, without a lot more background analysis –  and perhaps Treasury has done the analysis but just not published it – that seems too strong a conclusion.  If one were uncharitable, it could be seen as tending to avoid the real issues that specifically help explain New Zealand’s underperformance.  But perhaps that wasn’t the intention at all, and all they really mean is that we have to think hard about the specifics of New Zealand, and not simply latch onto one or other favoured overseas country as an example. If so, I agree.

I’m not going to use this post to pick at specific points in the Treasury note, but wanted to come at a similar issue in a slightly different way.

But first, lets remember quite how underwhelming New Zealand’s international trade performance has been.  This is a chart I ran a few months ago, comparing New Zealand and other small OECD countries since 1970.

exports small countries

The foreign trade share of GDP has gone basically sideways for almost 40 years.  It is hard –  but not impossible –  to get ahead with a performance like that.

I usually use OECD data –  as in the chart above –  but the Treasury piece used the World Bank data, which has some advantages in capturing a wider range of countries.  For some countries, and aggregates, they also have data going a bit further back.

Here is the World Bank’s estimate of exports as a share of GDP, for the whole world and for the OECD, back to 1960.

exports-as-share-ofg-gdp-world

Over the 40 or so years when the export share of New Zealand’s GDP has barely changed, that for the OECD and the world as a whole has increased by between 10 and 15 percentage points.  The trend –  world, and advanced countries –  has been strongly upwards, and somehow we’ve managed to defy that trend.    Not all of that growth has been in export value-added, some has been the rise of global supply chains and the increased cross-border trade in componentry –  something that is never likely to be a feature of remote countries’ trade –  but that isn’t the bulk of the story by any means.

From the World Bank’s data, I picked out the advanced countries (OECD plus a few others), the emerging Asian countries, and Latin American countries (the latter mostly because they fascinate me, but also because they add a large number of countries that have underperformed for long periods).  The official New Zealand export data start in 1971, so I had a look at how the export shares of the countries I had data for had changed from 1971 to 1975 to 2011 to 2015.  Using five-yearly averages gets rid of some of the noise that arises from short-term exchange rate or commodity price fluctuations.  Data don’t go back that far for most of the former Communist countries of Eastern Europe, but I was still left with a sample of around 45 countries.

Over that period, New Zealand’s export share of GDP had increased by 5.9 percentage points.  Nine countries had had less growth in their export share than New Zealand.

Change in export share of GDP : 1971-75 to 2011-15  (percentage points)
Costa Rica 5.70
South Africa 5.00
Japan 4.80
Brazil 4.30
Guatemala 3.70
Israel 2.90
Norway 2.80
Colombia 2.50
El Salvador -3.50

Of those countries, only Norway could be counted as am unambiguous economic success story over that period.  All the others –  like New Zealand –  were underperformers at best.  One might make an exception for Japan –  until the late 1980s its economic performance was very strong – but then it is also worth remembering that at the start of the period exports as a share of GDP in Japan were only around 10 per cent of GDP (less than half of the export share in a small country like New Zealand).  Over the period since the early 1970s, Japan has increased the export share of GDP by almost 50 per cent (from around 10 per cent to around 15 per cent) while the increase from New Zealand has been only around 25 per cent.

The Norway experience is a reminder that a large export (and import) share of GDP is not a necessary conditions for a sustained acceleration in economic (and income) growth.  Then again, countries can’t count on discovering a huge new extremely valuable natural resource as a basis for improved prosperity.  Typically the path to prosperity involves firms finding products and services they can sell successfully to the rest of the world. We’ve failed on that count, and that shows no sign of changing.

Although Treasury seems to want to play down the importance of the real exchange rate, I think that in the New Zealand context it is much more important than they suggest.   One can never sensibly think of the real exchange rate is isolation from what else is going on in the economy.  A country with fast productivity growth might find that its export share of GDP is growing even as the real exchange rate is high or rising –  such is, say, the quality of the products or services firms in that country are selling.

But as everyone knows, New Zealand’s productivity performance over decades has been lousy, among the very worst in the advanced world.  Sure we have a few years from time to time when things don’t look too bad, but the multi-decade pattern of underperformance is clear and shows no sign of reversing.  Against that backdrop, it seems not just plausible –  but entirely reasonable –  to suggest that a real exchange rate that has been high or rising (rather than weak and falling) will, in the specific context of New Zealand, have been the main proximate contributor to the weak foreign trade performance (exports and imports).

I ran this chart recently.  It only goes back 20 years, but over longer periods the picture is much the same.  Our relative productivity performance deteriorated, but our exchange rate didn’t sustainably fall.

real exch rate

That sort of pattern typically happens only when some sort of domestic demand pressures keep holding up the real exchange rate (and domestic real interest rates).  In a country with a modest national savings rate, government policies that result in rapid population growth are an example of just such a pressure.   It is hard to foster an environment in which exporting is profitable/attractive when so much resource constantly needs to be devoted to meeting the (individually entirely reasonable) needs of a rapidly growing population.

Of course, “the exchange rate” can’t be fixed in isolation.  It is a symptom of what else has gone wrong with the policies of successive governments.  But like the old canary in a coal mine, the persistently strong exchange rate –  in a country of such persistently weak productivity growth –  is supposed to be a warning signal that something about economic policy is very wrong.

But why would we be surprised that nothing changes?  The Opposition appears to have no compelling analysis or ideas, and we have a government run by a Prime Minister who in a recent interview declared that

Where would chairing the UN Security Council rank in your career highlights?

Right up near the top

I guess when there have been eight years of no substantive economic reform, no progress in improving the relative performance of the New Zealand economy, no progress in reversing decades of relative economic decline –  just the pretence that somehow we are a global economic success story –  we shouldn’t be surprised that chairing an ineffective meeting of foreign officials and ministers, dealing with an intractable problem in a far-away land, counts as some sort of career highlight.

Young New Zealanders, facing unaffordable houses, and  the prospect of growing up in a country slowly drifting ever further behind, might perhaps have hoped for something rather more tangible rather closer to home.

 

 

 

 

 

Envy of the world, or middling at best?

Michael Reddell New Zealand economic performance

Over the last couple of months I’ve lost track of the number of comments I’ve seen, from outlets that really should know better, suggesting that New Zealand’s economy at present is the envy of the world.  Radio New Zealand’s Checkpoint seems a particularly egregious offender, but that might just be because I often have it on while I’m making dinner.  But I’ve seen similar lines in the Herald, from Business New Zealand and a variety of other outlets.

The people running this line, when they aren’t just running propaganda, seem constantly to lose sight of just how much of our real GDP growth –  itself not that impressive by the standards of previous growth phases –  is accounted for by our very rapid population growth, in turn the result of our large (but fairly stable) inward immigration programme, and the reduction in the net outflow of New Zealanders.

Quarterly real per capita GDP data isn’t easily available for many countries, but the other day the IMF released its latest World Economic Outlook.  I had a look at how New Zealand is estimated to have performed over 2013 to 2016 relative to the IMF’s set of advanced countries.  Over this period, only two of these countries –  Israel and Luxembourg –  are estimated to have had faster population growth than New Zealand.

real-pc-gdp-growth-2013-to-2016-weo

Of course, we only have hard data to mid 2016, and even that will be subject to revision for some time.  But that is so for all these countries too.  Take the last three years together and New Zealand just doesn’t stand out.  It isn’t necessarily a bad performance (relative to other advanced countries over this period), but nothing much to write home about, absolutely or relatively.  And recall that we don’t exactly have the highest level of GDP per capita among these countries –  the aim, for decades, has been to catch up with the rest of the advanced world.  Over this three year period, we’ve made no progress at all.

We’ve had things working for and against us over that period.  The terms of trade have been high, but fell back quite a way from the peak, especially dairy.  We’ve had a significant boost to demand and activity from the Christchurch repair and rebuild process.  We’ve had a big (largely exogenous) boost to tourism, and a significant boost to export education.  We’ve had no constraints (other than self-imposed ones) on our ability to use monetary policy flexibly.  And we’ve had a massive boost to demand from the unexpected rapid growth in the population.  And yet, once again, we’ve made no progress in closing the gaps.

And, of course, our productivity performance in  recent years has been even worse.

real-gdp-phw-oct-2015No productivity growth at all in the last four years or so (even ignoring the last observation, where there is an unfortunate discontinuity in the HLFS hours worked series).

New Zealand the economic envy of the world?  I think not.

Subsidy city…airport, airlines and the Council

Michael Reddell Wellington

Earlier this week it emerged that the Wellington City Council’s decision to subsidise flights between Wellington and Canberra (and on to Singapore), details of which are still unknown to ratepayers, had been made on the basis of almost no supporting documentation.   There were, so the Ombudsman found, no emails, no cost-benefit analyses, in fact almost nothing at all.    As Stuff reported it:

Documents released by the Wellington City Council show that apart from a presentation made to councillors after the decision was made, the council generated a single two page document, which refers to the subsidy only in passing.

This subsidy could be as much as $8 million over 10 years.

Outrageous as the lack of documentation is, in a way it isn’t really surprising.  This is the Wellington City Council –  and the cabal at the top of the organization –  we are dealing with.  They aren’t exactly known for rigorous and robust policy and analysis processes.

In any half-decent public sector agency, proposing to use public money,  there would have been a proper substantive piece of policy analysis, reviewing the arguments and evidence,  critiquing the reasoning and evidence advanced by the private parties pursuing such a subsidy and, typically, an attempt at a properly quantified cost-benefit analysis.  Not all cost-benefit analyses are very robust, but if officials are forced to write down their reasoning and assumptions at least it opens things up to subsequent scrutiny and questions, based on numbers, not just the hunches or preferences of councillors.

But Wellington City Council doesn’t do things that way.

After refusing comment for several days, the Council’s CEO –  a temporary blow-in from the UK with no obvious expertise in evaluating industry subsidies or airlines – dug his own hole deeper today.

Lavery initially claimed that he had received a six-page report on the funding request written by “my staff”, before acknowledging that the report was actually written by Wellington Airport which had “different interests” to the council.

That looks a lot like a deliberate attempt by the Council to mislead the public.

The council commissioned no work of its own to review the airport’s claims, but could have, Lavery said.

“We could have done that, if we’d felt uncomfortable with it. But we didn’t, so we didn’t. And that’s not uncommon.”

So  he acknowledges that analysis done by the airport company will have been done primarily serving the interests of the airport company  (as it should) but nonetheless saw no reason to commission any analysis of its own, as regards the interests of the Council and the citizens and ratepayers of Wellington.  He didn’t feel “uncomfortable” with the airport company’s short paper.  And why would he?  I’m sure it was written persuasively and Lavery has no known background in aviation matters.  But that is precisely why he (and his bosses) should have commissioned some independent analysis.  Not to have done so might serve his “can do” mentality, but it looks and feels much more closer to dereliction of duty to the citizens of Wellington.

Lavery goes further

“The “paper trail” is the contract itself,” Lavery said.

Later he claimed government agencies often signed contracts without other documentation.

“That’s the way any contract goes. You get in rooms and have discussions. Then you write it up, that’s the way it works.”

Yes, I’m sure all the contractural terms are in the contract itself –  a contract so secret that not even councillors have access to its terms – but that simply isn’t the point.  What matters here is the disciplined process and analysis leading up to the decision to negotiate the contract at all.  And on that, in Lavery’s own words, there was all but nothing.

Of course, it is easy to focus on Lavery.  No doubt he likes the power the leading cabal of Council have entrusted to him .  He even argues that

The amount at issue was a “relatively modest delegation” Lavery said, adding that he had the power to allocate much larger amounts on sewerage schemes.

One is a core ongoing operational function of the Council, the other is a new industry subsidy, in a sector where councils don’t have a great track record.

But in fact the real responsibility here surely rests with the Council itself, and even more so on this particular occasion with the leading cabal –  the outgoing Greens mayor Celia Wade-Brown, the Labour Party Deputy Mayor Justin Lester, and councillor Jo Coughlan.  Lester was apparently a key figure in the discussion over this new subsidy, and Coughlan has chaired the Economic Growth and Arts Committee which seems to deal with such matters.

I suspect that what actually happened is that the airport company –  always keen to attract new flights – was negotiating with Singapore Airlines, who wouldn’t fly to Wellington (making a normal return on capital) without some sort of subsidy. So the airport company approached the senior “booster” councillors, and Lavery, with the idea of a subsidy scheme, all backed up (we are told)  by a six page paper from the airport company.  Lavery won’t really have been acting alone here –  even if he signed the contract –  but giving effect, with no supporting documentation, to the preferences of these key councillors, perhaps especially Justin Lester who will have been looking to the new flights starting around local body election time.

A lot of people attack this subsidy as corporate welfare.  I’m less sure about that. I doubt Singapore Airlines is benefiting much – the deal probably just makes it barely economic for them to trial this odd route.  Probably Wellington Airport, and its shareholders, are directly benefiting, since they make their money from people and planes passing through Wellington Airport.  But the biggest intended gainers really look like the Mayor (then still toying with re-election) and councillors Lester and Coughlan, wanting to be able to sell voters a line that “Wellington was prospering, new connections were growing etc”, all with ratepayers’ money as secret subsidies.   It was certainly convenient timing that the flights started almost to the week when the voting papers went out.

Justin Lester in particular seems to now be feeling some heat.

Lester believed the decision to subsidise the route was a good one, but called on Lavery to release further information.

“I haven’t seen enough information yet” to be satisfied the process had been robust. “I think there should have been more paperwork.”

Easy to say now as people are filling in their postal votes having read the Dominion-Post’s coverage.   But there is no evidence that the Deputy Mayor sought that sort of documentation and scrutiny back when he, and the rest of the cabal, were doing the deal.  Lavery has already told us about the documentation: there wasn’t any, and it is hard to believe that Lester was not aware of that all along.  As I say, Lavery won’t have been acting without political cover.

It is disgraceful all round.  And good reason to be very uneasy about how the Wellington Council will go about evaluating a proposal to contribute to the runway extension (on top of the considerable money already spent).  No doubt they will assure us that for a much bigger commitment there would be much more scrutiny, and much more transparency.  But how much confidence should voters have in such assurances?  Very lirtle, I’d suggest.

A couple of weeks ago, Treasury put out a link to a rather good few pages on a Policy Quality Framework, developed I gather in the Department of Prime Minister and Cabinet.  I can only commend it to the incoming Wellington City Council, and their employee Mr Lavery, as a starting point for evaluating policy proposals.  It is easy to read and digest, but would involve a sea change at the Council.  Evidence, rigour, and documentation have a great deal to commend them.  It is, after all, public money not that of Mr Lester or Mr Lavery..

To end, I’m reproducing a mock Council discussion sent to me the other day by an irate reader, and reproduced with his permission:

Today’s Dom Post on SQ flights left me more than outraged – quite ruined my breakfast
I can imagine the discussion at the Council table:
Councillor A: “ I have an idea – why don’t we increase the rates on struggling widows in Tawa and use the funds to subsidise shareholders in Singapore Airlines”
Councillor B: “Shouldn’t we call for tenders first as other airlines might be interested. After all Air NZ will lose traffic from Auckland?”
Councillor C: “ No we can’t do that – it is commercially sensitive?”
Councillor D: “ Hang on a minute – since when is a subsidy a commercial activity?”
Councillor E: “ Good point – perhaps we should rename it as market development and then the CEO can authorise it without bothering us”
Councillor A: “The taxpayers’ money will bring added business to Wellington – drawn from Christchurch and Auckland. And what is more, these flights will save Wellington business people 40 minutes compared to going via CHC to get the SQ flight from there. That is a big saving”
Councillor B: (the lone slightly more rational member): “ If business folks and others are enjoying a benefit that must be worth something to them – so why don’t we recoup the costs of the subsidy by a surcharge on the tickets for SQ flights?. Actually, come to think of it, the ratepayers are already subsidising all other flights out of Wellington through our involvement in the WIA so we could charge an extra fee on those too”

Councillor A: “ You all seem to be overlooking the multiplier effect; our own analysis (based on data supplied by the WIA and Singapore Airlines) shows a significant net economic benefit to Wellington”

Councillor B: “ But perhaps we should get a slightly more independent, disinterested party to review the business plan?“

Councillor C: “No, no  – we can’t do that– remember all this is highly commercial sensitive”

But, as I noted sadly to my correspondent, it was, of course, even worse than that. There was no such discussion around the Council table before the deal was signed –  just the inner cabal and Mr Lavery.  Even after the deal was done, councillors –  elected members –  are only allowed access to the terms if they pledge subsequent secrecy.  It is no way to run a government, but sadly it seems all too common in local government.  Wellington might well be no worse than most, but its failings are quite egregious enough.

UPDATE: When I wrote this post I hadn’t read the Herald story, from which this comes

“I think the current debacle in the press illustrates perfectly why it’s not appropriate to have it in the political domain. It gets politicised, and I think a lot of organisations wouldn’t touch us with a barge pole if that happened.”

The Dominion Post has reported the 10-year subsidy is worth up to $800,000 a year, but Lavery would not reveal the agreement, citing commercial sensitivity.

“We don’t want to lose out to competitor cities that would love to have the deal we have with Singapore Airlines,” he told Radio New Zealand.

Two thoughts:

  1.  “politicized” = voters/citizens concerned about how the city council they elect spends their money?    It simply isn’t the business of Councils to be subsidizing flights…..or election campaigns.
  2. “competitor cities”.  Those would be…..?  SQ already fly to Auckland and Christchurch, so was Lavery (and Lester) concerned about somehow “losing out” to flights from, say, Palmerston North to Canberra?

 

 

Subsidy city…Wellington airport

Michael Reddell Wellington

At about 3pm, the first Singapore Airlines flight to Wellington, via Canberra of all places, lands at Wellington Airport.  Wellington-boosters, well represented on the Council and the Chamber of Commerce, talk up the first “long-haul” flight to and from Wellington.  All of which would be more impressive if it were not for the ratepayers’ money being (secretly – no information on the amounts or terms of these sweetheart deals, no robust cost-benefit analysis etc) used to make it all possible.    Were the flights financially self-supporting that would be the best evidence of them being “a good thing”.  But they aren’t.  That means (a) a presumption against them being “a good thing”, and (b) a likelihood that they won’t survive for long, at least without some permanent subsidy from the long-suffering ratepayers of Wellington. It probably isn’t a subsidy to the giant Singapore Airlines –  they’ll probably just manage a normal return on capital –  but by quite which canons of social justice ratepayers should be subsidizing government departments (probably the main purchasers of tickets on the Wellington-Canberra leg, and one of the larger sources of international passengers from Wellington) is beyond me.

But at least these sorts of subsidy deals can usually be terminated with not too much notice.  Other cities have tried this sort of thing, and the arrangements have typically fallen over before too long.  There isn’t much irreversibility about them.  The same can’t be said for the proposed Wellington Airport runway extension.  If it goes ahead, very large amounts of money will be irreversibly lost.

There was a very nice, accessible, article out a few weeks ago in City Journal by leading US economist Ed Glaeser.  In “If you build it…..” Glaeser tackles some of the “myths and realities about America’s infrastructure spending”.  There is a lot enthusiasm around, especially in centre-left circles, for more – much more –  infrastructure spending, to “take advantage” of the current very low global interest rates.  Enthusiasts, of course, rarely stop to ask why interest rates are so low, and expected to remain low, but set that caveat to one side for now.   Glaeser reports on a variety of studies on just how underwhelming most government-led infrastructure actually is: too often in regions that are declining rather than ones that are growing, all too often with low payoffs (and massive cost over-runs) at the best of times, and so on.  There are plenty of specific differences between the US situation and our own – we don’t have the Senate, steering funds to lightly-populated states, but then we have by-election promises to build bridges to anywhere –  but I don’t think we have anything to be complacent about.  His penultimate paragraph is relevant pretty much anywhere

Economics teaches two basic truths: people make wise choices when they are forced to weigh benefits against costs; and competition produces good results. Large-scale federal involvement in transportation means that the people who benefit aren’t the people who pay the costs. The result is too many white-elephant projects and too little innovation and maintenance.

Just last week we heard of the latest large cost-escalation in the hugely-expensive questionable Auckland inner-city rail loop.  “Who cares” seems to be the reaction of central (National) and local government (Labour) politicians –  ratepayers and taxpayers will pay.   In Wellington the largest regional roading projects for generations (probably ever) is underway at Transmission Gully.  The economics of the project are simply shocking, but that doesn’t seem to bother our National or Labour politicians.

And then there is the airport extension proposal.  Now, on paper, it might look like a project that might pass some of Glaeser’s tests.  After all, Wellington Airport isn’t owned by central or local government –  although Wellington City has a minority stake –  but by a company majority-owned by some fairly hard-headed infrastructure investors/operators, Infratil.

There are plenty of people around –  including commenters here on previous airport posts –  who will attack Infratil.  I’m not one of them.  Infratil is a private sector business, no doubt pursuing (as it should) the best interests of its shareholders.  And Infratil has been quite unambiguiously clear that the airport extension project simply does not stack up on commercial grounds.  In a comment on this blog six months ago, the chairman of the airport company Tim Brown put it this way:

The Airport extension is forecast to cost $300m. If airport users who get no value from it (people on smaller aircraft, people buying coffee, parking cars, etc) don’t pay anything towards it, then the estimated present value to the airport company from those who do benefit from the extension and do help pay for it may be about $100m. So on purely commercial grounds and avoiding cross subsidies the shareholders are expected to contribute that sum.
Clearly that makes it a dead duck on a purely commercial basis. Who would hand over $300m for something “worth” $100m?

Since Infratil owns 66 per cent of the airport company (WIAL) that would involve them putting up around $66m and the minority shareholder putting up $34 million.

So when people attack the idea of council or government handing over (lots of) additional money to get the project going (in addition to the millions the Council has already spent) as “corporate welfare”, they are simply wrong, at least as regards Infratil.   This project seems to be driven by the Council “boosters”, presumably why they’ve been so ready to spending large amounts of ratepayers’ money on it already.  If some branch(es) of government in fact do stump up hundreds of millions of dollars beyond what is commercially justifiable, some of it will certainly benefit some local businesses, but most of it will simply be money down the drain; spent on real resources to build an extension that simply has almost no economic value.  Other than the exercise commissioned by the airport company itself –  funded by the Council –  no one who has taken a hard look at the numbers regards the claims of large scale economic benefits as stacking up.  Of course, there are plenty of “boosters”, and others who think of (real) long-haul flights from Wellington as a nice idea, but the numbers simply don’t stack up.

Fortunately, it is local body election time.  If it weren’t, I fear the project might be rammed through with as little serious scrutiny as the cosy subsidy deal to fund a movie museum/convention centre in Wellington recently was.  (The movie industry, of course, surviving on large scale taxpayer subsidies).  At present, WIAL has a resource consent application underway.  (Of course, if the project can’t get a resource consent, the economics is irrelevant.)  Somewhat curiously, WIAL recently temporarily put the resource application on ice. This was, ostensibly, to allow them to take account of points raised in the numerous public submissions. I’m a bit skeptical of that story –  surely the submissions can’t have been much of a surprise –  and wonder if it isn’t a convenient way to minimize coverage of the issue during the local body election season.  Perhaps not, but the timing is certainly convenient.

A year ago, I assumed that the Wellington City Council – which hardly ever turns down an opportunity to waste money, and which is in the thrall of an “economic development” mindset –  would simply write the cheque, shifting large amount of ratepayers’ money into a project which  –  while fundamentally uneconomic –  it would not even secure a much-increased ownership interest in.

But as the election season has gone on, I’ve begun to be a little more hopeful that perhaps hard-headed analysis might actually play some role in the eventual decision on Council funding (or indeed, central government funding, where there is little sign of much greater discipline around capital spending).   Our mayoral race is hotly contested, and so there have been plenty of surveys asking candidates for their views on the airport extension.  Here I’m drawing mostly from a survey done by my local residents’ association.

Somewhat encouragingly, of the eight mayoral candidates not one is now unambiguously in support of spending lots of ratepayers’ money on the runway extension.

One of the mainstream candidates –  centre-right councillor Nicola Young –  is outright opposed

 Opposed. Initially I thought it should funded in line with its ownership (Infratil 66%, WCC 34%) but now I believe it would be a $300million folly. Subsidising international airlines is very costly, as Christchurch Airport discovered when it paid Air Asia X millions to get direct flights to Asia; the flights were cancelled after nine months

Another sitting councillor, this time from the left, Helene Ritchie, is also opposed

I have repeatedly opposed it and any funding towards it-including Council using rates to support an application by the Company for a  resource consent.

She further offends the elites by suggesting that voters should get to make the final decision on such an expensive proposal

The Environment Court should throw it out. If it is not thrown out, then as mayor I will call for a referendum/poll of the people, on this proposed rates funded $350 million (probably likely $500million) Airport Extension, asking residents, “Do you want to pay for the proposed airport extension? Should rates be spent on “corporate welfare”-an unnecessary airport extension?”

Another candidate –  left-wing economist Keith Johnson, campaigning (I suspect) against waste rather than to be elected –  is also clearly opposed

I am opposed to the project and have submitted a substantial paper detailing my objections to the Environment Court, covering safety, environmental, budgetary and business-case concerns.
I am absolutely opposed to the allocation of $90 million from Wellington City Council to the project, as the proposal essentially constitutes corporate welfare funded from the pockets of ratepayers.

A final minor candidate is also clearly opposed.

Unfortunately, most of the more likely candidates are somewhat more positive.

Sitting councilor Andy Foster probably isn’t going to be mayor, but despite being a typical “booster” most times when it comes to council spending, on this one he has clearly been having second thoughts.

It will depend on whether it can get over some very tough hurdles: consent, demonstrated airline commitment, robust economic case and obtain funding.  If it can, I will support it. If it doesn’t I won’t.  I suspect it won’t.

The election seems set to come down to a race between the current Labour Deputy Mayor (endorsed by the Greens) Justin Lester, the current Labour mayor of Porirua Nick Leggett, and the centrist councillor Jo Coughlan.  All three have a track record of supporting spending (lots of) public money on “economic development” projects, but I am mildly encouraged by how cautious they now seem to have become.

Here is Coughlan

I support the runway extension subject to it getting a resource consent, a business case that stacks up and appropriate funding. If the city does contribute, it should be reflected in our ownership skate. It should not be a donation

On that basis, the Council would end up owning a very large share of WIAL.  It is a middle of the road line, but it is important for Wellington voters to remember that the project is fundamentally uneconomic, and whether any money was contributed as an equity stake or as a “donation” doesn’t change that.  Central government had lots of equity stakes in Think Big projects in the 1980s.  They were all financial and economic disasters.

Here is Leggett, current mayor of Porirua

I support the idea of the runway extension. Wellington has to open itself outwards and create better connections internationally to grow jobs and investment.   I don’t support the council funding the extension beyond its 33% shareholding and if the Resource Consent is not successful – or the Government refuses to offer funding – then the project won’t proceed.

Ah yes, the “idea” sounds good.  But if it were such a good idea, users would pay for it.  That is the market test, usually a pretty sound one.  One gets the impression he doesn’t actually think the project will pass a proper cost-benefit analysis for the Council –  and $200m is a lot of money.  Leggett seems to be looking to central government –  and as he must drive past the Transmission Gully works each day on the way to the office, perhaps that is no wonder.  Wasteful capex is just par for the course –  especially when it could be dressed up in current fashionable rhetoric about advancing (with subsidies) export education and tourism.

And what of the Labour (and Greens –  even though as a party they ostensibly oppose the runway extension) candidate, Justin Lester?  He has been a strong advocate of the project, and was apparently the key figure in securing subsidies for the Singapore Airlines flights to Canberra. But now….

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds: 1. Resource consent approval 2. Financial support from Central Government 3. Commitment from airlines to fly direct routes to Asia.
This is a 50 year project and needs careful consideration before any decision is made.

So even for Lester this is too big for the Council.  It can only proceed with central government funding.

Perhaps the most encouraging bit is his final sentence.  It is a long-lived project, and the option to delay must be a real one.  Perhaps in five or ten years time we will have a more secure feel for, for example, the viability of the new Singapore flights.  And –  for those more environmentally inclined than I am –  there is always the question of sea-level rise to consider, for a very low-lying airport.  Perhaps we could have another look in 20 years time?  Who knows, by then the benefits might be so overwhelming the users might even pay for the project?

In our council system, even mayors have only one vote.  Whichever of these candidates gets elected the project might still get significant additional council funding, or not.  And as central government has a terrible record of pouring money down sinkholes –  Transmission Gully, KiwiRail, probably the Auckland CRL etc – it might get funding from there even if the Council isn’t willing to stump up much.  But it is at least slightly encouraging that the mayoral candidates, reading the tea leaves of voter attitudes, have all either come out opposed to the Council paying for the project, or hedging support around with some tests that will be very hard to pass.

I’m not usually a single issue voter –  and the debacle of the Island Bay cycleway still concentrates the mind in other directions at times –  but this time I am.  There is simply too much money at stake, to allow boosters with the public cheque book to pursue their field of dreams vision for Wellington airport.

(For those wondering, I have  not run out of ideas or enthusiasm, just energy. I hope to be back to normal soon.)

UPDATE: From page 35 onwards of this Chamber of Commerce survey there are fuller statements of each candidate’s approach to the runway extension issue.   There isn’t anything very different than in the quotes I’ve included above, but for those interested the more detailed responses are worth consulting.  I strongly agreed with this line from Andy Foster

As much as possible all information pertinent to the decision should be made available to the Wellington community so that it can be scrutinised by everyone.

 

 

LVR controls, regulatory philosophy (and the OIA)

Michael Reddell Financial stability, OIA, Reserve Bank

I’ve had a bit of a relapse in my recovery and seem set to spend much of this week doing little more than lying on the sofa reading something not too taxing.  There are plenty of things I’d like to comment on substantively, but for now it won’t happen.

The Reserve Bank released its (latest –  third in three years) final LVR decision on Monday.  To no one’s surprise, after a sham consultation, they confirmed the Governor’s original plans, albeit with some curious refinements to the exemptions –  curious, that is, if one thinks that decisions on such things should be based on considerations – the statutory ones – around the soundness and efficiency of the financial system.

And although the lawgiver has now descended from the mountain and issued his unilateral decrees, which have the force of law, there is still no sign of a regulatory impact assessment.  There is talk in the summary of submissions that one is forthcoming, but really……when the regulatory impact assessment is published only some time after all the decisions have been made, it reveals quite how little weight the Governor seems to put on good processes.  And it is not as if the initial consultation document was sufficiently extensive and robust to cover the ground –  recall the “cost-benefit” analysis that consisted of a questionable list of pros and cons with no attempts to quantify any of them.

One of the other things I had hoped to comment on in more depth was a speech given last week by Toby Fiennes, the Reserve Bank’s Head of Prudential Supervision. on the Bank’s regulatory philosophy and supervisory practices.    It included this nice chart, outlining various aspects of financial institutions’ operations and how much, in the Bank’s judgement, they mattered to the “RBNZ and society” (as if these were the same thing) and how much they mattered to the institutions themselves.

Figure 1: Selected interests of the RBNZ, society and financial institutions

fiennes

Fiennes went on to note that the blue areas aren’t of much interest to the Bank (and don’t therefore attract much regulatory interest), while the red area are typically quite heavily and directly regulated.

But in this context, it was the comments on the green areas that caught my eye

Some things – like risk management and underwriting standards (in green) – are of strong interest to both the Reserve Bank and firms. Here we tend to use market and self-discipline. Examples of some of our supervisory practices in this area are:

  • Disclosure of credit risks;
  • Mandatory credit ratings;
  • Governance requirements; and
  • Publicly disclosed attestations by the board that key risks are being managed.

Now I know that the Bank’s prudential supervisors have never been keen on LVR restrictions, and that they are devised in a different department, but……..all controls are imposed under the same legislation –  indeed the same part of the legislation –  and by the same Governor.  And when housing loans are the biggest single component of banks’ credit exposure –  and banks have most to lose if things go wrong – and yet when the Bank has imposed three sets of direct controls on housing LVRs in three years, imposing its own judgements on underwriting standards, you might have hoped that practice and “philosophy” might have been better reconciled, or the gaps smoothed over in a speech by the Head of Prudential Supervision.

As regular readers know, I’ve been pushing to get submissions on Reserve Bank regulatory proposals routinely published.  Such publication is common practice in other areas of government, including submissions to parliamentary select committees.  If you make a submission seeking to influence public policy, that submission should generally be public as matter of course –  it should be one of the hallmarks of an open society.

Some progress has been made with the Reserve Bank.  If someone asks, they will now typically release submissions made by anyone who isn’t a regulated institution.  I asked for all the submissions on the latest LVR “proposal” to be released, and  –  as expected –  the Bank has released all those not made by banks (the regulated institutions in this proposal).  Anyone interested can find those submissions here. I have three remaining areas of concern.

The first is that release of submissions should be a routine part of the process for all consultations, not just when someone makes the effort (remembers) to ask.  The second is that on this occasion they have withheld the names of four private submitters.  As I noted, if you want to influence lawmaking, you should be prepared to have your name disclosed.  How can citizens have confidence in the integrity of lawmaking processes if they don’t know who the Bank is receiving submissions from, and what interests they may represent?  (Of course, since one of the anonymous submitters appears to have views very similar to my own, we can safely assume that that person’s views will have had no influence on the Bank.)

And the third concern is that the Reserve Bank is still consistently keeping secret the views of regulated entities (the banks in this case).  When the regulated lobby the regulator it is particularly important that citizens are able to see what arguments are being made, to ensure that the process remains robust and that the regulators are not being “captured” by their closeness to the regulated –  bearing in mind that the Bank is supposed to be regulating in the public interest, not that of banks.   As I’ve noted before, the Bank justifies withholding bank submissions on the grounds of section 105 of the Reserve Bank Act –  which they argue compels them to withhold such material.  In fact, that section of the Act gives no hint of a distinction between material received from banks and that from other parties,  If section 105 applies to submissions on proposed regulatory changes, the Bank is obliged to keep secret all submissions, not just those from banks.  As I’ve noted before, there is a good case for a small amendment to the Reserve Bank Act to make it clear that the section 105 protections do not apply to submissions on regulatory proposals and hence that banks should expect their submissions to the Reserve Bank on regulatory initiatives to be published, in just the same way that bank submissions to parliamentary select committees will generally be published.

I have appealed to the Ombudsman the Bank’s decision to withhold the bank submissions, in effect seeking greater legal clarity on what the section 105 restrictions actually apply to.  In the meantime, of course, if the banks have nothing to hide –  and I don’t imagine they really do –  they could chose to publish their submissions.  According to the Summary of Submissions “a few respondents urged tighter LVR restrictions on investors than proposed”, so perhaps the ANZ really did follow up on their CEO’s newspaper op-ed and advocate more far-reaching restrictions.  If so, citizens should have the right to know (customers might be interested to, but that is their affair).

Raising the inflation target….in 2002

Michael Reddell Monetary policy, New Zealand economic history

There is a bit of discussion around (internationally more so than in New Zealand) about the possible merits of raising inflation targets, to something centred on 4 or 5 per cent annual inflation, rather than the 2 per cent focal point of most countries’ targets today.  The main argument for doing so is to raise nominal interest rates in more normal times, in turn creating scope to cut policy interest rates further in real terms in future serious downturns.

I doubt it is a viable option at present for most inflation targeting countries, simply because most have largely exhausted conventional monetary policy capacity –  policy interest rates are already near or below zero –  and many are struggling to achieve their current inflation targets.  It is, probably, still an option for New Zealand (with the OCR still at 2 per cent), although in my view raising the target is less attractive an option than taking action to reduce the impact of physical cash in creating a near-zero lower bound on nominal interest rates.  The costs of positive inflation rates may not be that large, but they increase as the target inflation rate increases –  and perhaps especially so in a country like New Zealand where income on financial savings (eg interest, which includes compensation for inflation) is taxed just the same as labour income.

Unlike most inflation targeting countries, New Zealand does have a history of having raised its inflation target.  We started out aiming for 0 to 2 per cent annual inflation rates, and then raised that target to 0 t0 3 per cent at the end of 1996, as one aspect of the National/New Zealand First coalition deal.  The Bank acceded to the change, but had not sought it.

Yesterday I was asked a question about the background to the second increase in the target.  In September 2002 the inflation target was raised from 0 to 3 per cent per annum, to the current 1 to 3 per cent per annum.  Why?   My short answer was “politics”, and this is my fuller answer.  I was quite closely involved –  at the time I was one of the Governor’s three direct reports –  but others will no doubt have slightly different memories/perspectives.

The opportunity for a change in the Policy Targets Agreement (PTA) opened up when in late April 2002 the long-serving Governor, Don Brash, unexpectedly announced his resignation from the Bank, effective immediately, so that he could contest the forthcoming general election as a National Party candidate.  Key figures in the governing Labour Party – in particular the Prime Minister, Helen Clark – were furious, including with the Reserve Bank’s Board which had agreed terms and conditions with Brash that had not required any stand-down periods when he left office.  I can’t speak for all my then colleagues of course, but my impression was that many people at the Bank, while perhaps wishing Don well personally, thought that resigning as Governor to go straight into party politics wasn’t quite the done thing, and risked undermining (albeit at the margin) the reputation of the Bank.

The Bank’s (and Brash’s in particular –  as single decisionmaker) stewardship of monetary policy had been contentious in some circles for a long time.  Both National and Labour stood solidly behind the Reserve Bank Act, and especially its monetary policy arrangements, but the Minister of Finance, Michael Cullen, had been uneasy for a long time as to whether the target framework was too restrictive.  Back in the mid 1990s, as Opposition Finance spokesman, he had actually campaigned to widen the target band to -1 to 3 per cent per annum, and when he had become Minister in 1999 he added to the PTA the explicit requirement to  “seek to avoid unnecessary instability in output, interest rates and the exchange rate”.   No one ever –  in fact, still –  knew quite what it meant, but it was a response to the continuing unease, including that around the monetary conditions index debacle of 1997 to 1998.

The Labour-Alliance government which came to power at the end of 1999 commissioned, as had been promised, an international review of New Zealand’s monetary policy arrangements and the conduct of monetary policy.  Michael Cullen wasn’t looking for radical change –  or he would not have appointed Lars Svensson, one of the academic experts on inflation targeting, as the reviewer –  although there was a sense that he would not have been averse to a recommendation to shift to a committee or Board system for making monetary policy decisions.  In the end, the review was pretty tame –  I was part of the secretariat, at the same time as being a Bank senior manager, and we went to some lengths to encourage Svensson not to be too effusive about the Brash stewardship, fearing that otherwise the report would lack credibility.    Svensson did recommend a move to a committee system, but his proposal –  for a committee of internal senior managers, somewhat akin to Graeme Wheeler’s Governing Committee  – got no political traction.    There was no political mileage in legislating to shift from one technocratic economist making the decision to four or five technocrats making the decisions.

There was also longstanding unease, and puzzles, as to just why New Zealand’s relative economic performance had not improved.  At the time, our exchange rate wasn’t high, but our interest rates were still high relative to those in the rest of the world, and there was no sign that the income or productivity gaps to the rest of the OECD were beginning to close.  There was questions around whether somehow something in the way monetary policy was being run, or the way the target was specified, was somehow contributing to the medium-term real economic underperformance.  Were we, for example, by holding interest rates so high unintentionally lowering potential GDP growth? In some circles there was a sense that the Bank jumped at shadows –  raising interest rates at the first hint of inflation, and never “gave growth a chance”.  As people pointed out from time to time, our inflation target was lower than Australia’s, but our interest rates typically weren’t.

Add into the mix the government’s unease with Don Brash’s views of the wider economic policy framework.  His speech at the August 2001 Knowledge Wave Conference, on how best to accelerate economic growth, didn’t go down well with the government (understandably –  I think those internally who had seen the draft were all pretty much of a view that it was material that should be saved for his retirement).  It all seemed to just add to a sense that something was wrong at the Bank, and in how monetary policy was being run.

Actually, the Bank had been quite aggressive in easing policy during 2001, probably more so that (with hindsight) was warranted.  The US recession, and the 9/11 attacks, prompted pre-emptive easings, from an institution determined not to make Asian crisis mistakes again.  But by early 2002, the talk was turning again to the prospects for OCR increases.  There had already been two 25 basis point increases by the time Don Brash resigned, and the projections and policy statements foreshadowed a lot more increases to come.

It is also worth remembering that, at the time, just over a decade into inflation targeting, the Bank had had inflation out-turns averaging well above the midpoint of the inflation target range.  That track record continued right through until the 2008/09 recession, and it made us unusual by the standards of inflation targeting central banks –  the more so, perhaps, because our rhetoric often stressed the importance of focusing on the midpoint of the target range (to maximize the chances the inflation would be within the target range).     This chart illustrate the track record –  although note that, at the time, we did not have either of these particular core inflation measures (they are just readily to hand).

target change in 2002

Inflation had been above the target midpoint throughout almost all the inflation targeting period, had never (in core/underlying terms) been in the 0 to 1 per cent part of the range, and by now (mid 2002) inflation was not only in the upper half of the range, but was rising.

Deputy Governor Rod Carr was appointed as acting Governor once Don Brash resigned, and he took the next few OCR decisions, and did the associated communications.  The OCR was raised at both of his first two OCR decisions, and in the May 2002 MPS in particular, Carr’s rhetoric was (and was widely seen as) very hawkish –  words of man who might be champing at the bit to raise the OCR.  The May projections had envisaged another 150 basis points of OCR increases over the following year or so which would, so the projections showed, bring inflation progressively back to around the middle of the inflation range.

In the Beehive, there seems to have been a sense that they definitely didn’t want the Board nominating a “Brash clone” as Governor, and a real unease about what another 150 basis points of OCR increases would do to the prospects for the sort of “economic transformation”, including the growth in the export sector, they were seeking.  What, people might have asked themselves, was the point of having really large OCR increases to get inflation to the midpoint of the target range when it had never been there for long previously?  And since (core/underlying) inflation had never been in the zero to one percent part of the target range, why not just pull the range up a bit?  To do so, it could be argued, wouldn’t change anything much.

Throughout this period, Bank staff were at work on a major series of background briefing papers to help whoever was nominated as Governor, and perhaps the Minister, in negotiating a PTA.  For the first time, since the Act had come into effect, we passed the real possibility of an outside appointee, perhaps with little or no background in monetary policy.  I can’t now see that collection of papers on the Reserve Bank’s website (but will happily link to them if they are there: UPDATE: they are here) but suffice to say that they did not advocate a change to the PTA, or to the inflation target specificially.  They were not, by any means, doctrinaire on the importance  of the current target range, but saw little prospect of any real economic gains from raising the target.

In the Beehive, there was also a bit of a sense that if Australia could do just fine –  indeed, so it was seen, to prosper – with an inflation target centred on 2.5 per  cent annual inflation, perhaps we should move to adopt the same target.  I gathered that the Prime Minister in particular was quite keen on that option.

In the end, the Secretary to the Treasury, Alan Bollard was appointed as Governor.  He agreed to change the target in two ways.

The first was eliminating the 0 to 1 per cent part of the target range, so that in future the target would be 1 to 3 per cent annual inflation.  My understanding/memory is that he did not see this as a route to higher inflation, but rather to cementing in something more like the average inflation outcomes of the previous few years.  But it ruled out the need to tighten simply to get back to a target midpoint on 1.5 per cent.  To Alan’s credit, he strongly resisted the Prime Ministerial preference for adopting the RBA’s target, centred on 2.5 per cent.  Staff advice was that a target as high as that could not really be considered consistent with the statutory requirement to pursue and maintain price stability.

The second was to introduce the concept of a medium-term horizon explicitly into the PTA, as in these extracts

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target.

Since we had always run inflation targeting looking out at the medium-term projections, it was never entirely clear to what extent this change was substantive, and to what extent it was (as with many PTA changes) rhetorical –  making explicit what was already happening.

Shortly after he took office, Bollard gave a speech in which he tried to explain how he interpreted the new PTA.  The speech was much haggled over internally, and so what emerged was pretty carefully considered drafting. The key passage was

The key change in the agreement is that the inflation target has been explicitly defined in terms of “future inflation … on average over the medium term”. This implies that monetary policy should be forward-looking, and avoid getting distracted by transitory fluctuations in the inflation rate. In typical circumstances, we expect to give most attention to the outlook for CPI inflation over the next three or so years. If the outlook for trend inflation over that period is inconsistent with the target, we will adjust the Official Cash Rate. Our intention will be that projected inflation will be comfortably within the target range in the latter half of the three year period.

Note that the “key change” in his view was not the increase in the target –  consistent with the notion that the unused portion of the range was just being dropped off –  but the “on average over the medium-term wording”.  There are no references left to the midpoint of the target range, just a focus on being “comfortably within” the target range when we looked at projections 18 months to three years ahead.

I recall writing an internal paper, probably as part of haggling over this speech, arguing that if anything the new PTA might have given us less (or at least not more) flexibility –  a narrower target range balanced against the “on average over the medium-term” wording.

Bollard operated with the same operational autonomy over the OCR as others Governors had.  But I think those of us there at the time felt that he had much the same unease about how the Bank had been run –  and about the anti-inflation inclinations of key personnel –  as the Beehive did.  It wasn’t that long after he took office that the OCR was cut by 75 basis points.  As always, there were economic arguments that could be made for and against those cuts –  at least one seemed reasonable to me at the time –  but they proved quite ill-fated.  They had to be reversed, and more, although it took too long to do so –  and to his credit, at the end of his term, Bollard explicitly acknowledged that the cuts had been unnecessary.  The cuts, and the slow reversal of them, set the stage for core inflation increasing to above 3 per cent over the following few years.   Without the Policy Targets Agreement change, it would have been a little harder for that particular mistake to have been made.

(In discussions about raising inflation targets, a focus is often on the response of inflation expectations.  In a sense, Alan Bollard was gifted a modest “free lunch” –  he could stimulate the economy a bit more than otherwise in the short-term –  because there was no immediate increase in survey measures of inflation expectations when the target midpoint was raised, perhaps reflecting some sense that –  whatever our rhetoric –  the 0 to 1 per cent part of the old range had already become something of a dead letter.)

So, as I said, it was politics rather than solid economic analysis that drove the 2002 PTA changes.  To the extent that it reflected unease about New Zealand’s economic performance, they were good questions, but the wrong answer.  The same could, of course, be said for the desire of Labour, the Greens and New Zealand First to change the Reserve Bank Act now (rather than just the PTA).  There are real economic challenges and puzzles around New Zealand’s long-term economic underperformance, but changing purely nominal measures – like the way an inflation (or related) target is specified  –  is likely to be almost wholly irrelevant to responding to those problems,

 

Graeme Wheeler, Geoff Bascand, and the cluster munitions

Michael Reddell Reserve Bank

As a a key regulator of components of the New Zealand banking and financial system, and an institution which puts a great deal of emphasis in its regulatory philosophy (expounded again in a speech given only last night) on strong governance systems  and protocols and the importance of directors taking very seriously their legal and other responsibilities, you might have supposed that the Reserve Bank would be punctilious in observing canons of good governance, to the limits of the legal requirements and beyond, for any institutions they themselves, and key managers, were associated with.  After all, that respect for the law, for boundaries, for the appropriate management of potential and actual conflicts of interest for example, would surely be second nature.  And, even if it weren’t, they would surely want to set a good example, and be whiter than white so that if questions even arose there would no doubt that the Reserve Bank was operating fully consistently with the best of the sorts of standards they espouse for (and often impose on) regulated institutions.

Unfortunately, if that had been your supposition, you would be quite wrong.

I’m a trustee of the Reserve Bank of New Zealand Staff Superannuation and Provident Fund.  The long-standing fund, long since closed to new members, is established and operates under its under trust deed.  It is a separate legal entity, with its own governance structures, lawyers,auditors, and is subject to the Superannuation Schemes Act, soon to transition to the Financial Market Conduct Act.  The Reserve Bank is a party to the deed that establishes the fund, but neither the Reserve Bank, nor its Board of Directors (nor for that matter the Minister of Finance) has any powers in respect of the Fund.  It cannot direct the trustees on their investments, or how to apply the rules, and nor has it any rights to demand information from the trustees.  The Bank has obligations to the Fund under the trust deed, but no specific rights or powers in respect of it.   By law –  common law and statute –  all trustees must operate in the best interests of the members of the Fund.  The Fund, in essence, exists for members, in effect holding some of their remuneration in a savings vehicle and then paying out pensions and other benefits, under the rules, in due course.

On paper, the governance model is quite elegant.  The Governor is a trustee.  The Bank’s Board appoints one of its members as a trustee, and they also appoint one member of the scheme as a trustee (although both these appointees serve at the pleasure of the Board, and appointments can be revoked at any time if those trustees get difficult).  And there are two trustees elected by the members for five year terms.  I’m one of those members’ trustees.    Most members are now retired, so typically members’ trustees also are (although I’ve been a trustee since 2008).

But whoever appoints the trustees, none of us serves as delegates or representatives of those who appoint us.  We are all –  equally –  subject to the same legal responsibility that in conducting the affairs of the Fund, we must serve the best interests of members.  If there is any (actual or potential) conflict between the interests of members, those conflicts need to be identified, but it is the interests of members that must be paramount.  For material conflicts, conflicted trustees should absent themselves from involvement in the matters where conflicts arise.

This isn’t novel stuff.  And it has long been recognized that when senior managers  (or directors) of sponsoring organisations serve as trustees of superannuation funds, there is a particularly serious risk of conflicts of interest arising, between the duties those individuals owe to their employer, and those they owe to the members of the superannuation scheme.  In the United Kingdom, the Pensions Regulator some years ago published a very useful and substantial guide to managing conflicts of interest in the context of superannuation schemes.

Management of these issues at the Reserve Bank scheme has been shockingly bad over the years.  From meeting to meeting, there often aren’t material conflicts, but when the conflicts do arise there has been no evidence that the Governor (or, typically, his alternate  –  since the Governor consistently claims to unavailable for meetings, even when scheduled a year in advance) has managed those conflicts in ways consistent with their overriding legal obligation, when acting as trustees, to act in the best interests of members.  I’m a bit of a starry-eyed optimist at heart, so have been constantly surprised at how indifferent to these responsibilities  trustees who are senior Bank managers have been.  Mostly, I don’t even think it is willful –  but sheer indifference, or failure to appreciate the importance of appropriately managing conflicts of interest, are almost as bad.  Perhaps especially in an institution that is a key financial regulator.

I could give you lots of boring detail about examples.  This is a troubled scheme, against which complaints have now been made to the Financial Markets Authority (regulator of such superannuation schemes).  But for now, those are issues for us, and many of them are very complex.

But this morning one of the issues has been put in the public domain by the trustees as a whole, acting under duress.  This morning, the trustees made their first ever press statement (stories here and here) .  And so since the matter is in the public domain, I feel free to give you some context.

On Wednesday last week, in the face of media coverage of some of the investments of the State Services Retirement Savings Scheme, I suggested to trustees that we should check with our investment managers on whether we had any similar exposures, about which questions might be raised.  As I noted then, I wasn’t particularly concerned for the fund itself –  a private body, and closed to new members –  but recognized that there might be some reputational questions for the Bank, and that we should probably be aware of any such exposures.  Our regularly quarterly meeting was to be held the next day, which would provide a good opportunity to discuss the matter (albeit, we already had a full agenda).

Our administration managers arranged to get the relevant information, at least at a high initial level, identifying that in one passive offshore equity fund we had holdings of, some of the underlying shares were those of firms associated with what might be considered “controversial weapons”.

The next day we held a meeting of trustees.  It was long and difficult one dealing with several other issues.  The Reserve Bank’s Deputy Governor, Geoff Bascand, is the Governor’s alternate (when the Governor is unavailable to attend) and also chairs the meeting.  He made no effort to raise the “ethical investment” issue, and when he tried to adjourn the meeting I pointed out that we had still not discussed this issue.  Geoff insisted he had another meeting, and rather than (say) handing over the chairmanship to another member, he simply refused to have a discussion, made no effort to schedule one even by email (we only meet quarterly) and ended the meeting and left.  Curiously, as he left the meeting he signed, as chair, a revised Statement of Investment Performance and Objectives (SIPO), a document all superannuation schemes need to have, that reaffirmed our existing investment approach, including (explicitly) the holdings in the offshore index fund that had the small “controversial weapons” exposures.

We heard nothing more until late on Monday when Geoff emailed trustees about a written parliamentary question that the Minister of Finance had received.  Predictably, questions had been raised about the holdings of the Reserve Bank superannuation scheme.  As is customary, the Minister’s office had referred the PQ to the Reserve Bank for advice on a draft answer.  The people who handle PQs etc in the Reserve Bank work to Geoff, as Deputy Governor.

It wasn’t clear to me what business it was of the Minister of Finance.  The Minister has no ministerial responsibility for the Reserve Bank superannuation fund (structure and governance as above) although he no doubt does have responsibility for the actions of the Reserve Bank (including vis-à-vis the Fund).   How the Minister chose to answer was, and is, up to him.  However, the information requested in the PQ belonged to the trustees, and no one else (in this context, the Reserve Bank or the Minister) had any legal right to demand it from us.  It was our information, and our members’ money.

In a well-governed institution, Geoff would have passed on the PQ to trustees and invited trustees themselves to consider how the Fund should respond.  If the Bank had wanted us to provide the information so that, in its interests, it could pass it on to the Minister, a proper request, cognizant of the legal responsibilities of the trustees, could have been made to the trustees.  And given the potential for the interests of the Bank and the trustees to diverge, Geoff would wisely have taken no further role in the discussions on the matter by the trustees.

But this was the Reserve Bank.  By the time, late on Monday afternoon, that trustees were even made aware of the issue, Geoff had already emailed our investment managers and got the detailed information that was being sought in the PQ.     In fact, he had known about the request since mid-afternoon on the previous Friday.  And when he emailed the investment managers, he didn’t keep the information to the trustees (or their own administration managers), he copied in Bank staff who had nothing whatever to do with the superannuation scheme.  Emails went back and forth on Sunday and Monday, every single one was copied to other Bank staff, and the trustees had still not been made aware of the issue.  To the extent that Geoff Bascand had a right to the information on the Fund’s investment, it was solely as an (alternate) trustee, not as Deputy Governor of the Bank, and he had no right at all to use that information himself for Bank purposes or to share that information with Bank staff, without the prior authorization of the trustees as a whole.

That made the whole exercise a fait accompli.  Whatever the attitude of trustees, the Bank now had our information and was free to use it as it chose.  Geoff’s email to the trustees late on Monday afternoon said “we have to supply information” –  but it wasn’t clear, at all, who “we” were.  The trustees were certainly under no legal obligation to do so.

As the first trustee to respond to Geoff, I noted that the Minister had no power over, or ministerial responsibility for, the Fund, noted that we needed to obey any laws constraining our specific investments, noted that shifting the portfolio in response to Bank reputational concerns could be costly so the Bank might need to consider reimbursing the Fund, and also highlighted the importance of ensuring that conflicts of interest were appropriately managed in handling this issue.

There was never of any sign of that.  The Bank –  having obtained our information without authorization –  simply advised us, via emails from Geoff (never clear from them whether acting as a trustee or as Deputy Governor) that the Bank would pass on our information to the Minister, would advise the Minister to answer the question fully, and would advise the Minister to say that the Bank would be seeking to encourage us to adopt an “ethical” investment policy.   Continuing his glaring inability to recognize the different interests of the Fund and the Bank, he urged trustees not to approach the Minister’s office directly “as the Bank was handling that”.     The Bank, of course, was not required  –  or expected – to operate in the best interests of members (or trustees).

We gravitated towards the idea of putting out our own public statement –  while Geoff continued to act as conduit for the Bank in telling us what the Bank “insisted” had to be in such a statement.  At one point, I explicitly asked Geoff, acting as trustee, what course of action he thought we should take, acting (as legally required) in the best interests of members.  He simply refused to answer directly, responding with the following extraordinary comment

Now I accept that this may reflect the Bank’s interests more than that of Trustees per se, but the reality is that a Bank director, the Governor and a bank employee are trustees (with me as alternate and chair).

All these people are legally required to act in the best interests of members.  For several years, I was an employee and a trustee, and I hope I always sought to do so.

Fighting something of a rear-guard action, I argued that if we were giving the information about these exposures to anyone, we  should at very least provide it to members of the scheme before we provide it to the Minister of Finance, let alone the public.   It is, after all, their money, and if there are to be any changes in investments as a result of a distaste for particular types of exposures, members’ preferences should presumably be the ones that count.  That request got nowhere either, with Geoff apparently much more interested in his day job as Deputy Governor.  We finally got a grudging statement that the information would be sent to members shortly after our public press release went out at 10am this morning.  It went out, baldly, with no context or background.  Frankly, it is the sort of process that treats members with disdain.  I can only apologise to our members for that.

There has been a suggestion that even a passive interest in cluster munitions firms, through a very broad-based index-linked fund –  we held one that mirrored the MSCI  World ex Australia index  –  was illegal under New Zealand law.  There is a range of views on that issue apparently, and reallocating any fund’s investment involves (potentially quite material) transactions costs, but even when it was suggested that we should consult our own lawyers, or the legal opinions of industry bodies, Bascand has little or no interest.  The best interests of members didn’t seem to matter, but the “reputation” of the Reserve Bank did. I have no particular problem with the Reserve Bank managing its own reputational risks –  recall, I was the first person among trustees to even raise the issues –  but for a Reserve Bank senior manager to abuse his position to force through the Bank’s interests is quite another matter.

In the press release it states that

Trustees will act expeditiously to eliminate our exposure to these firms.

In fact, when I pointed out yesterday that if we were going to say this, we really should have some sort of process in place to effect the change (eg formally request options and costs from our investment managers), I was simply ignored. Trustees have not commissioned any such process yet.    I guess what mattered more to the Bank was to (have the trustees) be seen to say it.

The press release goes on.

The Bank has requested that Trustees adopt a socially responsible investment policy and we will consider the matter at our next meeting.

At the time this press release was agreed there had been no such request at all.  When I asked again last night, shouldn’t we actually have a written request from the Bank if we were going to say there was such a request,  one finally came through at 8.24 this morning.  Interestingly, it came from the Bank’s Communications Manager, highlighting the extent to which this is mostly a Bank PR management issue.  Graciously, the Bank sent through a version of their “socially responsible investment policy”, expressing their “surprise” that the trustees did not have such a policy and commending to us the example of theirs.  This blatant attempt to seize the high moral ground was somewhat undermined  (in addition to the fact that the Governor himself is a –  absentee – trustee) by the fact that their own ‘responsible investment’ policy document does not apply to international ventures the Reserve Bank is party to, or to any specific countries.   Which is convenient because, as I used to point out as an insider, it allowed the Bank to invest New Zealand taxpayers’ money in Chinese government bonds, do swap deals with the Chinese central bank, even though China remains one of the greatest human rights abusers of modern times, as well as an aggressively expansionist power.  Maybe that is just fine, in the interests of international relations, but don’t try claiming the moral ground Governor.  Perhaps its just me, but $15000 of passive indirect holdings in companies that may be making cluster bombs, bother me much less than the Bank funding the butchers of Beijing.  Tastes on that will differ –  but the Reserve Bank’s assets are public money, and the superannuation scheme’s assets are not.

So let’s summarise:

  • as recently as last Thursday, this issue didn’t bother Bascand –  or his boss, who could have turned up to a trustees meeting –  enough to even have a discussion at a long-scheduled meeting.  Despite the points I’ve noted here, had they done so, I’d have suggested we get a prompt legal opinion, get out of such exposures expeditiously if they were illegal, and if not would have been happy to have agreed to restructure the portfolio if the Bank had covered the transactions costs etc of doing so.
  • But once the PQ was asked, the Bank panicked.  Good governance processes were over-ridden and in exchange after exchange, Geoff Bascand –  a man generally regarded as ambitious to become the next Governor –  prioritized the interests of the Bank over the interests of members of the superannuation fund.  That wasn’t just bad form, it was in breach of the fundamental duty of trustees.
  • When an institution communicates with an associated institution, that is only a email away, primarily by press release, you know that what is going on is mostly about spin and PR.

Does it really matter?  On the specific issue, perhaps not overly, and the final outcome might well have been the same anyway.  After all, I’d raised the issue before the MP did.  But as the old saying had it “take care of the pennies and the pounds will take care of themselves”.   It applies as much to doing the small stuff well, and having good and disciplined processes in place, and observed.  The Reserve Bank would surely expect no less from the institutions it regulates/supervises.  And when small stuff is done badly –  as it was here –  it often points to some rather serious problems in the institution concerned.   .

I don’t know how the Minister of Finance will eventually choose to respond to the original parliamentary question. I’ll watch with some interest, conscious that it will be one of those days when an Opposition MP can take heart.  That MP will have made a difference.

In the course of all this, it became clear that most dealings of the superannuation scheme, and all the email traffic over this issue, is captured by the Official Information Act (since two trustees are Reserve Bank employees, using Reserve Bank computers and email addresses) and thus the material is “held” by the Reserve Bank.  I wouldn’t necessarily encourage it, but anyone interested could seek the whole gruesome paper trail.

 

 

New dwellings and population growth

Michael Reddell Housing

I hadn’t really intended to write anything today –  tempted as I was by the topic of so-called “ethical investing” – but yesterday’s post on how best to look at new building consents relative to population (growth) sparked a surprising number of comments so I thought some brief follow-up comments and charts might be in order.

My single main point yesterday was that new building permits per capita, whether compared across time or across TLAs, is not a particularly useful indicator of anything.  There are substantial differences in population growth rates –  both across time and across TLAs – so that simple comparisons of consents for new dwellings relative to the current stock of population won’t tell observers anything useful about how supply/demand balances are unfolding in particular markets, or how responsive land use and building regulation allow markets to be in particular times and places.

For either purpose –  and perhaps particularly for the latter – one really probably needs a more formal empirical model that can capture more of the idiosyncracies of particular times and places, and some of the two-way causation that can be at work (eg population growth generates demand for housing, but a readily responsive housing supply might also make such a locality more attractive to more people).  Fortunately, in comparing across TLAs in a single country we can treat a lot of things as constant (applying similarly across all TLAs) –  eg the same tax system, the same interest rates, the same banking system, the same trends in divorce rates, or childbirth rates (the latter two have clear implications for the number of houses demanded per capita).  But there are still local idiosyncratic features that need to be taken into account at times.  The most obvious of these in recent New Zealand history is the impact of the Canterbury earthquakes, which led to the loss of a lot of existing houses, especially in Christchurch city and Waimakariri (Kaiapoi).    Even if the population of those places didn’t change much at all, one would expect a lot of new dwelling consents in the years following such destruction simply to re-establish the previously desired volume of housing.  Seeing a lot of new dwelling permits in those (and neighbouring) localities might not tell one much about the responsiveness of the regulatory systems in those council areas, but simply about the specific nature of the shock.  And –  fortunately –  we don’t know how other localities (and their regulatory systems) would have responded to a natural disaster of that sort.

Building permits per capita don’t tell us much at all.  Building permits for new dwellings per person increase in population tells us more, but it is still a far from perfect measure –  especially when, as around Christchurch, there is a sudden need to replace existing lost houses.  So in my post yesterday I used the SNZ national data on housing stocks, and compared the (estimated) change in the housing stock to the (estimated) change in population.  This was the resulting chart.

housing stock

At a national level, the net increase in the number of houses has been very weak relative to (estimated) population growth, and there is no sign of any improvement.   It isn’t a perfect indicator –  changing birth rates or divorce rates might affect the desired number of people per house – but it is less bad than anything else we have.

What about at the TLA level?  We don’t have annual housing stock estimates (that I’m aware of) and the latest annual subnational population estimates are for June 2015.  So we are pushed back to using new dwelling consents.  Comparing consents with population growth produces silly answers in places with falling populations –  where there is usually some new building just to slowly replace the existing stock –  or even places with very low population growth rates.  So in what follows I’m just going to focus on places that are

  • relatively large, and/or
  • have had reasonable population growth

but with a particular focus on Auckland, greater Wellington, greater Christchurch, Hamilton and Tauranga.  The readily accessible data go back to 1996.

Here is an easy-to-read chart comparing the experiences of Auckland and Hamilton.  Both cities have had around a 40 per cent increase in population over the period.

akld and hamilton

But in only one year of these nineteen were more new houses being built per each new resident in Auckland than in Hamilton.  There might be some underlying demographic differences  –  as I said, ideally one needs a fuller empirical model –  but on the face of things it doesn’t reflect very favourably on the land use and building restriction of the Auckland council(s).  At least up to June 2015, there was no sign of the gap closing.

Tauranga has actually had faster population growth than either Auckland or Hamilton over the 20 years.  Here is what the chart looks like when we add Tauranga.

akld hamilton tuaranga

Pretty consistently higher (apparently more responsive to changes in demand) than Auckland in particular.  But what really stands out is the final four or five years on the chart.  Auckland and Hamilton are seeing less new building (relative to population growth) than they used to, while activity in Tauranga has held up at around the average for the previous 15 years.

What about Wellington and Christchurch?  The population of greater Wellington (Wellington, Upper and Lower Hutt, Porirua, and Kapiti) has grown by only 17 per cent over this period.  I never voluntarily defend Wellington local authorities.  Perhaps –  quite probably –  in a climate of heavy land and building regulation it is easier for building to keep pace with more modest population growth.  But for the full period, here is the number of new dwelling consents per person increase in population.

Auckland 0.32
Hamilton 0.38
Tauranga 0.45
Wellington 0.49

Greater Wellington has actually seen more building, relative to population growth, than even the least bad of those northern cities.

Christchurch is a story complicated by the loss of houses as a result of the earthquakes.  One would simply expect to see a lot more permits in that region following the earthquakes even if the population changed little.  Greater Christchurch encompasses three TLAs –  Christchurch city, Waimakariri and Selwyn.  The Selwyn council has a reputation for having facilitated growth –  including the otherwise improbable meteoric post-quake growth of Rolleston.

If we split the sample and look at the years up to June 2010 (ie before the first earthquake), the number of new dwelling permits in greater Christchurch relative to the (quite strong) growth in population had been higher than in Auckland, Hamilton or Tauranga over the same period –  but still a little behind Wellington.

The loss of existing houses muddies the post-2010 data.  If we take the full period (1996 to 2015) in the table above greater Christchurch comes out at 0.66 –  far above the other large cities.  But, of course, greater Christchurch lost lots of existing houses –  so the high numbers tell one nothing about supply/demand balances, or responsiveness of councils.

But one interesting angle is to look just at Selwyn.  Queenstown apart, Selwyn has had the highest population growth rate of any TLA in New Zealand over the last 20 years (107 per cent).  And Selwyn had few houses destroyed in the quakes. This is the chart of new dwelling consents per person increase in population in Selwyn.

selwyn

It is certainly a better experience than Auckland’s, but nothing to write home about.  In fact, in the sub-period prior to the quakes, the rate of new dwelling consents per increase in population was a little lower in Selwyn than it had been in Christchurch city itself. Of course, an open question is to what extent people moved to Selwyn because of a responsive regulatory system –  in turn pushed to its limits –  and to what extent because the land itself was more stable, and the new motorway made places like Rolleston very easy to get to and from.

And what if we add fast-growing Queenstown into the mix?

New dwelling consents per person increase in population (June years 1997 to 2015)

Auckland 0.32
Hamilton 0.38
Tauranga 0.45
Wellington (greater) 0.49
Christchurch (greater) to 2010 0.50
Queenstown 0.53

Of course, much of Queenstown’s construction is likely to be holiday homes, but nonetheless the contrast –  in a town with very rapid population growth – with Auckland (and even Hamilton) is striking.

As a final caution, do note that the sub-national population numbers for the period since the 2013 census are estimates, themselves derived from national population estimates.  In a couple of years’ time, after the next census, some of the recent population data could look quite different, affecting the interpretation of some of these recent construction numbers.  But in most cases, the patterns were well in place before even the 2013 census.

 

Still abusing the Official Information Act

Michael Reddell OIA, Reserve Bank

I still don’t have much energy back and posting next week is also likely to be light, but I didn’t want to let pass another shameless abuse of the Official Information Act.

Several weeks ago I lodged a submission with the Reserve Bank on their (long and slow) consultation on the publication of submissions to consultations.  I made the case for a default approach of full publication –  bringing the Bank into line with a widespread practice now in the rest of the public sector.  If necessary, I argued, the Bank should promote a minor legislative change that, for the avoidance of doubt, might ensure that they were fully able to release submissions on matters relating to the exercise of the Bank’s regulatory powers.

The consultation on publication of submissions was not about the exercise of regulatory powers, so there was no question that submissions to that consultation were covered by the Official Information Act.  So I lodged a request asking for copies of the submissions.

I don’t suppose they will have received that many submissions to this consultation.  Few of the submissions are likely to have been long.  The issues covered by the consultation concern the Reserve Bank only, not any other agencies, so there shouldn’t be any need for inter-agency consultation.  And of course the Act requires official information to be released “as soon as reasonably practicable”.  So my request should, quite easily, have been able to be dealt with within, say, 10 days.

But this afternoon I received this letter

Dear Mr Reddell

On 3 August 2016 you made a request  under the provisions of the Official Information Act (OIA), seeking:

“copies of all submissions received by the Reserve Bank on this consultation up to and including the close of the consultation period on 5 August 2016,” where the consultation you are referring to is the consultation on the default option for publication of submissions.

The Reserve Bank is extending by 20 working days the time limit for a decision on your request, to Friday 23 September 2016, as permitted under section 15A(1)(b) of the Official Information Act, because consultations necessary to make a decision on the request are such that a proper response to the request cannot reasonably be made within the original time limit.

You have the right, under section 28(3) of the Official Information Act, to make a complaint to an Ombudsman about the Reserve Bank’s decisions relating to your request.

Yours sincerely

Angus Barclay

External Communications Advisor | Reserve Bank of New Zealand 2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140   +64 4 471 3698 | M. +64 27 337 1102

It isn’t the most time-sensitive request ever, and there have been more egregious Reserve Bank obstructions, but the law is the law.

Actually, I suspect they are delaying not because any “consultations” are necessary, but simply because it doesn’t suit them to release anything until they have released their own final decision.    But that isn’t a legitimate grounds for extending a request, and nor should it be.  The Bank is, of course, free to make its decision on the substance of the policy on its own timetable, but the submissions are public information.  A public institution committed to open government, transparent policymaking etc etc, would already have released the submissions.    But not the Reserve Bank.

The Ombudsman promised a few months ago to start reporting on how agencies did in responding to OIA requests.  It will be interesting to see how the Reserve Bank –  which actually does make much of its alleged openness and transparency (about stuff it doesn’t know –  the future –  rather than stuff it does know –  official information)  – scores.

English demonstrates why monetary policy governance needs to change

Michael Reddell Governance, Monetary policy, Reserve Bank

Writing about monetary policy the other day, I observed that

we all know that ex post accountability for monetary policy judgements means little in practice (perhaps inevitably so)

Our (unusual) system for the governance of monetary policy was built around the presumption that such accountability could be made effective, but it has long been clear that wasn’t correct.  The Acting Chief Economist of Westpac, Michael Gordon, is quoted in the Herald saying:

“There needs be tighter enforcement of it [inflation targeting]. The problem at the moment is the only option the Finance Minister or the Reserve Bank board has is the nuclear option of sacking the governor, and of course they don’t want to do that, so it’s just left to drift.”

I think that is only partly right (and actually the Board can’t dismiss the Governor, only the Minister can).  The issue isn’t so much the lack of powers as the lack of will (in turn perhaps reflecting lack of incentives).  The Board and the Minister could give the Governor a very hard time –  well short of sacking him (something I doubt anyone wants) –  but don’t.

The Reserve Bank’s Board met yesterday and, if past practice is anything to go by, it will have been the meeting at which they finalized their Annual Report –  their job being, primarily, to monitor and hold to account the Governor.  It has been a pretty bad year for the Bank and the Governor.  Inflation continued to undershoot the target, communications has been patchy at best, and the analysis in support of the Governor’s housing finance market controls remains at least as poor as ever.  And then there was the OCR leak.  These things happen –  sometimes it takes a breach to highlight system vulnerabilities –  but the refusal to take any responsibility, and then to resort to smearing the person who brought the leak to their attention, showed something of the character of the Governor, his Deputy, and the Board members who –  passively or (in the case of the chair) actively – backed his approach.  In a post last month, I suggested what a good Board Annual Report might actually look like –  one that took seriously the problems, as well as seeking to build on the strengths of the institution.  We’ll see when the report is finally published, but I’m not optimistic that there will be any evidence of serious scrutiny or accountability.

The Minister’s approach to all this was nicely reflected in another useful Bernard Hickey story

English was asked if the Governor had failed to meet his PTA target with English.

“I think that’s an unfair assessment in the circumstances,” English told reporters in Parliament.

So inflation, on the Bank’s own forecasts, will be away from target for seven years and that’s okay according to the Minister of Finance.  Of course, the first year or two of that wasn’t the current Governor’s responsibility, but it seems unlikely that in the five years of inflation outcomes he is responsible for, inflation will get to 2 per cent at all.   And yet Mr English and Mr Wheeler explicitly inserted that 2 per cent focal point into the PTA.

I’m not sure that “failed” is open to an easy yes or no answer.  But it wouldn’t have been hard for the Minister to have noted that “look. pretty obviously there have been some mistakes and misjudgments, at least with the benefit of hindsight, and that’s unfortunate.  But humans make mistakes –  even politicians do –  and, as I think the Governor has pointed out, often private economists had even higher inflation forecasts than the Bank did”.

But, no.  Instead, the Governor is absolved of all blame/responsibility.

“If world inflation was 2-3% and we were wandering along at 1% and had high unemployment then I think you could say that,” he said.

As the Treasury has pointed out –  to him and to us –  the unemployment rate is still well above the NAIRU, and has been for the whole of the Governor’s term (in fact, almost the whole of the government’s term).  Oh, and there is that pesky new under-utilisation series as well –  almost 13 per cent.

And then there was the first half of that sentence.  It sounded a lot like the sort of nonsense criticism we used to get back in the late 1980s when the price stability target was being set: Winston Peters, for example, used to argue that we couldn’t possibly get inflation lower than that of our trading partners.  Perhaps it was true in the days of fixed exchange rates, but securing that monetary independence was one of the reasons the exchange rate was floated 30 years ago.  If your target inflation rate is lower than that of your trading partners, you should expect to see the exchange rate appreciate over time, and if your target inflation rate is higher, than the exchange rate should depreciate over time.

And as it happens, when I checked the IMF database, world inflation last year was 2.8 per cent last year, a little lower than the 3.2 per cent the year before.  I suppose the Minister had in mind other advanced economies or the G7 –  they each had an inflation rate last year of around 0.3 per cent.

The Minister goes on

“But the fact is we’re dealing with the threat of deflation around the world.”

Well yes.  Many countries have exhausted their conventional monetary policy capacity, and are stuck.  We aren’t, and there is simply no reason why a country with policy interest rates well clear of the effective floor can’t keep core inflation relatively near target.  As Norway has done, for example.

I suspect the Minister knows all this very well, but it is easier and less politically risky to blame deep foreign trends outside our control, than to cast any doubt on the performance of the Governor for whom he is responsible, and risk reflecting adversely on his own government’s economic performance.  He did fire the odd shot across the bows of the Governor last year –  which never came to much, even in his annual letter of expectation –  but perhaps the government itself was under less pressure then?

The Minister continues with his defence, falling back on the “quality problems” approach preferred by his leader.

English said any assessment had to take into account that the economy was growing at faster than 3% with stable interest rates and moderate wage growth.

“These are characteristics of an economy that is actually succeeding, not one that’s failing, and that’s the important context of the discussion you have about the Reserve Bank,” he said.

“Whatever the niceties of Reserve Bank monetary policy, the fact is the economy is producing jobs, it’s lifting incomes and that’s relatively unusual.”

GDP growth has been around 3 per cent in the last year –  but then population growth has been just over 2 per cent.  That’s pretty feeble per capita income growth.  Perhaps GDP growth will strengthen from here –  as the Reserve Bank forecasts –  or perhaps not.

And I’m not sure what to make of the final phrase in that block, the claim that “the economy is producing, jobs, it’s lifting incomes and that’s relatively unusual”.   I’ve been among those making much of the dismal long-term economic performance of the New Zealand economy, but per capita real income growth is the norm not the exception –  and typically at a faster rate than we’ve had in the last few years.

But perhaps the Minister has in mind international comparisons.  Since 2007 we’ve done a little better than the median advanced country in GDP per capita comparisons.  Good quarterly estimates are harder to come by, but I did find some on the OECD website.  Of the 28 member countries for which they have data, the median increase in real capita GDP in the most recent year (typically year to March 2016, as for NZ) is 0.9 per cent.  In other words, per capita growth in the typical advanced country is running about as fast (or slow) as that in New Zealand.  Few people anywhere in the advanced world think that is a mark of success.

Pushed further, the Minister reverts to his “it is all too hard” defence of the Bank (and, by implication, himself):

“But any reasonable person would think that it’s quite difficult when you’ve got a deflationary effect around the world, where deflation has become the big threat, rather than inflation. Our Reserve Bank is trying to achieve the target in a global context where inflation is zero and interest rates are negative in some places,” English said, adding it was challenging for the Reserve Bank to hit its target.”

Many “reasonable people” might think that –  it might sound initially plausible when the Minister of Finance says it –  but they would be wrong.  Many other countries have largely run out of policy capacity.  We haven’t, but we –  or rather the Governor –  have simply chosen not to use it.  Perhaps few people would want to hold against the Bank the initial failure to recognize what was going in the wake of the 2008/09 recession, but it is seven years later now.  We spend a lot of money employing capable people in the Reserve Bank to recognize trends promptly and respond sufficiently firmly to keep inflation near target.  Perhaps one day we’ll also have exhausted conventional monetary policy capacity –  sadly, more probable than it needs to be because the Minister and Governor have done no planning to remove the roadblocks that create effective lower bounds –  but we are nowhere near that situation now.

As I noted the other day, all the Governor has needed to do over his entire first four years in office was…..nothing.  If he’d just left the OCR at 2.5 per cent then, whatever, the global pressures, inflation (and inflation expectations) would be nearer the 2 per cent target today.  I’m sure the Minister knows that.  He probably knows that the 2014 tightening cycle was completely unnecessary, and that subsequent reversal was –  and remains –  grudging at best.  But the Minister won’t say any of that, even in more muted and diplomatic terms.

And I can sort of understand why not.  After all, the economy isn’t in fact doing that well.  Unemployment remains disconcertingly high, the government’s export target is totally off track, per capita income growth is subdued, and there is no sign of governments fixing the disaster they’ve made of the housing market.  But if the Minister is critical of the Governor’s performance –  even though that is the model the Act envisages –  it will probably blowback on the Minister himself.   The Governor isn’t up for election, but the Minister and his colleagues are.

And that was my starting point: the sort of ex post accountability the current legislative framework is built around is simply unrealistic in all but the most egregious (almost inconceivable) circumstances.  And that makes it all the more important to the get the right people for the job in the first place, including not putting so much power in the hands of single unelected person who most probably won’t effectively be held to account if that person does make mistakes or prove not well-suited to the job.  The current Governor only has a year to go on his term.  It is tempting to suggest, quoting Cromwell to the Rump Parliament or (more recently) Leo Amery to Neville Chamberlain

You have sat too long here for any good you have been doing. Depart, I say, and let us have done with you. In the name of God, go!

In fact, we’ll just have to wait out the end of the Governor’s term, and the Minister –  despite his defence –  may be as pleased as anyone to see that term end.  There is a real challenge in finding the right replacement –  there is no obvious Churchill figure (nor, fo course, a crisis of that magnitude)  –  but the focus should really be on reforming the institutional arrangements so that no one person carries that much power without effective responsibility.  Other countries don’t do it.  And we don’t do it in other areas of government.  It is time for a change.

(And it is also time for a break. I’ve been slowly recovering from surgery last week. I have a reasonable amount of energy for the basics, but none to spare, and next week I have some other stuff I just have to do. If there are any posts next week, they will be few in number.)

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