What should be done about the Reserve Bank?

October 19, 2023November 27, 2023 Michael Reddell Adrian Orr, MPC, Reserve Bank Act reforms, Reserve Bank Board

Monday’s post was on the important place effective accountability must have when government agencies are given great discretionary power which – as is in the nature of any human institutions – they will at times exercise poorly. My particular focus is on the Reserve Bank, both because it is what I know best, because it exercises a great deal of discretionary power affecting us all, and because in recent times it has done very poorly in multiple dimensions (be it bloated staffing, demonstrated loss of focus, massive financial losses, barefaced lies, or – most obvious to the public – core inflation persistently well above target).

What has happened under the current (outgoing) government is now an unfortunate series of bygones. What has happened, happened, and some combination of Orr, Robertson, Quigley (and lesser lights including MPC members and the Secretary to the Treasury) bear responsibility. Not one of them emerges with any credit as regards their Reserve Bank roles and responsibilities.

But in a couple of weeks we will have a new government, and almost certainly Nicola Willis will be Minister of Finance. The focus of this post is on what I think she and the new government should do, if they are at all serious about a much better, and better governed and run, institution in future. It builds on a post I wrote in mid 2022 after someone had sought some advice on a couple of specific points.

Thus far, we have heard very little from National on what plans they might have for the Reserve Bank. When they were consulted, as the law now requires, they opposed Orr’s reappointment (although on process grounds – wanting to make a permanent appointment after the election, something the legislation precluded – rather than explicitly substantive ones). And anyone who has watched FEC hearings over the past 18 months will have seen the somewhat testy relationship between Orr and Willis (responsibility for which clearly rests with Orr, the public servant, who in addition to his tone – dismissive and clearly uninterested in scrutiny – has at least once just lied or actively and deliberately misled in answer to one of Willis’s perfectly reasonable questions). In the Stuff finance debate last week I noticed that when invited to do so Willis avoided stating that she had confidence in Orr, but she has on a couple of occasions said that she will not seek to sack him, stating that she and he are both “professionals” (a description that, given Orr’s record, seems generous to say the least).

Even if she had wanted to, it would not be easy to sack Orr.

From last year’s post, these are the statutory grounds for removal

Note too that his current term in office started only in March this year, and the more egregious policy failures occurred in the previous term (and thus probably not grounds for removal now). I have my own list of clear failures even since March – no serious speeches, no serious scrutiny, no serious research, actively misleading Parliament, and so on – such that it would be much better if Orr were gone but seeking to remove him using these provisions would not be seriously viable, including because any attempt to remove him could result in judicial review proceedings, leaving huge market uncertainty for weeks or months.

Were the Governor an honourable figure he would now give six months notice, recognising that the incoming parties do not have confidence in him and that – whatever his own view of his own merits – it actually matters that the head of an agency wielding so much discretionary power should have cross-party confidence and respect (which does NOT mean agreeing with absolutely everything someone does in office).

Historically (and even when I wrote that post 18 months ago) I would have defended fairly staunchly the idea that incoming governments should not simply be able to replace the central bank Governor. The basic idea behind long terms for central bank Governors was so that governments couldn’t put their hand on the scales and influence monetary policy by threat of dismissal. But many of those conceptions date from the days before the modern conception of the government itself setting an inflation target and the central bank being primarily an agency implementing policy in pursuit of that objective. Even when the Reserve Bank of New Zealand legislation was first overhauled in 1989 the conception was that Policy Targets Agreements should be set and unchanged for five year terms, beyond any single electoral term. That (legislated) conception never survived the first election after the Act was passed, but these days the legislation is quite clear that the Minister of Finance can reset the inflation target any time s/he chooses (there are some consultation requirements). If the government can reset the target any time they choose, then it isn’t obvious that they shouldn’t be able to replace the key decision-makers easily (when the key decisionmakers – specifically the Governor – have influence, for good and ill, much more broadly than just around pursuit of the inflation target).

(There is a parallel issue around the question of whether we should move to the Australian system where heads of government departments can be replaced more easily, but here I’m focused only on the Reserve Bank, which exercises a great deal of discretionary policy power, and isn’t just an advice or implementation entity.)

By law they can’t make such changes at present. They could, of course, amend the law, but to do so in a way narrowly focused on Orr (ie an amendment deeming the appointment of the current Governor as at the passage of this amendment to be terminated with effect six months from the date of the Royal Assent) would smack rather of a bill of attainder. Governors have been ousted this way in other countries, but I don’t think it is a path we should go down.

Some will also argue that Orr should simply be bought out. If the government was seriously willing to do that – and pay the headline price of having written a multi-million-dollar cheque to (as it would be put) “reward failure” – I wouldn’t object, but it isn’t an option I’d champion either. (Apart from anything else, a stubborn incumbent could always refuse an offer, and once this option was opened up there really is no going back.)

So the starting point – which Willis has probably recognised – is that unless Orr offers to go they are stuck with him for the time being.

The same probably goes for the MPC members and the members of the Bank’s Board. The incoming Minister of Finance could, however, remove the chair of the Board from his chairmanship (this is not subject to a “just cause” test). The current chair’s Board term expires on 30 June next year, and it might not be thought worth doing anything about him now, except that he is on record as having actively misled Treasury (and through them the public) about the Board’s previous ban on experts being appointed to the MPC, and he has been responsible for (not) holding the Governor to account for the Bank’s failures in recent years. Removing Quigley would be one possible mark of seriousness by a new government, and a clear signal to management and Board that a new government wanted things to be different in future.

The current Reserve Bank Board was appointed entirely by Grant Robertson when the new legislation came into effect last year. It was clearly appointed more with diversity considerations in mind than with a focus on central banking excellence, and several members were caught up in conflict of interest issues. The appointments were for staggered terms but – Quigley aside – the first set of vacancies don’t arise until mid 2025. It would seem not unreasonable for a new Minister to invite at least some of the hacks and token appointees to resign.

There are three external appointees to the Monetary Policy Committee. None has covered themselves in any glory or represented an adornment to the Committee or monetary policymaking in New Zealand. All three have (final) terms that expire in the next 18 months, two (Harris and Saunders) in the first half of next year. This is perhaps the easiest opportunity open to a new Minister to begin to reshape the institution, at least on the monetary policy side, because appointments simply have to be made in the next few months. As I noted in a post a couple of weeks ago, OIAed documents show that the current Board’s process for recommending replacements is already largely completed, with the intention that once a new government is sworn in they will wheel up a list of recommendations. If the new government is at all serious about change, this should be treated as unacceptable, and the new Minister should tell the Board to rip up the work done so far and start from scratch, having outlined her priorities for the sort of people she would want on the MPC (eg expert, open, willing and able to challenge Orr etc). It would also be an opportunity for her to revisit the MPC charter, ideally to make it clear that individual MPC members are expected to be accountable for, and to explain, their individual views and analysis. Were she interested in change, it is likely that the pool of potentially suitable applicants might be rather different than those who might have applied – perhaps to be rejected as uncomfortable for Orr at the pre-screening – under the previous regime.

The Reserve Bank operates under a (flawed) statutory model where a Funding Agreement with the Minister governs their spending for, in principle, five years at a time. The current Agreement – recently amended (generously) with no serious scrutiny, including none at all by Parliament – runs to June 2025. The incoming government parties have been strong on the need to cut public spending by public agencies on things that do not face the public. They need to be signalling to the Reserve Bank that they are not exempt from that approach, and if the current Funding Agreement cannot be changed it should be made clear to the Board and management that there will be much lower levels of funding from July 2025. Indulging the Governor’s personal ideological whims or inclinations to corporate bloat are not legitimate uses of public money.

If she is serious about change, the incoming Minister also shouldn’t lose the opportunity to deploy weaker but symbolic tools at her disposal. Letters of expectation to the Governor/MPC and the Board can make clear the direction a new government is looking for, as can the Minister’s comments on the Bank’s proposed Statement of Intent. Treasury now has a more-formal role in monitoring the Bank’s performance, and the Minister should make clear to Treasury that she expects serious, vigorous and rigorous, review.

All this assumes the incoming Minister is serious about a leaner, better, more-excellent and focused Reserve Bank. If she is, and is willing to use the tools and appointments at her disposal, she can put a lot of pressure on Orr. If that were to lead to him concluding that it wasn’t really worth sticking around for another 4.5 years that would be a good outcome. But at worst, he would be somewhat more tightly constrained.

I haven’t so far touched on the two specific promises National have made. The first is to revise the legislation (and Remit) to revert to a single statutory focus for monetary policy on price stability. I don’t really support this change – the reason we have discretionary monetary policy is for macro stabilisation subject to keeping inflation in check – but I’m not going to strongly oppose it either. The 2019 change made no material difference to policy – mistakes were ones of forecasting (and perhaps limited interest and inattention thrown in) – and neither would reversing it. Both are matters of product differentiation in the political market rather than a point of policy substance. The proposed change back risks being a substitute for focusing on the things that might make for an excellent central bank – as it was with Robertson. I hope not.

The other specific promise has been of an independent expert review of the Bank’s Covid-era policymaking. It isn’t that I’m opposed to it – and there is no doubt the Bank’s own self-review last year was pretty once-over-lightly and self-exonerating – but I’m also not quite sure what the point is, other than being seen to have done it. Action, and a reorientation of the institution and people, needs to start now, not months down the track when some independent reviewer might have reported (and everyone recognises that who is chosen to do the review will largely pre-determine the thrust of the resulting report). It isn’t impossible that some useful suggestions might come out of such a report, but it doesn’t seem as though it should be a top priority, unless appearance of action/interest is more important than actual change. I hope that isn’t so either.

What of the longer term, including things that might require more-complex legislative change?

I think there are number worth considering, including:

how the MPC itself is configured. I strongly favour a model – as in the UK, the US, and Sweden – in which all MPC members are expected to be individually accountable for their views, and should be expected routinely to record votes (and from time to time make speeches, give interviews, appear before FEC). I’m less convinced now than I once was that the part-time externals model can work excellently in the long haul, even with a different – much more open, much more analytically-leading – Governor. One problem is the time commitment, which falls betwixt and between. External MPC members have been being paid for about 50 days a year, which works just fine for people who are retired or semi-retired, but doesn’t really encourage excellent people in the prime of life to put themselves forward (I’m not sure how even university academics – with a fulltime job – can devote 50 days to the role). In the US and Sweden all MPC members are fulltime appointments, and in the UK while the appointments are half-time they seem to be paid at a rate that would enable, say, an academic to live on the appointment, perhaps supplemented with some other part-time (non-conflicted roles). I also used to put more weight on the idea of a majority of externals, which I now think is a less tenable option than I once did. External members can and should act as something of a check on and challenge to management, but it will always be even more important to have the core institution functioning excellently (at senior and junior levels). We should not have a central bank deputy chief executive responsible for matters macroeconomic who simply has no expertise and experience, and is unsuited to be on any professional MPC.
I would also favour (and long have favoured) moving away from the current model in which the Board controls which names go to the Minister of Finance for MPC and Governor appointments. It is a fundamentally anti-democratic system (in a way with no redeeming merits), and out of step with the way things are done in most countries. We don’t want partisan hacks appointed to these roles, but the Board – itself appointed by (past) ministers – is little or no protection, and Board members in our system have mostly had little or no relevant expertise. Appointments should be made by the Minister – in the case of the Governor, perhaps with Opposition consultation – and public/political scrutiny should be the protection we look to. I would also favour all appointees to key central bank roles have FEC scrutiny – NOT confirmation- hearings before taking up their roles (as is done in the UK).
I would also favour (as I argued here a few years ago [UPDATE eg in this post]) looking again at splitting the Reserve Bank, along Australian lines, such that we would have a central bank with responsibility for monetary policy and macro matters and a prudential regulatory agency responsible for the (now extensive) supervisory functions. They are two very different roles, requiring different sets of skills from key senior managers and governance and decision-making bodies. Accountability would also be a little clearer if each institution was responsible for exercising discretion in a narrower range of area. Quite obviously, the two institutions would need to work closely together in some (limited) areas, but that is no different than (say) the expectation that the Reserve Bank and Treasury work effectively together in some areas. (Reform in this area might also have the incidental advantage of disestabishing the current Governor’s job). Reform along these lines would leave two institutions with two boards each responsible for policymaking (and everything else) the institutions had statutory responsibility for. The current vogue globally has been for something like having a Board and an MPC in a single institution, the former monitoring the latter. But the New Zealand experience in recent years is illustrative of just how flawed such a model is in practice: not only is the Board still within the same institution (thus all the incentives are against tough challenge and scrutiny) but typically Reserve Bank Board members have no relevant expertise to evaluate macro policy performance or key appointments in that area). Monitoring and review matter but if they are to be done well they will rarely be done within the same institution with (as here) the chair of the MPC (Orr) sitting on the monitoring board. The new Board’s first Annual Report last week illustrates just how lacking the current system is in practice, and although a new minister might appoint better people, we should be looking to a more resilient structure.

As I said at the start of this post we – public, voters, RB watchers – really don’t have much sense of what National or Willis might be thinking as regards the Reserve Bank. I tend to be a bit sceptical that they care much, but would really like to be proved wrong. There are significant opportunities for change, which could give us a leaner, better, much more respected, central bank. It is unfortunate that these matters need to be revisited so soon after the legislative reforms put in place by the previous government, but they do – we need better people soon, but also need some further legislative change.

UPDATE: A conversation this afternoon reminded me of the other possible option for getting Orr out of the Reserve Bank role: finding him another job. There might not be many suitable jobs the new government would want someone like Orr in, but I have previously suggested that something like High Commissioner to the Cook Islands might be one (having regard to his part Cooks ancestry, and apparent active involvement in some Pacific causes). More creative people than me may have other (practical) suggestions.

Accountability

October 16, 2023October 16, 2023 Michael Reddell LSAP, Monetary policy, MPC, Reserve Bank Board

On Saturday dozens of candidates for the governing Labour Party stood for election to Parliament. The aim was to form (at least a big part of) the next government. They didn’t succeed. People will debate for decades precisely what motivated the public as a whole to vote as we did, but having governed for the last three years, they (Labour) lost. It is perhaps the key feature of our democratic system, perhaps especially in New Zealand with so few other checks and balances. You (and your party) wield great power, and if we the public aren’t satisfied – think you’ve done poorly, think another lot might be better, or simply wake up grumpy on election day – you are out. It is your (and your party’s) job to convince us to give you another go. If you don’t convince us you are out (and typically when a party loses power a satisfying number of individuals – even if rarely Cabinet ministers – actually lose their job (as MP) altogether). And if you are a disappointed Labour voter this morning, the beauty of the system is that no doubt your turn will come again. It is accountability – sometimes crude, rough and ready, perhaps even (by some standards) unfair or wrong – but the threat and risk is real, and the job holders keep it constantly in mind.

Many other people in the public employ also wield considerable amounts of power. In some cases, that power is quite tightly constrained and often (for example) there are appeal authorities. If a benefit clerk denies you a benefit you are clearly legally entitled to you will probably end up getting it, and if the clerk’s mistake is severe or repeated often enough they might lose their job. Less so at more exalted levels. When, for example, the wrong person is put in prison for decades typically no one responsible pays a price. When the Public Service Commissioner engages in repeated blatant attempts to mislead to protect one of his own, it seems that no pays a price.

And then there are central banks.

Every few months I do a book review for the house journal of central bankers, Central Banking magazine. They are often fairly obscure books that I otherwise wouldn’t come across or wouldn’t spend my own money on (at academic publishing prices). A few months back I reviewed Inflation Targeting and Central Banks: Institutional Set-ups and Monetary Policy Effectiveness (hardback yours from Amazon at a mere US$170 – yes, there is a cheaper paperback if anyone is really interested), by a mid-career economist at the Polish central bank, in turn based on her fairly recent PhD thesis. The focus isn’t on the question of what difference inflation targeting makes but on what institutional details, which differ across inflation-targeting central banks, seem to make a difference. Sadly for the author – these things happen – her thesis was finished before the outbreak of inflation in much of the advanced world in the last 2-3 years.

At the core of the book is a set of painstakingly-compiled indexes on various aspects of inflation-targeting central banks which might be thought to be relevant to how those central banks might perform in managing inflation. There are ones for independence, ones for transparency, and so on, but the one that stuck with me months on was the one for accountability. Accountability used to be thought of as an absolutely critical element – the quid pro quo – for the operational independence that so many countries have given to central banks in the last few decades. With great power goes great responsibility, and ideas like that. The Reserve Bank itself was very fond on that sort of rhetoric. In fact, there used to be a substantive article on that topic by me on their website, in which I waxed eloquent on the topic (after it was toned down when my original version upset the Bank’s then Board by suggesting that for all the importance of accountability it was more difficult in practice than in theory). At a more casual level my favourite example has always been a radio interview then-Governor Don Brash did in 2003, the transcript of which the Bank chose to publish, in which there is a snippet that runs as follows:

Brash: ….we were concerned……we were running risk of inflation coming in above 2 per cent which is the top of our target

Interviewer: And then you’d lose your job?

Brash: Exactly right.

I was working overseas at the time, and can only assume my colleagues gulped when they saw it put so unequivocally. But it wasn’t inconsistent with a meeting the handful of senior monetary policy advisers had with Don in one of his first days in office. He eyed us up – chief economist, deputy chief economist, and manager responsible for monetary policy advice – and said (words to the effect of) “you know we are going to introduce a new law in which if inflation is away from target I can lose my job. Just be sure to realise gentlemen that if I go, you are going too.” Not ever taken – at least by me – as a threat, but as a simple statement of the then-prevalent idea (crucial in the public sector reforms being done at the time) that operational independence and authority went hand in hand with serious personal responsibility and potential personal consequences. It was part of the logic of having a single decision-maker system (an element of the New Zealand system that no one chose to follow and – in one of Labour’s better reforms in recent years – was finally replaced here_.

But that was then.

By contrast, these are the components of the Accountability sub-index in the recent book I mentioned

There is nothing very idiosyncratic about the book or the work in it; indeed, she seeks to be guided by the literature and current conventional understanding. And if you look down that list of items – which is the sort of stuff central bankers often now seem to have in mind when they ever mention “accountability – you’ll quickly realise that there is really a heavy emphasis on transparency (a good thing in itself of course) and almost none of them on any sort of accountability that involves real consequences for individuals, anyone paying any sort of price. The only one of these items that represents anything like that sort of accountability is item 6.7 but even there the provision is about whether Governors/MPC members can be dismissed for neglecting their work (not turning up to meetings etc), not for actual performance in the job.

But if there are no personal consequences for failure and inadequate performance, why would we hand over all this power? I’ve written here before about former Bank of England Deputy Governor Paul Tucker’s book Unelected Power – which ranges much wider than just central banks – where his first criterion for whether a function should be delegated to people voters can’t themselves toss out (eg central bankers) is whether the goal – what is expecting from the delegatees – can be sufficiently specified that we know whether outcomes are in line with what was sought. If there is no such clear advance specification either there will be no effective accountability or such accountability will at best be rather arbitrary.

As it happens, almost no one believes the over-simplified accountability expressed in that 1993 Brash quote above makes sense, even if expressed in core inflation terms (I don’t think most people involved really did even in 1993 – although there was a brief period of hubris where it all seemed surprisingly easy – and certainly as soon as inflation went above the target range in 1995 there was some hasty rearticulation of that sense).

But if we have handed over all this power – and central bank monetary policy decisions, good ones and bad, have huge ramifications for the economy as a whole and for many individuals – we should be able to point to behaviours or outcomes that would result in dismissal, non-reappointment, or other serious sanctions. Or otherwise in practical terms central banker inhabit a gilded sphere of huge power and no effective responsibility at all. And central banks aren’t like a Supreme Court, where we look at judges to be non-corrupt (including conflicts of interest) and able……but the desired products are about process – judging without fear or favour – not about particular outcomes, or decisions in a particular direction. It is right that it should be hard to remove a Supreme Court judge. It is less clear it should be so for central bank Governors, MPC members etc. The jobs are at times difficult to do excellently, but no one is forced to take the job, with its associated pay, power, prestige and post-office opportunities.

The problem – power has been handed over, but with no commensurate real accountability – isn’t just a New Zealand phenomenon, but one evident across the entire advanced world (the ECB at the most extreme, an institution existing by international treaty rather than domestic statute).

When I wrote my review I noted that “it isn’t clear that any central bank policymaker has paid any price at all for the recent stark departures of core inflation from target. It tends not to be that way for corporate CEOs or their senior managers when things go wrong in their bailiwicks.” It is possible there is now one exception to that story – the decision by the Australian government not to reappoint Phil Lowe on the completion of his seven year term – but even there it isn’t clear how much is about specific policy failures and how much about a more general discontents with the organisation and a desire for a modernised etc RBA structure, and the desire for a fresh face atop it. The promotion of a senior insider – not known to have sharply dissented from what policy mistakes there were – is at least a clue.

It increasingly looks to me as though delegation of discretionary monetary policy to central bankers should be rethought. I have long been fairly ambivalent but when the system is faced with its biggest test in decades – in all the years globally of delegating operational independence – central banks fail (the only possible to read recent core inflation outcomes relative to the targets given them) and no one pays a price (with just possibly a solo Australian exception) it begins to look as though we should leave the decisions with those whom we can toss out – Grant Robertson’s fate on Saturday – and keep central banks on as researchers, expert advisers, and as implementation agencies, but not themselves being unaccountable wielders of great powers.

The outgoing New Zealand government has made numerous bad economic choices in the last couple of years. Prominent among them were the decisions to reappoint MPC members, to allow the appointment to the MPC of someone with no relevant professional background or expertise, to reappoint the chair of the RB Board (while surrounding him with a bunch of non-entities, none of whom had any relevant expertise) and (above all on this front) the decision to reappoint the Governor. The latter decision was most especially egregious because it was Robertson himself who had amended the law to require parliamentary parties to be consulted before a Governor was (re)appointed, and when the two main Opposition parties both objected, Robertson went ahead anyway. If the operational independence of a Governor, appointed to a term not aligned with parliamentary terms, means anything, it surely should at least mean that the person appointed commands respect – for their capability, integrity etc – across political party lines. By simply ignoring dissent – that his own reforms formally invited – Robertson made Orr’s reappointment a purely opportunistic partisan call. At the time – 11 months ago – I outlined a list of 22 reasons Orr should not have been reappointed (and at that I wasn’t convinced simply missing the inflation target was one)

I’ll come back – probably tomorrow – to a post on what I think the incoming government and its Minister of Finance (presumably Willis) should do about Orr and the Reserve Bank now.

But this rest of this post is to illustrate that not even the rituals Parliament forces them to go through – in this case the production of an Annual Report – amount to any sort of accountability at all. (One day. perhaps next year now, they will have to front up on it to the new FEC, but sadly select committee scrutiny – committees being seriously under-resourced – is hit and miss at best, the more so in this case if Grant Robertson is the key Opposition figure on the new FEC reviewing the performance of the man he appointed and reappointed.)

It is difficult to know where to start on the Annual Report that was released last week.

It might be quite useful if you care about the Bank’s emissions, as there is several pages of material, but you shouldn’t (since we have an ETS for that). It is almost utterly useless for anything much that the Bank is responsible for. There are administrative things like why the Bank has 22 senior managers earning more than $300000 a year, or why it has 36 people shown in the senior management group (in a total of 510 FTE), or why staff numbers have risen sharply yet again, or why – having signed up to a very generous five year funding agreement in 2020 – they were coming cap in hand for lots more funding (much of which they got) this year. Or why the part-time chair of the Board – who has a fulltime job running a university, and where many of the key powers are statutorily delegated to the MPC – is pulling in $170000 a year; this the same chair who has been shown to have actively misrepresented – and led Treasury to make false statements about – the past ban on expertise on the MPC (issues he has never addressed). Or why the Governor gets away with actively misleading FEC. Or how seriously (or not) conflicts of interest are taken (even how the Board sees itself relative to the recent lofty words in the RB/FMA review of financial institutions’ governance).

But on policy matters it is arguably even worse. In a year when core inflation has – again – been miles away from the Bank’s target, the Board chair’s statement is reduced to 1.5 emollient pages uttering no concerns at all (recall that the Board does not do monetary policy, but it is charged by statute with reviewing monetary policy and the MPC and making recommendations on appointments of MPC members and the Governor). We learn nothing at all from the highly-paid chair as to why he and his Board of unqualified non-entities considered, in the circumstances, that reappointments had been warranted (nothing in Board minutes has provided anything more).

We do however learn of the Board’s effort to indulge the political whims of the Governor and Board members, the Treaty of Waitangi (a) not being mentioned in the acts supposedly governing the Bank, and b) not itself mentioning anything even remotely connected to monetary policy or financial stability.

There is a couple of page section on monetary policy in the body of the report. But in itself this is a reminder that the MPC – which wields the power – publishes no Annual Report, and exposes itself to no serious scrutiny. In this central bank not only does the deputy chief executive responsible for economics and monetary policy never give a serious speech on the subject, she is never seriously exposed to either media or parliamentary scrutiny. External members are so sheltered we have on idea what any of them think, what contribution they make, and so on. They never front FEC or any serious media. Perhaps it isn’t surprising that the total remuneration of these three ornamental figures isn’t much more than what the chair of the Board himself is paid.

But then surely the Board would be doing a rigorous review (it is after all the Board’s job, by law)? That would be difficult when most of the Board has no relevant expertise (the Governor is the main exception, and he chairs the MPC….).

But what we actually get in no sign of any serious thought, challenge or questioning, no attempt to frame the MPC’s achievements and failings. Instead we get this process-heavy but substantively-empty little box

It might be interesting to OIA that “self-review” MPC members are said to have carried out, but you’d just have no idea from any of this that the biggest monetary policy failure in decades had happened on the MPC members’ watch – even as all expiring terms were renewed. It is Potemkin-like “accountability”, with barely even that level of pretence. (Note here that the weak internal review last year wasn’t even an MPC document but rather a management one.)

If that is all rather weak it gets worse when the LSAP comes into view. This, you will recall, was the bondbuying programme in which the MPC’s choices cost taxpayers now just over $12 billion, a simply staggering sum of money, swamping all those “fiscal holes” of the recent election campaign. There are lot of LSAP references – it is the Annual Accounts after all – but none from the Board chair, and here is the one substantive bit.

I’ve highlighted the utterly egregious bit. As they say, IMF staff did put out a little modelling exercise. but it has no credibility whatever, as the scenario described in the exercise bore no relationship to what actually happened in the New Zealand economy in 2020 and 2021. It was a scenario under which, even with the LSAP, the New Zealand economy languished underemployed for three years (but a bit less so because of LSAP) rather than an overheated economy with very high inflation and – in the Governor’s own words – employment running above maximum sustainable employment. I critiqued the piece in a post here, and I know of no economists who read the IMF piece and concluded “ah yes, of course, notwithstanding that the LSAP had a direct loss of $12bn, in fact the taxpayer was really made better off by that intervention after all”. I’m sure no serious economist at the Reserve Bank – there still are some – believes it either. But there seems to be a premium on keeping quiet, and keeping your head down, in the Orr central bank. It was dishonest when the Governor first ran this line in an interview with the Herald but perhaps then he’d seen no critiques (or asked for one); it is materially worse when the Board chair (and the Governor’s 35 senior colleagues) let him get away with it and repeat it, without any scrutiny or further attempt to make a case, in what is supposed to be a powerful public institution’s premier accountability document.

Any serious accountability for the Bank seemed to be dead, at least under the outgoing government. Whether it will be any less bad under the new government it is far too soon to tell. But if it isn’t, serious questions needed to be asked about whether the model is any longer fit for purpose in the sort of democracy New Zealanders typically aspire to have – we’ll delegate power, but if you take up that power and stuff things up then you should personally pay some price. In this document not only in there is serious scrutiny, no personal consequences, but not even a glimpse of contrition from any of them. Never mind the huge losses, never mind the arbitrary deeply disruptive inflation, never mind the lies……after all, the government hasn’t seemed to mind.

Almost any private sector CEO, committee or Board that had stuffed up as badly as the Reserve Bank – with corporate excess and loss of focus thrown in – would have been sent packing some time ago. The stock price would have been falling, investors demanding change, and the business press all over the situation. But not here, not our central bank………

One last pre-election fiscal post

October 13, 2023March 7, 2025 Michael Reddell Fiscal policy

A few weeks ago I wrote a post surveying the range of fiscal indicators (local ones and IMF/OECD metrics) to look at recent New Zealand fiscal policy across time and across countries.

I included in that post this chart, which I had cobbled together using IMF April data for other countries and their estimates for New Zealand reported in the recent Article IV review (it was the indicator they specifically cited in suggesting a need for “frontloaded fiscal consolidation” in New Zealand.

A new IMF Fiscal Monitor has been released in the last few days. We now have consistent cross-country estimates, including numbers for New Zealand which will have taken account of the government’s sudden “get religion” line-on-a-chart cuts of a few weeks ago.

With those updates all round New Zealand is now “only” projected to be third-worst among the advanced economies next year, on current policy (ie assuming the government’s top down cuts are effectively implemented).

And how about over time?

We used to be better than the pack. But now we are a lot worse.

You can see that New Zealand’s primary deficit are barely smaller than those at the height of the Covid spend, a quite different picture than the median country. Out of curiosity I wondered where we ranked.

Most countries have very substantially improved their cyclically-adjusted primary deficits/surpluses. New Zealand, by contrast, is way to the right of the chart.

But what of The Netherlands and Denmark? They seemed a little puzzling. I wasn’t aware they had recent fiscally reckless governments. It turns out that Denmark ran primary surpluses right through the Covid – look at just a fiscal chart and you’d barely know there had been a pandemic – and is now running a roughly zero primary balance (cyclically adjusted). The Netherlands has gone from primary surplus pre-Covid to deficit in Covid and subsequently. But the IMF estimates that next year they will have a cyclically-adjusted primary deficit of 1.8 per cent of GDP. Not great, but nothing like as bad as New Zealand’s projected 3.4 per cent of GDP deficit.

Whichever party leads the next government there is a huge amount of fiscal work to do – including making real the “cuts” already included in the IMF numbers – all thanks to the extravagant fiscal choices of the current government in the last two (post big Covid spend) budgets.

Productivity growth….or lack of it

October 13, 2023October 13, 2023 Michael Reddell New Zealand economic performance, Productivity

Earlier in the week a journalist asked me for some thoughts on which political party in government had managed the economy better – in overall macroeconomic terms – over the years since we moved to MMP.

My initial response was that the answer would be pretty dull. Pressed to write something anyway, I outlined briefly why really there was not a great deal between them, at least without a great deal more in-depth study. And that shouldn’t be very surprising. After all, external shocks happen (overseas, or physical/climatic ones here), and cyclical macroeconomic management has been outsourced to the Reserve Bank over all that period, with very similar targets set by successive governments. Crude partisans might point out that (core) inflation went outside the target zone at the end – or so it appears likely – of both Labour governments over that period, but those failures are first and foremost on the Reserve Bank. Other crude partisans might point out that unemployment has been at its lowest right towards the end of both Labour governments, but……since that is basically the same phenomenon as the overheated economies that gave rise to the inflation problem, you are back with it being the Reserve Bank’s mistake again. One can argue, say, that the current government should have done more to sort out, punish, or even support (via fiscal policy) the Reserve Bank, but…..it is a sample of one event.

When I wrote something a bit fuller on this topic a few years ago, I noted that fiscal policy had also largely been a bipartisan success story. We might not have had a very successful economy, but when deficits have emerged governments of both parties have restated their commitment to surpluses, and had delivered. You could argue that National deserves a better rating there, having inherited large deficits in 2008 (as I’ve argued here before Labour had been badly advised by Treasury and did not think it would be leaving deficits) and returned to surplus. But actually if you look back at the 2009 and 2010 Budgets, contemporary Treasury estimates were that – starting from a deficit – they were expansionary. I’ve been quite critical of this government’s fiscal stewardship over the last couple of years, but…..nothing much in the campaign suggests any more urgency for or conviction about a return to surpluses from the other side.

But the backdrop to it all was that while, until quite recently, New Zealand – under governments led by either party – had done reasonably well on the stabilisation side of things (monetary and fiscal, and even with structural policies that kept the non-inflationary rate of unemployment fairly low), productivity (or the lack of it) was the elephant in the room. It has been for a long time, and still is (or should be).

We don’t have an official quarterly labour productivity series, but it is easy enough to construct one’s own. In this chart, I’m showing the average of production and expenditure GDP measures, divided by hours worked from the HLFS, all normalised and expressed in log terms. Expressing things in logs means that a slowdown in the growth rate is mirrored in a flattening of the curve. We don’t have long runs of official historical data in New Zealand, but this goes back to 1987Q2.

If you can easily see any great difference from governments of one party to governments of the other you are more eagle-eyed (or perhaps “motivated”) than I am.

But I did check anyway. One could go from the last quarter of the previous government to the last quarter of the next one, but….there is clearly noise and measurement error in the data, and nothing is that precise, so although I checked both, this little table uses annual data (eg average change from 1990 (last year of that Labour government) to 1999 (last year of that National government) and so on. Now, no one really believes that changes of government make a difference immediately, so this is illustrative more than anything.

Average annual growth in real GDP per hour worked (%)
1990-1999 National 1.1
1999-2008 Labour 1.4
2008-2017 National 0.9
2017-2023 Labour 0.7

Much the biggest story isn’t the difference between the parties, but the difference over time. Productivity growth in the last decade or more – under both governments – has been materially lower than it was earlier in the period – under governments of both parties. This is consistent with the factoid I’ve thrown around a few times in recent weeks: in OECD league tables for labour productivity we dropped six places – in a club of only 37 – in the last decade.

Here is the deterioriation illustrated graphically. Eyeballing the data it looked to me as though there was a break around mid 2010. So what I’ve shown is (a) the actual data per the previous chart, and (b) an extrapolation to now of the trend in the data from 1987 to 2010.

Roughly speaking the gap between the two lines as of now is equivalent to a 10 per cent loss of productivity (growth we would have seen if the previous trend had continued).

Note that all of this is simply New Zealand data. I have repeated often charts showing our deterioriation – or at best lack of catch-up – relative to other advanced countries. But this is us. And remember that we are so far behind the productive frontier economies – it would take perhaps a 60 per cent increase to catch them – that even to the extent world productivity growth slowed down (and it did, in the US from about 2005) there is no necessary reason why New Zealand productivity growth needed to slow. Our slowing was about New Zealand policy choices, passive or active.

It is depressing how little serious attention has been paid to these failures – and challenges – in the election campaign, and since politicians mostly display little interest our bureaucratic institutions don’t bother doing or supplying the hard analysis. Some are simply emasculated to that end – one could think most notably of what the current government has done at the Productivity Commission. Productivity really matters for our future material living standards, and even for the shiny baubles both main parties try to woo us with.

I’m not an ACT supporter – on quite different grounds – but here I would give that party some credit. Their policy document on productivity evinces a degree of seriousness about the issues that nothing from any of the other parliamentary parties has even hinted at. I don’t agree with all the specifics, and would probably disagree substantially on some, but….they write as though it matters. And that isn’t nothing (even if it can’t overcome my scruples about the party leaders’ values etc). In fact, a week or two back a reader not otherwise known to me got in touch and asked who I thought they should vote for if it was housing affordability and productivity that mattered most to them. Making clear that I was definitely not an ACT supporter myself, I nonetheless gave them an analyst’s answer: probably ACT, on both counts.

GDP and GDP pc: where does NZ rank in the IMF numbers?

October 12, 2023October 12, 2023 Michael Reddell New Zealand economic performance

It was one too many mentions of Equatorial Guinea that prompted me to pull together this very quick follow-up to my post yesterday showing some snippets from the newly-released IMF WEO.

For my tastes, these comparisons of forecast growth in real GDP per capita for New Zealand and the group of advanced countries are most useful and enlightening

But it was easy enough to download the data for both GDP and GDP per capita (both in constant price – “real” – terms) for all the countries and territories in the Fund’s database (roughly 190 of them, depending on the precise variable and year). I did it for both variables and for the three years, 2022, 2023, and 2024. The forecasts are annual not quarterly, so (for example) the growth rate for 2023 is GDP generated in the whole of this year relative to that in the whole of last year.

Take real GDP growth first:

In 2022, New Zealand is shown as having 2.2 per cent growth. That put us 130th of 192 countries (in case you are wondering, and to no one’s surprise surely, Ukraine did worst).

In 2023, the Fund expects real GDP growth here of 1.1 per cent. That would put us 152nd of 190 countries (Sudan doing worst).

In 2024 – and for these forecasts the Fund basically assumes constant policy – the Fund forecasts that New Zealand’s real GDP growth will be 1.0 per cent, 180th of 190 countries (and here Equatorial Guinea really is last).

As context, here are the five countries either side of New Zealand for 2024

But headline GDP isn’t even close to a measure of economic wellbeing. Some countries have rising populations and some falling populations. New Zealand’s population has tended to rise faster than most advanced countries, particularly so right now. Real GDP per capita data/forecasts are typically more useful, as being a bit closer to the average experience of an individual in a country.

How does the IMF see New Zealand doing on that count?

In 2022 the IMF shows us as having had growth in real per capita GDP of 2.2 per cent, 98th of 192 countries/territories (Macao did worst)

In 2023 the IMF expects that New Zealand will have had real per capita GDP growth of -0.1 per cent, ranking us 156th of 190 countries (Timor-Leste did worst).

And in 2024 the IMF forecasts that New Zealand will have real per capita GDP growth of 0.0 per cent, ranking us 177th of 190 countries (and there Equatorial Guinea is projected to be worst).

Here are the five countries/territories either side of us this year (an eclectic mix it would be fair to say)

and here is the same snippet for the 2024 forecasts

To repeat, macroeconomic forecasters aren’t very good, and the IMF is no better than most of the others. But these are consistently compiled numbers, and for 2022 the numbers are reasonably firm and for 2023 almost three-quarters of the year had gone when the numbers were finalised.

A few snippets from the IMF WEO

October 11, 2023October 11, 2023 Michael Reddell Fiscal policy, New Zealand economic performance

The IMF released its latest World Economic Outlook and associated forecast tables overnight. There is no reason to think the IMF is any better as a forecaster than anyone else (ie not very good at all) but they do look at a bunch of advanced countries all at the same time, against a common global backdrop, so it is still worth looking at how they see things here relative to those other advanced countries. A few charts follow.

(Here, as in various recent posts, I remove from the IMF advanced countries Andorra and San Marino (as too small to matter) and Hong Kong, Macao, and Puerto Rico (as not countries at all), and add in Poland and Hungary, both of which are OECD member countries and performing similarly economically to various central and eastern European countries the IMF includes in their advanced country grouping. That leaves a group of 38 countries, including New Zealand.)

First, we look at the Fund’s forecasts for real per capita GDP growth.

In calendar 2023

and calendar 2024 (I can’t highlight New Zealand – zero growth – but we are fifth from the right)

What about fiscal policy? The IMF has actuals and forecasts for the general government structural balance. We used to be better than most advanced countries. But that was then.

For calendar 2024 alone (for 2023 we are a couple of places less bad). These numbers seem very consistent with the IMF cyclically-adjusted primary deficit estimates in their recent Article IV review of New Zealand.

What of net general government debt?

We do still have government debt as a share of GDP less than the median advanced country, but that gap is closing fast. You’ve heard a lot in this election campaign about the pandemic: other countries had one too.

And what of the current account deficit? There is no right or wrong number for a current account deficit. Huge surpluses or huge deficits can both be symptoms of things going right or wrong. Context matters. In a country with rapid productivity growth and lots of business investment, catching up with the rest of world, really large deficits make sense. That was Singapore and South Korea in their earlier development phases, or 19th century New Zealand.

In 2023, New Zealand doesn’t have the largest deficit as a share of GDP, but it is close. (We had the third largest deficit last year and are still forecast to be second largest next year.)

All in all, it didn’t really make encouraging reading.

One final post on PSC/MPP

October 10, 2023October 10, 2023 Michael Reddell PSC

The topic may not be of much interest to core or regular readers of this blog, but this is about seeing an issue through to the end.

My post on Saturday highlighted how the Public Service Commission seems to keep just making stuff up in defence of (a) themselves, and (b) the Commissioner’s protege, Mr Leauanae formerly of the Ministry for Pacific Peoples and now CE of the Ministry for Culture and Heritage. They tell it the way it isn’t or wasn’t, but perhaps the way they would prefer it to have been. It is simply dishonest, and discredits the institution (and the government that is responsible for the Commission). Leauanae did not pay back money for months after he had inappropriately received benefits, and never took any pro-active steps, and PSC’s report did not criticise Leauanae for having recused himself from involvement in planning for his farewell, let alone call it out “clearly and strongly, and [..] on the public record”.

But yesterday I had another OIA response from PSC. I’d asked about all and any contact (written or otherwise) with ministers or their offices about the MPP/Leauanae affair. And it prompted me to stand back a little.

First, in case you were wondering about advice to ministers, this is the full response on that point.

In other words, over the eight months from start to finish of this investigation and review, into what was revealed to be grossly inappropriate spending in a public service department, including considerable personal benefit for a senior public servant, PSC never once provided anything in writing to the Minister for the Public Service (when the process started that was still Hipkins), or to any of the portfolio ministers of the departments Leauanae had been (MPP) or was (MCH) chief executive of. Had some journalists asked the Minister for the Public Service in, say, early January about this issue/investigation, we are to suppose he would not even have been aware of the matter. Doesn’t seem very much in line with “no surprises”.

There was also the question of when PSC was first aware. I’ve already noted how odd it was – or would be if PSC had been doing its job, and some culture of excess and entitlement had not apparently taken hold in parts of the public service – that PSC itself seemed not to know about any of this until (mid December) two months after the events and spending in question (last October). According to the PSC report released in August, things got underway this way.

Perhaps. But this latest release contains quite a bit of material from 21 December, starting with an email from a person whose entire email address is blacked out to four people with parliament.govt.nz email addresses (almost certainly people in one or more ministerial office, including that of the Minister for Pacific Peoples), but including Christina Connolly, the private secretary in the office of the Minister for the Public Service. Here is the relevant page from the release (there is a whole other paragraph withheld from that final email). Connolly sends it on to one of the PSC Deputy Commissioners, one responsible for communications and public affairs.

Mr Sio, then Minister for Pacific Peoples, is on record – his ministerial diary – as having attended and spoken at this lavish farewell, but it is apparently only two months later, confronted with the actual numbers (of the expenditure), that his staff appear to think there might perhaps be a bit of an issue. And there is no sign at this point that the PSC secondee in the Minister for the Public Service’s office is even aware there is an issue. It wasn’t perhaps an ideal day for some of this to come to light, as it was the day PSC had announced the appointment of a new head of MPP.

Anyway, whatever PSC knew by then, they first seemed to think that some public statement might be in order. Because there are several emails about a proposed “Statement from Public Service Commissioner Peter Hughes” in which it was intended to indicate that the spending had come to his attention and “I have decided to look into this matter to understand the extent to which that guidance was adhered to”. This work was to be completed by February 2023 (ie in fairly short order, given that this was being discussed on 21 December). For whatever reason, that statement was never issued and the wider public wasn’t aware there even was an issue until the final report finally came out in August,

The next document is from 7 June: an email from the PSC Deputy Commissioner to the secondee in the Minister’s office, advising that PSC is envisaging releasing their final report the following week (and providing a bullet point summary of what was known to them then).

We don’t know why this investigation took months longer than PSC had initially envisaged. But we’ve known for a while that up to this point (early June) PSC knew nothing at all about the inappropriate spending (by MPP) on Leauanae’s family members’ travel to his welcome ceremony at MCH. Something of that must have come to light in the days after 7 June, and the enquiry is then reopened and is only finally published in August (Leauanae – who simply has to have known all along that this was inappropriate spending for personal benefit – having very belatedly paid that money back by then). There is no way it would not have come to light earlier if either MPP or Leauanae himself had been at all proactive, and inclined to bend over backwards to think about anything that might have been raising questions re these events in October last year.

The final document in the bundle is an email from 4 August, shortly before the report is finally released, to the secondee in the office of the Minister for the Public Service asking her to pass the final material along to the offices of Edmonds (now Minister for Pacific Peoples) and Sepuloni (primarily responsible for MCH). But just as one ministerial services staffer to others. Nothing at all from the Commissioner to these ministers.

No one emerges well from this affair:

Not the Public Service Commission (or Commissioner) as regards the original matter and investigation itself. How did a department they oversee come to exemplify such a culture of excess in the first place? How did the (bloated) Commission have no idea of the lavish farewell and gifts for two months after the event, apparently reliant entirely on a member of the public’s OIA which – after it had gone out – finally ended up on their desks. Why did the initial inquiry take six months, not the two initially envisaged, and why did they not ask sufficient questions that would have led them to the MCH-welcome travel expenditure until they had almost all wrapped up and were ready to publish. How did the Commissioner in his press release go beyond the facts and actively mislead the public about Mr Leauanae’s part in all this, particularly the speed (or otherwise, more to the point) with which the money was repaid?

Not the Ministry for Pacific Peoples which arranged the lavish event in the first place, in clear breach of public sector standards (the written ones, but who knows if they were the lived ones), and then must have been not overly cooperative and proactive in the PSC inquiry, or otherwise it would not have taken until June before PSC finally became aware of the spending on Leauanae’s family travel. Shouldn’t PSC have asked early on, and MPP proferred it early on even if PSC didn’t ask, about all expenditure on or for Mr Leauanae and/or his family in (say) the preceding six months. You cast the net wide to be sure of capturing everything relevant. Unless you don’t care greatly, want to protect your former boss, and just want to do the bare minimum.

Not the several relevant ministers of the Crown. As noted already, Mr Sio, the Minister for Pacific Peoples, had attended and spoken at the farewell. There is no evidence he raised concerns with either MPP or PSC. What sense of public expenditure restraint and appropriate spending on a public servant changing jobs did he have? Any at all? And there is no sign, at any point early or late, of any serious expressions of concern from Hipkins (then Minister for the Public Service) or Edmonds or Sepuloni, or Andrew Little (currently Minister for the Public Service).

Not Mr Leauanae, whose lists of faults and failings, revealing someone simply unfit to be a government department CEO, is long. In earlier posts, I’d noted that he could and should have ensured reimbursements to MPP within days of the event taking place, and should have immediately recognised how inappropriate his receipt of those benefits was. There is no evidence that he ever had that moment of recognition. A point that hadn’t occurred to me until I wrote my post on Saturday was that a slack but honourable CE (one whose subordinates – appointed by him- had badly stuffed up with this lavish and inappropriate expenditure) would have been on the phone to Peter Hughes the very next day, deeply embarrassed and apologetic, suggesting that an PSC investigation was probably warranted, pledging cooperation, and indicating that he had already taken steps to return the money and benefit he himself had inappropriately received. He did nothing of the sort, and the case against him is only strengthened by his failure even in March, when he returned the gifts and money he’d received at the farewell, to have drawn PSC’s attention to the spending on his family travel, or to have taken immediate steps even then (very belatedly) to have returned that money promptly. That he is still a government CE is a disgraceful reflection on the management of the public sector by Hughes and by the various relevant ministers.

And then finally, not the Public Service Commission (and the Commissioner) who have simply not been straight with the public even when their initial defence of their protege has been revealed to be threadbare. The lack of straightforward integrity is staggering.

PSC not walking the talk

October 7, 2023October 7, 2023 Michael Reddell PSC

A quick Google of “Public Service Commission values” brings up a list that includes this item among the list of things PSC say “are how New Zealand expects public servants to behave”

If walking that sort of talk meant anything you might suppose it would mean that when the Public Service Commissioner himself issued a press release it would be clear and straightforward, free of any intent or effect of misleading the press and public. And that if, perchance, the Commissioner once fell short of the high standard he himself had laid out then contrition and correction – with a dose of humility thrown in -would follow quickly.

Instead, we are dealing with Peter Hughes and the Hughes-led PSC.

Two months ago Peter Hughes released a report into the excessive and inappropriate spending by the Ministry for Pacific Peoples on the farewell to its outgoing chief executive as he moved down the road to head a bigger government department (MCH). The spending was lavish and inappropriate, something the report rightly (if belatedly) called out. But the second element of it all was the lavish taxpayer-funded gifts given to the outgoing CE, Mr Leauanae, and the spending by MPP of taxpayer money on travel for members of his family for his welcome to MCH. With the report there was a covering press release (the report document itself is linked to in the press release). In the press release in particular Hughes went out of his way to play down Leauanae’s culpability, with this culminating line

I thank Mr Leauanae for putting the matter right at the first opportunity

Except that Mr Leauanae did nothing of the sort. There had been no dates at all in the press release and none of the relevant ones were in the 11 page report either. Casual readers might reasonably have supposed it had all been sorted out within days, not months later.

But OIA requests finally got confirmation from PSC (and MPP) that despite this inappropriate spending having occurred in October last year, the money was not returned until March (in respect of the gifts) and July (in respect of the travel). And not from any belated sense of compunction on Mr Leauanae’s part. I wrote about this in a post a few weeks ago.

Which is by way of prelude to Andrea Vance’s article on the issue in The Post this morning. She had drawn on the OIAs and my post and had asked PSC some follow up questions, including asking why the Commissioner had said that the money had been paid back at the first opportunity when the documents – from PSC itself – had clearly shown otherwise. Vance was kind enough to share the statement from PSC with me. These are the relevant paragraphs

There are multiple problems with this.

Any public servant – notably any very senior public servant – would have known immediately that it was not appropriate to receive lavish farewell gifts (no matter what the mix of private and taxpayer funding) and even more so to have received public money from his previous employer to pay for travel for family for his welcome into a new role down the road. (He should also immediately have recognised that the lavish farewell itself was in breach of all public service standards and have immediately alerted Hughes to the mistake by his underlings (on his watch)). On timing from my previous post.

The PSC statements seem to rely entirely on the point that it was not until the day or two before the money was paid back that he knew exactly how much each item had cost. He hadn’t asked, not even once, in all the previous months. It simply wasn’t sorted out “at the first opportunity”

And while Leauanae did eventually put out an apologetic statement, it was only the day after the Commissioner’s statement, when the issue started to get some media coverage. And we know there is no written apology to PSC or MPP because my OIAs covered all communications with Leauanae on these matters, and none of them included either an apology from him (or any reprimand by the senior PSC officials dealing with the matter – and PSC did not say there were any documents they were withholding on the grounds of, say, personal privacy).

But then notice that middle paragraph of the PSC statement, which followed a comment that Leauanae had not been involved in decisions at MPP about the scope, nature and expense of the farewell

The Commissioner found in his review that Mr Leauanae’s decision to recuse himself was an error in judgement. As chief executive at the time he was responsible, overall, for agency expenditure and ultimately for the spending decisions of his organisation. That has been called out clearly and strongly, and is on the public record.

which sounds fair enough I guess. Or would if it were true. When Vance sent me this statement yesterday I went back and checked the report. From Vance’s article

There is simply no statement along those lines in the report or the press release. Did Hughes and his comms guy really suppose no one would check? Or did they just not care?

Not only are the specific words not there, but neither is anything along those lines. Read the documents yourself if you doubt me (I had to twice, because I couldn’t quite believe we were just being lied to). The press release will take you 2 minutes, and the report not that much longer. The report simply notes that even if he formally or informally recused himself, Leauanae was still chief executive and was responsible (which is not in dispute, but is very different from what the PSC statement yesterday said).

There are a lot of other points that could be repeated from my previous post, including about how PSC’s oversight of the public service was so lax that it was months after the event before they knew (or claim to have known) about any of this lavish spending, despite two of their staff being there, another CE being a speaker, and the relevant government minister also having been a speaker. But you can read the previous post for that.

I’m just going to end where this post started. Hughes and the PSC proclaim the importance of the value of trustworthiness, integrity etc. Little or nothing of that has been on display around the public side of this investigation into serious misjudgements (and, it appears, weak management and/or a sense of entitlement) by someone (Leauanae) who appears to be a Hughes protege. Never less so that in the follow up statement to Andrea Vance yesterday.

On the evidence of this affair, PSC appears to serve PSC’s interests and those of its chosen. That is, of course, the tendency that economic analysis would tend to predict. But it is a very long way from the guff that Hughes likes to spout about the public interest and public trust.

MPC appointments, past and future

October 5, 2023 Michael Reddell MPC, Reserve Bank Board

A few weeks ago, just before I went away for 10 days holiday, the latest in the saga of the Reserve Bank MPC, and the blackball on external experts when the first MPC appointments were made, appeared in the Herald.

You’ll recall that it was widely understood that there had been such a blackball, put in place by the Bank’s Board and agreed by the Minister of Finance. It was widely understood by pretty much everyone – the Minister, Treasury and Reserve Bank staff, former senior Reserve Bank figures, (quite probably even MPC members themselves), a former senior adviser to the Minister, and Bank spokespeople – and was widely reported, and not denied, once the news got out formally with an OIA release from the Minister to me back in 2019, which had included a procedural papers from Treasury’s appointments and governance manager, handling the formal side of the appointment process, which described the blackball. Lines in that paper – that they were being particularly cautious but that a more relaxed approach might be adopted in future appointments – had been echoed in later comments by people speaking for the Bank. All this had come on top of the person, with macro-specific expertise, who back in 2018 had enquired about the MPC roles and been told by the Board’s recruitment firm that there was a blackball on research expertise, and who had then gone to the Board chair (Neil Quigley) himself to check, and had been told face to face that indeed there was such a ban. I wrote about it all here.

The reason I (and others) were still writing about it was that a few months ago, when forthcoming MPC vacancies were first advertised, it became apparent that the blackball had been lifted, and in this round people with research expertise and possible future research activity in areas of macroeconomics and monetary policy would not be barred from consideration by the Bank’s Board. That was, and is, good news (cynics might suggest that the Board is simply likely to fall back on adopting a slightly different test, barring anyone who might prove awkward for the Governor, but leave that issue for later). But then Treasury, backed by the Minister, issued a statement to the Herald claiming there had never been a blackball, it had all been a sad misunderstanding, and tossed one of their own former mid-level staffers under a bus by suggesting that when she’d written that memo to the Minister, she’d simply got the wrong end of the stick. And, so OIAs revealed, they made this comment – without any serious scrutiny or testing (including asking the person concerned) – because Neil Quigley had, on two occasions, this year told them so. The Treasury official had simply got things wrong, and all that had happened is that some academic who was interviewed for the role had refused to commit to not commenting publicly if appointed, and so that person had not been taken any further. Or so Quigley said.

In that post last month I outlined why this simply wasn’t a credible story, and that either Quigley was simply and deliberately misrepresenting things, or – years on – was suffering from a faulty memory, and had conflated two quite different things. Either way, his claim now that there had never been a blackball simply did not stack up, and Treasury should not have been uncritically making statements based on it, perhaps particularly when it involved throwing one of their own former managers (and managers at Treasury aren’t junior people) under a bus. Treasury should now be rather annoyed at Quigley, for putting them in a situation where taking him at his word – a senior government appointee – had left them with egg on their face (I have an OIA in on how, if at all, they have dealt with this subsequently).

Anyway, that is all prelude to the Herald’s story on 12 September. In my posts I had noted that among the many reasons for scepticism about the Quigley story was former Board member Chris Eichbaum. I knew he used to read my stuff (he told me so one day when I ran into him) and had not been backward in coming forward, commenting in replies on Twitter when he thought I’d got it wrong or been unfair about the Board and its role/performance. Not once had he objected to my characterisations of the existence of a blackball (this back before he left Twitter).

The Herald’s Jenee Tibshraeny got in touch with Eichbaum to see if he had anything to say now. He did. In fact, her story opens with an Eichbaum expletive.

Asked specifically about the 2023 Treasury denial, which had channelled Quigley, this was Eichbaum’s response

Well indeed.

He’d added

noting that today’s Board might not be as “risk-averse” as the old Board was.

Here it is worth noting that Eichbaum was not just any Board member, but was one of the small interview panel (him, Orr, and Quigley) for these MPC roles back then.

I also understand that Eichbaum regards the Herald article as having fairly and accurately represented his views/comments.

That might have seemed fairly open and shut. There are suggestions there is no love lost between Eichbaum and Quigley (one of the left, one of the right, and Quigley had been a former senior manager at Victoria University where Eichbaum taught – and comments on Quigley from people at Vic then often seem to have quite an edge to them), but it all seemed pretty clear. There was an expertise blackball, as everyone else had believed until Quigley belatedly sought to deny it.

But there were some more Eichbaum comments in the post, on a slightly different strand of what seems to have gone in 2018/19.

Which seems to give support to what outsiders have supposed all along (anyone awkward for management, especially the Governor, wasn’t going to be welcome), but is also consistent with that “consensus collegial” model of MPC decisionmaking which the Minister went along with (but which is not practiced in the best practice MPCs globally). The Bank had actually wanted to ban external MPC members from giving speeches or interviews at all, but the Minister didn’t go along with that…..and the practical solution seems to have been to appoint people who had neither the interest, inclination or ability to give speeches or serious interviews (despite being responsible, supposedly actually accountable, statutory appointees and decisionmakers).

But it also points to what Quigley may have been remembering when he falsely claimed there had never been a general blackball. There clearly was – as Eichbaum says – but it looks as though they may have also turned down one person who got as far as an interview because he/she wanted to be freer to speak. That wasn’t a wider general ban, but specific to an individual and the limitations of the model the Bank wanted around MPC. There was still a wider ban on people with actual/future macro research expertise etc.

But focus on that final para of Eichbaum. In open and transparent central banks – Bank of England, Fed, Riksbank – individual MPC members often give speeches or interviews, sometimes based on their own research, often drawing on their own analysis, outlining their thinking on issues, risks, and outlooks, including policy outlooks. It is quite normal, not at all problematic, and quite consistent with the inevitable huge uncertainty around any view on the outlook and likely required future stance of monetary policy. But we don’t want any of that sort of openness in the Robertson/Orr/Quigley Reserve Bank……and they’ve delivered. We’ve heard nothing of substance – research or not – from any of them.

And that might have been that, but on the same morning the Herald article Newsroom published a column on the MPC blackball issue by Eric Crampton, who has had many of the same views as me on the issue.

And one Chris Eichbaum left a comment.

This is the same person quoted in the Herald saying Treasury’s description of the blackball had been quite right, and it was only a shame Quigley hadn’t just said so and said they’d now moved on.

But this comment, if it is to be interpreted consistently with this comments to the Herald, must also be about that desire to ensure that no external MPC members were speaking in public at all, at least never articulating any views of their own. That is a different issues than the macro research expertise blackball – not much more defensible in substance, but at least with some precedents (notably in the RBA model that the Bank wanted to model its committee on – more ornamental than substantive).

What of that second paragraph? I am not aware of anyone who thought they had a “claim on MPC membership” – and Eichbaum seems to have no evidence for his claim – but a really large number of people, economists and not, many of whom would not have wanted to touch an Orr RB MPC with a barge pole, were nonetheless seriously disconcerted that our MPC was to be the only one in the world where formal expertise in the subject was a disqualifying factor. As it clearly was, as Eichbaum acknowledged to the Herald. And recall that the story did not break in the first place because some aggrieved academic went to the press but because a citizen used the OIA and the Minister of Finance complied with the law and released the relevant material.

In the Newsroom comments column Eric Crampton responded to Eichbaum. Here were some relevant bits of Eichbaum’s reply.

It is interesting in its way, but what it seems to confirm is the conflation of two quite separate events by Quigley. The block put on an individual at the interview stage seems to have been specific to one person’s desire to be free to communicate publically while in office.

But that is very different from the message conveyed by the Board’s recruitment firm – confirmed face to face by Quigley – that no one with active or future research interests in and around monetary policy would be considered (would even be longlisted), let alone interviewed or appointed.

There is no real doubt that happened. The person who recounted their experience to me is someone whose integrity and honesty I have never had any reason to doubt. The fact of that blackball also squares with what the record of a Board meeting discussion in 2018 suggested (copy in earlier posts).

But I realised that when the Bank had responded to my OIA request in 2019 re MPC appointments it had left out a lot of material that as clearly covered by the wording of my request. So I lodged a few weeks ago a further request – noting the prior omission – asking for all dealings with the recruitment firm around that first round of appointments. The Bank is slowwalking that request too – citing the need for “consultations”, about events 4-5 years ago – but before long we should have those answers too.

(Interestingly, I had another OIA back from the Minister of Finance last week re any discussions/advice this year re the blackball and its removal. It appears he was not involved at all (which I have no particular problem with, although one might perhaps have hoped for a more proactive approach).

Some of you will be wondering why any of this matters. To me it is a matter of two things. First, a really bad decision was made in 2018/19, which got the MPC off to a very poor start. But at least as importantly, because honesty and integity matters, or should do, in public life, and particularly in and around powerful independent agencies. We’ve simply not seen that from Neil Quigley (and here I am clear that his responsibility is personal: the Governor and management have not weighed in to support his, clearly wrong, story).

But it does bring us to today. In the papers I got from the Bank a month or so back there was a lot of material about the process that is underway to fill the two MPC external vacancies next year. It is a quite unsatisfactory situation. The Board – appointed entirely by the current Minister of Finance, few of whom have any relevat expertise – have not only advertised to fill the MPC vacancies, have had their recruitment firm tell at least one qualified person that they simply won’t be considered, but were on schedule to have conducted final interviews last month, positioned to deliver recommendations to the Minister of Finance once a new government is formed.

Perhaps that would be no great problem if a Labour-led government were to be returned – his friends and appointees on the Board will be delivering names consistent with the last few years’ model of the Reserve Bank. But it is highly unsatisfactory if there is a new government, especially in light of the concerns both National and ACT have expressed about the Governor and the Bank’s stewardship. If Nicola Willis is appointed Minister of Finance, she should start the process from scratch, making clear to the Board the sort of people, and sort of model (hopefully both more expert and more open) that she wants, opening the process to people who might be more interested in serving under such a model, even if Orr is still in place. The first vacancy is not until 1 April next year. It is very difficult to get rid of the Governor himself – and thus Willis has made a virtue of necessity in ruling it out – but if a new government is at all serious about change it has to start with a keen focus on all vacancies, MPC and Board, as they arise. Whether they are really serious – I’m sceptical – I guess only time will tell.

Some charts on our underperforming economy

October 3, 2023October 3, 2023 Michael Reddell New Zealand economic performance

It is election season, and since the performance of the economy enables (or disables) so much of what political parties want to do, or to spend, it is worth having a look at a few charts. There have been plenty on inflation this year, and plenty of fiscal policy in just the last few weeks.

I had an op-ed in The Post and The Press the other day, which touched on some of the old and new economic challenges, the greatest of which – and longest running of which – is the dismal productivity performance of the economy.

I had in mind this, from a post a few weeks ago

I’d wondered how New Zealand had done over just the last 10 years – half spent under National governments and half under Labour governments.

We’ve dropped six ranking places in a club of only 37 members in just a decade. It took me a little bit by surprise, and I think partly because the New Zealand debate (such as it is) rarely focuses on the countries that are now most similar to us in productivity terms.

And for those wanting to play crude National vs Labour partisan games on this one, probably best not. Here is our quarterly data up to Q2 this year, with a simple linear trend through the data. The last few years have been a lot noisier, as you might expect, between (a) Covid disruptions, and (b) the fact that recent data are somewhat provisional and will keep getting revised for the next few years. Note that whatever influence political parties’ policies and practices have on economywide productivity, outcomes don’t just change the day a different party takes office.

A line I’ve banged on about quite a bit over the years is the unbalanced nature of the New Zealand economy, in which growth in production in the tradables sectors has tended to lag behind that in the non-tradables sectors, going back at least 20 years, and the opposite to what one might expect to see in a successful economy gaining ground on other countries it had dropped behind.

Here is the latest version of the summary chart I’ve used for that purpose.

Tradables sector output, per capita, is about where it was 30 years ago. Even if tourism magically quickly recovered to pre-Covid levels, the pre-Covid picture wasn’t really much more encouraging.

In last week’s column I noted

Productivity isn’t primarily about individuals working harder. It is mostly about having an economy where more firms find it attractive to invest in producing new and better products, to produce old products in better ways, tapping new markets, and by doing so supporting higher incomes across the board. But business investment here has been weak, as a share of GDP, for a long time. Nowhere near enough firms are finding anywhere near enough opportunities to enable New Zealand to reverse its sustained relative economic decline.

I hadn’t checked the comparative business investment numbers for a while but I did this morning

Sure enough, in a country which has had much faster population growth than most OECD countries – and high labour force participation – business investment has been lower as a share of GDP than in most advanced economies. That isn’t what you’d expect to see in a country making any progress at all in reversing the decades of decline. It is, however, consistent with New Zealand’s own dismal record.

And while for a decade or so we managed to support growth in living standards on the back of a rising terms of trade, that was almost a decade ago now. The terms of trade haven’t gone consistently backwards, but they aren’t supporting any further growth in material purchasing power (or the tax base)

I also touched on house prices in that op-ed, observing

House prices are rising again, from levels that are still punishingly high. In real terms they are materially higher now than when the current government took office, a pattern we’ve seen with successive governments for decades. Political parties talk about improving housing affordability, but market prices speak louder than politicians’ words.

What I had in mind was this chart, drawn from the BIS cross-country database of real house prices, going back many decades (in our case to 1970). Assuming Labour loses office this month we won’t have the final data for their term for a while yet, but I’ve allowed another 2.5 per cent real drop from the last published value for the March quarter this year.

Terms of government differ (3, 6, and 9 years) and of course background economic circumstances differ a lot. Often within terms of government there have been both periods of flat or falling real prices and ones of quite material increases. But for more than 30 years, real prices have been rising……really for no other reason than the combination of regulatory and structural policy choices successive governments have made. Parties approaching office like to suggest they have some sort of answers, but they haven’t delivered…..and current market prices (remember, houses are asset prices, trading on all information about the expected future) don’t suggest the likely next government is likely to be much different. Land prices in peripheral areas around our cities certainly aren’t collapsing. (And all this latterly after the steepest quick increase in interest rates for many decades – probably since 1984/85.)

Which brings us back to productivity. Neither main party – one of which will lead the next government – seems to have any serious idea or policies (not even an underlying narrative) that might turn things around and offer a much better (relative to the other countries we increasingly lag behind) tomorrow for our children. Judging by how little the words (“productivity”) or ideas have appeared in debates, manifestos, campaign appearances, it isn’t obvious they really care much. Squabbling over which baubles to offer the voters, and how to pay for them (at a time when the budget is deep in deficit) seems to be where the game is at.

Our poor next generations……

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective