Israel: economic success, or not

I’m out of town this morning, so just something brief and prescheduled:

Israel has been in the media a lot this week.  Much of that has been about the confrontation on the Gaza border.

But it has also been the 70th anniversary of the founding of the state of Israel.  In many respects it is an astonishing achievement, even if I remain sceptical of its longevity.  Sadly, demography and history seem to be against them.  Demography? 400 million Arabs and 80 million Iranians, few of whom seem reconciled to the idea of a permanent state of Israel.  History?  Well, the Crusader states last longer than 70 years, but were wiped out.  More recently, Smyrna (let alone the cleansing of the millenia-old Jewish community in Baghdad).

But the economic achievement of Israel can be, and often is, overstated. I noted on Kiwiblog the other day, a celebratory post, including this

In 70 years, Israel has become one of the world’s leading scientific and technological companies[countries?]. 45 of their top inventions are listed here.

12 Israelis have won Nobel Prizes – one literature, three peace, two economics, six chemistry. (Note a further 155 Jews in other countries have won a Nobel Prize, comprising 22% of all nobel prizes since 1901 despite being just 0.25% of the world’s population).

A few of their inventions are:

  • cellphones
  • Intel chips
  • ICQ
  • Polio vaccine
  • antivirus software
  • ingestible video cameras for cancer detection
  • USB flash drives

All of which is pretty impressive.  But what does it amount at an economywide level?

As regular readers will know I frequently point out that over recent decades New Zealand’s cumulative growth in productivity (real GDP per hour worked) has been lower than in almost all other OECD countries.  And we started below the average and had been aiming to catch up.

But how has Israel done by comparison?  This chart just shows the ratio of real GDP per hour worked for New Zealand and Israel relative to that of the United States (as a representative high productivity OECD economy), starting from 1981 because that is when the Israel data starts.

israel nz comparison

We’ve done badly, and they’ve done even worse.

I’m sure there are all sorts of explanations.  For example, Israel spends a large chunk of its GDP on defence and security, and even if that demand spurs innovations in some specific industries, it is unlikely to be a long-term positive for economywide productivity.  As I’ve pointed out previously, Israel is also remote – albeit in different ways to New Zealand: political barriers, security fears etc, limit the opportunities for trade and investment.   And Israel doesn’t exactly have the least heavily-regulated economy in the OECD.

But it is also hard to go past the elephant in the room.  To listen to the advocates of economic benefits of immigration, Israel should really the poster-child, the unquestionable success story.  Any Jewish person anywhere can move to Israel and claim citizenship, and large numbers have.  Population growth in Israel in recent decades has been faster than anywhere else in the OECD –  partly birth rates and partly migration – and (for whatever reason) Jewish people tend to come quite highly-skilled.   That part of the population growth has probably been a boon from a defence and security perspective, and of course the Law of Return is pretty fundamental to Israel’s sense of national identity, and its founding purpose.

But evidence of economic gains appears elusive.

Very unwise and quite inappropriate

That was my immediate reaction yesterday when someone asked my view of Reserve Bank Governor Adrian Orr’s latest public comments, on the Christchurch rebuild, PPPs, government infrastructure spending, and so on.

Here was just a sample of what the Reserve Bank Governor said, as reported by Stuff’s Hamish Rutherford

Orr, who is now the governor of the Reserve Bank, made an enthusiastic plea for New Zealand to embrace “third party capital” – a reference to public private partnerships – as a means of boosting investment in infrastructure.

“This country, we’ve gone through the lowest ever global interest rates, we’re in good fiscal health. Why aren’t we investing?” Orr said in an interview.

“Personally, as a citizen of New Zealand I’m very pleased to see public investment being planned and trying to get underway, and I’m even more pleased as a citizen of the world that third party capital is increasingly being allowed to be part of the public infrastructure investment.”

Orr acknowledged he was giving a plug for his former employer, the NZ Super Fund

He goes on to complain about the rebuild process, and the lack of investment opportunities for NZSF, about public procurement processes, even weighing on the woes of Fletcher Building.

As I’ve said before, if having left the NZSF job he was now retired –  or even just joining the ranks of company directors and consultants –  there would be no problem with him expressing his views.

But he is a public servant.  And as Governor of the Reserve Bank he personally exercises an extraordinary degree of power, singlehandedly making the monetary policy decisions, as well as exercising a huge range of regulatory powers over banks, insurance companies and other non-bank deposit-takers.  He is the most powerful unelected individual in New Zealand.    In the areas Parliament has empowered him.

But the stuff he was talking about in his interview yesterday was –  again –  none of his official business.  He is welcome to his personal views, but when he speaks publically he should be speaking only on the things he has official responsibility for.   Either that, or change jobs and make a run for Parliament.  As someone observed to me recently, too often Orr sounds as if he would really prefer to be Minister of Finance.  But he isn’t.  He has no popular mandate, and responsibilities only as specifically laid down in various bits of legislation (primarily the Reserve Bank Act).

Why does it matter?  Because if the public is to be confident in delegating huge amounts of power to unelected officials, they also need to be confident that those unelected officials aren’t misusing that power, or the pulpit it can provide, to pursue personal or political agendas.

I’ve written several posts recently about the new book, Unelected Power, by former Bank of England Deputy Governor Paul Tucker.  Touching on some of these sorts of issues, Tucker notes that in his time at the top of the Bank of England he never knew the personal politics of his senior colleagues, and he was glad of that.   Perhaps that is just the famed English reserve, but it is something to reflect on here.  I’ve written previously about Don Brash overstepping that mark –  in a way that really soured relations between the Bank and the then government.   Arguably Orr’s case is worse, both because he is weighing in on immediately relevant political issues, including more or less directly attacking the stewardship of the previous government, and because he is overtly on the same side as the current government.  When (as central bank Governor) you openly disagree with the current government on general policy issues it might still be unwise and very wrong , but at least no one thinks you are in league with the government.   The whole case for an independent central bank, is so that they can act independently, in those specific areas Parliament has asked them to handle.  The Christchurch rebuild, PPPs, infrastructure finance more generally, are not among those responsibilities.  Nor, for that matter, is “giving a plug” for the Governor’s former employer.

When the initial Stuff story appeared, I was a bit surprised the journalist didn’t seem to have sought a comment from the Opposition Finance spokesperson, who as it happens is also a Christchurch MP.   You just do not see anything like this degree of overt political comment from central bank Governors in other advanced economies, and one of Paul Tucker’s other points is that delegating power to independent agencies really only works well if the legislature is effective in scrutinising and holding it to account the independent agency, including ensuring that it is (a) doing its job, and (b) only doing its job (in other words, sticking to the mandate democratically elected people have given them).   Parliamentary scrutiny of the Reserve Bank was very weak under the previous government, and appears to be no better now.  There is still no word from Amy Adams about the Governor flagrantly overstepping the bounds.

But a few hours later, her colleague Gerry Brownlee came out swinging at the Governor.  I don’t often agree with Mr Brownlee, but on this occasion his remarks seemed both forthright and to the point.  He was “incensed”

Brownlee said he was “incensed” by the comments which he believes mischaracterised the situation. As Canterbury Earthquake Recovery Minister he visited the fund about investment options but were told were not on the scale the fund needed.

“It certainly looks like the Reserve Bank governor has bought into the current Government’s mantra that everything the previous government did was wrong and everyone should join in in saying so.

“And I think that’s a very dangerous position for him to be in.”

When a senior MP describes himself as “incensed” by comments made by the central bank Governor –  especially when they aren’t about things in the Governor’s remit –  it is time for the grown-ups in the room to wake up and do something about the situation.   When the Governor so undermines confidence in himself, he weakens his own position, he weakens the Bank, and that is potentially damaging for the country.

I’m still a bit puzzled by what game the Governor is playing.

It could be that he just hasn’t yet adjusted to his new role.    In various earlier incarnations he was chief economist for the National Bank and for Westpac.  In roles like that part of his job was to say to provocative stuff in an interesting way, to get coverage for him and his bank. Back in the spotlight now, with every serious media outlet only too happy to report his every word, perhaps he just hasn’t adjusted yet.   I find that a little hard to credit, for various reasons, including that he is 55 not 35, has already spent  eleven years as a public sector CEO, and that yesterday’s remarks weren’t the first time he’s overstepped.

Perhaps, too, he just sees no connection between the comments he makes on climate change, infrastructure finance, the Christchurch rebuild, PPPs etc and his day job.  But he’d have to be extraordinarily naive to believe that, and he isn’t.  His views are reported because he is the Governor, not as “Adrian Orr, citizen of Devenport [or wherever he now lives]”.  Another really senior unelected role is that of the Chief Justice: just think of the outrage if she were out giving speeches and interviews on all manner of political issues, unrelated to the administration of justice.   That is a measure of how wrong Orr’s current stance is –  and he wields more power personally than the Chief Justice.

And that leaves the even more unwelcome possibility that, in some sense, Orr is playing politics.   A former colleague put it to me the other day that “Orr is a political animal, par excellence”.   I’m sure he is only ever uttering his own genuinely-held views, and I’m not sure he is even that good a political player (on the evidence of the last few weeks) but look at his incentives.  The Governor has a huge number of turf battles to fight and win this year, around the various stages of the review of the Reserve Bank Act.    Will the Bank keep prudential responsibilities in house?  Even if so, will the policymaking powers stay with the Governor, move to a committee, or be removed back to the Minister?  What sort of people will be appointed to the new Monetary Policy Committee, and what sorts of constraints will the Minister put on their freedom to challenge the Governor?  Might tighter budgetary constraints be put on the Bank, or regular (properly-resourced)_ provisions for external reviews be established?   And so on.

And how to win those battles?  Good quality analysis and advice goes only so far.  Orr might reasonably conclude that things are more likely to go his way, if the Minister and his Cabinet colleagues (and parties outside Cabinet) smile benevolently on the Governor and think of him as “one of us”.

I’m not fully persuaded this is the bulk of the story either.  Orr has, after all, been a public servant for the last 15 years, and if his approach is all about political game-playing and seeking leverage with ministers, you’d have to think he’d have the art down pat better than the overtly political stuff on display in recent weeks.   There has to be a risk that, whatever his intentions, he has overstepped the mark so far and so often, so early, that at least some in government might be having a case of buyer’s remorse, wondering quite what they have got themselves into with this new Governor –  who might be “sound” ideologically, but seems to lack that deeper sort of soundness the nation should be able to count on.

Whatever the explanation, it needs to stop.

When there was speculation last year as to who might be the next Governor, one reason on my list of factors counting against Adrian Orr was precisely that he was a strong character, given to speaking his mind, and one whom the Board (and specifically the Board chair) might find hard to keep on a leash.  The same thought might, I speculated, worry a new Minister of Finance.    Of course, in the Board’s case it has become increasingly clear that they see themselves as facilitators for, and defenders of, the Governor, not needing to do anything to hold him to account.  But if they really care at all about the institution, and about good governance in New Zealand, they need to call the Governor to order now.

I noted earlier my surprise that the Opposition finance spokesperson had not commented on the way the Governor is operating.  Neither, it appears, has the Minister of Finance.   Perhaps it would be worth some journalist asking the Minister for his comments, even if only to record him refusing to comment, washing his hands of any responsibility (for the conduct of someone he appointed, in an agency he is responsible for).

The Governor is damaging himself, and he is damaging the institution.  It is early days and there is still time for a course correction, but it needs to happen now, and to be decisive.  It isn’t, after all, as if the Governor is without messes to clear up in his own areas of responsibility (eg here and here).  And leave politics –  including public finance, infrastructure, climate change or whatever  – to those we’ve elected.

(I have deliberately avoided engaging with the content of the Governor’s comments.  Even if I fully agreed with him, they would still be unwise and quite inappropriate, and it is the process point –  good governance – that matters most.)

UPDATE: I notice that issues about Orr’s remarks are beginning to be highlighted elsewhere.

UPDATE 2: Rereading the post I wrote when Orr’s appointment was first announced, there is nothing (positive or otherwise) in it I’d resile from now, and some of the potential areas of concern touched on then already seem to be being realised.

UPDATE 3: For those who don’t normally read the comments here, I suggest at least looking at the one by former Reserve Bank official, Geof Mortlock.

UPDATE 4:  The Minister of Finance has indeed refused to comment.

Eyes determinedly shut

After a series of posts late last year, I haven’t written much recently about the New Zealand economic and political relationship with the People’s Republic of China.  It isn’t that I’ve lost interest, or become somehow less convinced of the importance of the issues. It remains, for example, a disgrace that unrepentant former PRC intelligence officer Jian Yang  –  who now acknowledges misrepresenting his past on official documents –  sits in our Parliament, protected by his own party and not subject to any critical scrutiny from the new Prime Minister or her party.  All parties seem determined to look the other way.  Businesses trading with the party-State no doubt quietly cheer them on.  Don’t ever rock the boat, don’t ever display any self-respect, seems to be the watchword.  Deals need doing, bottom lines enriching.

I’ve been busy with other things, but yesterday was the “China Business Summit 2018” in Auckland, operating under the logo “Eyes Wide Open”.    The Prime Minister and the Minister for Trade and Export Growth both gave what were billed as keynote speeches.  I want to focus on the Prime Minister’s speech, but couldn’t go past David Parker’s risible description of

“China’s leadership on issues like…trade liberalisation have the potential to add momentum to collective efforts in the region”.

No serious observer –  no one with other than an obsequious political agenda –  could regard the PRC as a leader in the cause of trade liberalisation.  The PRC lags badly, mostly to the detriment of their own citizens. That is so whether it is tariffs under consideration, or non-tariff barriers, and it is as true of the letter of law as well as the way laws are actually applied (recalling that the PRC is not exactly known for the priority placed on the rule of law.  As the Chief Justice of the PRC regularly reminds people, in the PRC the law is at the service of the Party.

Curiously enough, even Stephen Jacobi –  executive director of and spokesman for the (largely) taxpayer-funded advocacy group the New Zealand China Council seems to agree.  He is reported in another article this morning again stressing how difficult it will be to get the upgrade to the New Zealand/China preferential (“free’) trade agreement unless New Zealand gets more actively on board with the PRC geopolitical initiative, the Belt and Road.    Because, let’s be clear, the PRC’s barriers to international trade are a great deal higher than those New Zealand still has in place.  For them, deals (“FTAs”) are primarily about politics, not about some rules-based international order –  which may from time to time be useful to them, but only instrumentally.

But what of the Prime Minister’s speech?

There is lots of gush, and little reality.

We will look to cooperate with China to promote regional stability and development

How, one wonders, do we see the PRC promoting regional stability –  that isn’t just the quiescence of the indebted, the intimidated, or the bought – in  flagrant aggression in the South China Sea, standoffs with India, in the repeated threats to prosperous and democratic Taiwan, in the intimidating patrols around the Senkaku Islands, in loading up developing countries with debt, in the threats to democracy in places like Cambodia or the Maldives?

She moves on to note that

The Belt and Road Initiative is a priority for China.  New Zealand is considering areas we want to engage in the initiative, and other areas where we will be interested observers.

In fairness, that is hardly a ringing endorsement –  and perhaps less than her audience would have liked –  but recall what our government (previous one) has already signed up to in the Memorandum of Arrangement.  I wrote about that a few months ago.  You might recall that the two governments agreed.

BRI 3
I think the ball is in the PRC’s court when it comes to avoiding threats to regional peace.  By pretending otherwise, New Zealand governments simply give cover to the PRC agenda.

Of course, there is worse in the agreement, with talk of us both promoting the “fusion of civilisations”

BRI 2

As I noted in the earlier post

I’m quite sure I – and most New Zealanders –  have  little interest in pushing forward “coordinated economic…and cultural development” with a state that can’t deliver anything like first world living standards for its own people (while Taiwan, Singapore, South Korea etc do) and whose idea of cultural development appears to involve the deliberate suppression of culture in Xinjiang, the persecution of religion (Christian, Muslim, Falun Gong or whatever), the denial of freedom of expression (let alone the vote) and which has only recently backed away from compelling abortions.  And that is just their activities inside China.    “Fusion among civilisations” doesn’t sound overly attractive either –  most of us cherish our own, and value and respect the good in others, without wanting any sort of fusion,and loss of distinctiveness.  But perhaps Simon Bridges [who signed the agreement for the previous government]  saw things differently?

Perhaps one day the Prime Minister could tell us, straightforwardly, whether this stuff –  an agreement the New Zealand government is party to – reflects her values?

In her speech yesterday there was a whole section headed “New Zealand Values”

This brings me back to something that this government has placed front and centre of its agenda – our values

But what might those values be?  She goes on to tell us (or at least I think she does –  the language is a bit garbled).

This is why my government is placing such an emphasis on our core values, like on environmental and climate change issues. 

So that was no mention of:

  • democracy,
  • rule of law, domestically and internationally,
  • freedom of speech,
  • freedom of religion,
  • standing by countries that share similar values, when they are threatened.

or anything of the sort.  Just climate change and the environment (although are those “values” or just issues?) –  where, conveniently, her rhetoric and the PRC seem to, for now, align.

Then she moves to the standard fallback line of one New Zealand minister or Prime Minister after another.

Naturally, there are areas where we do not see eye to eye with China. 

We will just never, ever, come out and clearly and state what those differences are.  Instead, she trivialises the (unspoken) differences

This is normal and to be expected with any country, especially where we have different histories and different political systems.

It is as if she treats the PRC as a normal country, rather than one of the biggest abusers of domestic human rights and most aggressive external powers anywhere.  It is today’s Soviet Union, except probably with more evidence of an active external aggressive agenda.   Our Prime Ministers a generation or two back didn’t trivialise the difference between the Soviet Union and the West in the way that John Key did, and Jacinda Ardern does.  Then again, I’m pretty sure we didn’t have party presidents (Haworth and Goodfellow) issuing congratulary statements on the occasion of meetings of the Soviet Communist Party.

But there weren’t big business interests –  private and government (think universities) –  with dollars at stake then.

Of course, the Prime Minister tries to cover herself with talk of

New Zealand and China can and do discuss issues where we have different perspectives.  We can do this because we have a strong and a mature relationship – a relationship built on mutual respect; and a relationship that is resilient enough for us to raise differences of view, in a respectful way.   This is a sign of the strength and maturity of our relationship.

But it is just words when our leaders –  accountable to the citizenry, not to Fonterra, Zespri or university vice-chancellors –  will never utter a word of concern in public.   Maybe they do occasionally raise issues in private –  and the PRC authorities politely ignore them – but even that argument was undercut by the Deputy Prime Minister in comments yesterday

The foreign minister was asked whether China’s influence in New Zealand, Australia and the Pacific would be on the agenda during his trip.

“I’m in a job called foreign affairs, and diplomacy is rather important. You’ll know I’m naturally a tactful person, and I won’t be raising those issues in the way you put them.”

These aren’t values they stand for, just dollars.

The Prime Minister can talk in generalities all she likes

Our reputation as a leader on environmental issues; as a fair player internationally; as a defender of the international rules-based system, a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue, is fundamental to who we are as a nation and as a society.

But specifics are what count.  Anyone can give POLSCI 101 talks, but when she won’t (say) stand up and call unacceptable China’s illegal creation of new artificial islands in the South China Sea, its illegal assertion of sovereignty, and the militarisation of those new “islands” –  to reference just her talk of “a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue” –  it is hard to take her seriously on the values score.  When she won’t call out Jian Yang’s position, or the way in which PRC-affiliated entities have gained effective control of Chinese language media in New Zealand, or the way several universities and many of our schools are taking PRC money on PRC terms, it is hard to take her seriously when she talks of values, even as it directly affects New Zealand.   [UPDATE: This very morning she managed to openly criticise actions of two other countries.]

But probably the big-business entities putting pressure on the government to do whatever it takes to get the “FTA” upgrade –  unconcerned about values, but very interested in bottom lines –  will be happy with her.

It all seems a lot more Neville Chamberlain than Michael Joseph Savage (whose government was quite critical of the appeasement of Nazi Germany).  But however deluded Chamberlain was, nobody supposed his stance was just about the money.

And, since most of you come here for the economics, I was struck by an account I saw of the appearance last week by the Governor of the Reserve Bank at Parliament’s Finance and Expenditure Committee, where he was asked about China.  Astonishingly, the Governor reportedly claimed that the Chinese economic story was well-understood –  I think most of those close to it would argue that anyone who thinks they really understand it is only revealing how much they don’t know – but then he want on to make what is simply a factually inaccurate statement.  He claimed, so it is reported, that China was in some “miraculous” period where it was moving into “first world economic wealth”.

Productivity is the foundation of prosperity.  The cohort of countries near the very top of the OECD league tables (several northern European ones and the US) have real GDP per hour worked, in PPP terms, of around US$70 an hour.   Here –  from the Conference Board database – are the 2017 numbers for the various first world Asian economies, and for the PRC.

Real GDP per hour worked (USD, PPP)
Singapore 64
Hong Kong 54
Taiwan 51
Japan 46
South Korea 37
(PR of) China 14

Even underperforming New Zealand manages US$42 an hour.  Other countries matching the PRC productivity numbers include such denizens of the first world as Indonesia, Ecuador, and Peru.

It sounds as if the Governor has been buying the hype.  But I suppose his political masters won’t be unhappy: flattery and never ever uttering a sceptical word are among their watchwords.

 

 

Breathtaking indifference

On TVNZ’s Q&A programme yesterday, the Minister for Workplace Relations, Iain Lees-Galloway was interviewed.

The Minister and his government are keen to increase union membership and are putting in place further significant increases in the minimum wage.

From his interview yesterday, here is part of the Minister’s story

….all the evidence from around the world shows us that when you have more people covered by collective agreements, that helps to drive wages up. It also helps to drive productivity, and yes, we’re a government that’s focused on transforming our economy into one that’s productive, more sustainable.

It almost invites one of those Tui ads.  We’ll come back to wages in a moment, but just consider for moment that claim that there is causal relationship between steps to increase union membership (and collective bargaining) and higher (economywide) productivity.  It is a shame the interviewer didn’t push the Minister on the point, but his comments suggest that he really has little idea what productivity is.   It is about businesses, old and new, finding new products, new markets, new ways of doing things, new ways of combining capital and labour in ways that successfully take on the world.   I’m not suggesting that unions can never play a constructive role –  although they can also play a destructive one.  But the Minister offers no credible story for how a greater role for unions in New Zealand will make any material positive difference to the ability of firms operating in New Zealand to take on the world from here.

That is especially so because he is quite open that his goal to shift the balance in the labour market, so that a larger share of GDP flows to labour.

CORIN So the purpose of these changes is to boost union power.

IAIN Well, it’s to get a better share of the economy. We’ve talked about having an economy that’s more inclusive, where working people can actually bargain for a fair share of a prosperous economy. That’s what we’re trying to achieve.

I’m not going to debate what is “fair” here, but as a matter of arithmetic, more for one side means less for the other, unless somehow the size of the cake itself increases faster.  And since firms are the ones making the investment and location decisions, it isn’t self-evidently obvious that increased union power would lead to faster rate of real GDP growth.

In support of his claims, the Minister attempted to use the example of Australia.

If you look at the wage gap between us and Australia, that has broadened over the last 30 years. Australia didn’t dismantle their collective bargaining framework in the same way that New Zealand did. That’s part of the story, but absolutely, we’re strongly of the view that people not being in a strong bargaining position has meant they haven’t been able to make the demands on the employers.

Reading that, I had hazy memories of some posts last year (eg here) drawing attention to an increase in the labour share of GDP in the last 15 years.    But what about the comparison with Australia?

Here is the change in the labour share of GDP (less net production taxes and subsidies) since 1990.  Why 1990?  Well, the Minister talked about the last 30 years, but also explicitly highlighted the labour market reforms most of which date to 1991.   I’ve shown the numbers not just for New Zealand and Australia, but also for the other three Anglo countries.

lab share may 18

New Zealand is the median country.  The labour share of income fell a bit less here than in Australia.   If one takes the comparison just over the terms of the last two governments, so starting from 1999, the labour share of income here has increased – and in each of these other Anglo countries, it either fell or increased less than the increase in New Zealand.

I don’t want to make very much of pretty small differences.  But the numbers just don’t seem to support the Minister’s case.  And to revert to productivity, Australia has had one of the faster rate of productivity growth (real GDP per hour worked) among the older OECD countries since 1990.  I’m not aware of any evidence suggesting that collective bargaining and the role of unions has been a material (positive) part of that story.   A rather more common story is to emphasise the role of the rapid increase in Australia’s mineral exports.

The interviewer moved onto minimum wages

CORIN You talk about balance. How fair is it for a business, let’s say a business making a product that’s sold globally, with 25 staff, to now face the higher minimum wage; they lose their fire-at-will rights; they’re going to face much stronger unions, more compliance costs; they are operating in a global marketplace; they’ve lost their flexibility; how fair is it for that business?

IAIN I don’t think they’ve lost any flexibility at all. And operating in a global market means that businesses need to be resilient. They need to be able to work with the different market forces. Now, if a small change to the minimum wage is going to be that detrimental to them, they don’t sound resilient, and so what we actually need is to signal to businesses, as we have done, what our plans are for the minimum wage and for our other industrial law changes, give them an opportunity, if they don’t feel like their business model can operate in those in that environment–

CORIN So tough luck if they can’t make that work?

IAIN To give the opportunity to transition. Because we need businesses to transition into an environment where in a high-skill, high-wage economy, they are able to operate.

CORIN I think there’ll be plenty of people watching this morning who run small businesses, very frustrated and will be yelling at the TV, saying their margins are small; they’re battling away; they’re trying to employ Kiwis. They will see these changes, and certainly Business NZ is arguing that this week, as being unfair and unreasonable.

IAIN Look a lot of businesses come and go, regardless of any changes the government makes. So, yeah, most start-ups, for instance, don’t actually last beyond a couple of years. That’s the nature of doing business. What we as a government have to do is make sure there is an environment in which new businesses can develop; new jobs can be created; and as thing change for people, new opportunities become available for them. That, I think is the most important thing – that we have a strong economy where if businesses do come and go over time, which they do, that there are new opportunities for people to take up.

Now, no one is going to dispute that firms come and go, that is the nature –  the desirable nature –  of a market economy.  But the indifference of the Minister here is all but breathtaking.   His attitude appears to be that somehow we don’t want firms that can’t manage to turn a profit paying what has already been one of the highest minimum wages (relative to median wages, or to the overall productivity of the economy) anywhere.

He mightn’t, but the people who hold those jobs at present might have a rather different attitude.  Sure, they’d prefer a higher wage, all else equal.  Who wouldn’t?  But that isn’t the scenario the Minister paints.  It isn’t even the usual line the advocates of higher minimum wages run, that somehow hardly any jobs will be lost.  The Minister seems to recognise that some firms will be forced out of business, and he just doesn’t care.  Because amid all the blather about “new opportunities” and the earlier rhetoric about “transforming our economy into one that’s productive”, there is nothing in what the Minister is saying –  or what his leaders and colleagues have been saying –  to give anyone any confidence that government policy is about to transform our underwhelming productivity performance.

It is true, of course, that there might be some small measurement effects from big increases in the minimum wage.  If some people are priced out of work altogether they will tend, on average, to be the least productive workers.  Average productivity of those who remain may be a little higher as a result. But that is no comfort to anyone, and doesn’t earn New Zealand as a whole better opportunities in the wider world.   In some cases, firms may even respond to higher minimum wages by mechanising more, but again that isn’t a gain for New Zealanders as a whole –  but rather a second-best response (not the production process they’d have preferred, and which market opportunities would have warranted) to a direct government intervention.    Pricing some people out of the labour market is no way to improve opportunities (and incomes) for all.

It is also not as if the increases in minimum wages are small.  The minimum wage was set at $15.75 last April, and under coalition agreement it is to reach $20 per hour in April 2021.  That is a 27 per cent increase in four years.  There will be some inflation over that period.  But on the Reserve Bank’s forecasts the other day, that will total only 6.7 per cent over four years.  In real terms, minimum wages are rising by 19 per cent in only four years.

All of which might be fine if there was productivity growth to match.    Over the last five years there has been only about 1.5 per cent productivity growth in total.

real GDP phw may 18

Perhaps the next few years will be different?  But there is nothing in the Minister’s remarks offering any sort of credible explanation as to how, or why we should expect something better?  Most likely, some firms –  not very resilient, in the Minister’s terms –  will be forced to close, to downsize, or to adopt production patterns that are less efficient than market opportunities and market prices would lead them to prefer.

Those losses are more likely to be concentrated in the outward-facing tradables sectors of the economy.   Domestically-oriented firms don’t have unlimited pricing power, but they often have some –  especially when across the board regulatory changes like this are put in place.  Most outward-oriented firms –  whether in tourism, export education, farming or wherever –  have very little, if any.

And it is not as if the economy has been successfully becoming more outward-oriented over recent years either, even before this latest scheduled lift in the real (unit labour cost) exchange rate.

export share may 18

One mark of a successful economy tends to be an increasing share of the economy accounted for by exports and imports –  local products and services successfully taking on the world, enabling locals to consume the best the world has to offer.

Perhaps the Minister wishes for a world of abundant home-grown high-performing, high margin businesses.  It might even be a worthy aspiration, but wishing doesn’t make it so, and there is no sign that government has any credible story as to what might make it so.

Changing tack, as I noted in my post on Saturday, I did an interview with Wallace Chapman for yesterday’s Sunday Morning  programme on Radio New Zealand.   Later in the same programme, Chapman had an interview on population issues with Massey university sociologist Paul Spoonley (he runs the government-funded immigration advocacy research programme CADDANZ) and with environmental economist Suzi Kerr, of Motu and Victoria University.

It was a slightly unnerving discussion, at least to anyone who counts children as a blessing.  Kerr seemed set on encouraging people to have fewer children for the “sake of planet” (observing that she and all the people she worked with had chosen to have two or fewer), observing that adjustment to climate change would be easier with fewer people.  In the course of the discussion, she was careful to disavow any particular expertise in immigration –  and didn’t come across as a particular immigration booster (countering Spoonley’s arguments in a couple of placs) – but never once did she suggest that if we were concerned about reducing the number of people here that immigration policy –  affecting non-New Zealanders –  would be an obvious place to start.  Non-citizen immigration is, after all, an increasingly large share of New Zealand’s population increase, and the total fertility rate here is already below replacement, reaching a record low last year.    I suspect she isn’t much interested in New Zealand specifically and is more interested in “saving the planet”, including talking of redistributing people round the world.  It was a little disconcerting given that she has just been appointed as a member of the government’s new Climate Change Commission (a fact Radio New Zealand failed to point out in introducing her).  One hopes that in her new official role she will think rather harder about the easier options –  if not ones necessary welcome to the political masters to whom the owes her appointment –  open to New Zealand to ease the cost of adjustment to the government’s carbon targets.

As for Spoonley, he asserted –  of my comments on immigration (lack of NZ specific evidence of benefits) in the earlier interview –  that I was partly right and partly wrong.    If he remains convinced of the economic benefits of immigration to New Zealanders as a whole, perhaps he could engage with some of the indicators I’ve referred to in various recent posts (eg here and here) –  the underperforming Auckland labour market, the outflow from Auckland of New Zealanders, the way in which the margin by which real GDP per capita in Auckland exceeds that in the rest of the country is small and shrinking, all in an economy with an underwhelming overall productivity performance, and a shrinking share of the outward-oriented sectors.  Spoonley’s apparent preference –  to encourage/incentivise immigrants to move to places other than Auckland – is no (economic) solution either, just transferring the problems to even less productive places.

 

Some public opinion on immigration

Over the course of the last week, I’ve noticed a couple of interesting polls on attitudes to (some aspects of) immigration.

First was a note by Katharine Betts, for The Australian Population Research Institute, drawing on data from the 2016 Australian Election Survey.   Two of the questions asked were

A1: ‘Do you think the number of immigrants allowed into Australia nowadays should be reduced or increased?’

A2:  ‘The number of migrants allowed into Australia at the present time has: gone much too far, too far, is about right, not gone far enough, not gone nearly far enough’

And one of the very interesting aspects of the survey is that election candidates were asked the same questions as general (voter) respondents.

Recall, too, that the target level of non-citizen immigration to Australia was increased a lot about a decade ago, and is now similar to –  just a little less than – New Zealand, in per capita terms.

Here is a chart of the summary responses to that second question.

betts a2

Among all voters, more think things have gone too far than think there hasn’t been enough migration.  On the other hand, a majority favour either keeping things at the current high level or increasing immigration further  (the results are similar for the first question, the wording of which is more explicitly flow-based).

But what is most striking is the contrast in views between voters and candidates.   60 per cent of candidates favoured further increasing Australia’s rate of immigration while only 6 per cent favoured a reduction (a net 54 per cent favouring an increase).   By party, that result is massively dominated by Labor and Greens candidates, with Coalition candidates more evenly divided.    By contrast, among voters a net 17 per cent favoured a reduction, and among non-graduates a net 32 per cent favoured a reduction.

It will be interesting to see the results of any immigration questions in the New Zealand 2017 Election Survey, including the results by party.  In last year’s election, two of our now governing parties campaigned on policies intended to have the effect of reducing immigration (one half-heartedly, and one not very specifically).

The other poll results were from the UK-based CANZUK International, which has been calling for free movement between Australia, Canada, New Zealand and the UK.  In New Zealand, some pro-immigration advocates –  including ACT’s David Seymour – have been championing the cause (and I noticed these results thanks to Eric Crampton of the New Zealand Initiative).

This was the question posed in New Zealand (country names re-organised according to which country is being polled)

“At present,citizens of the European Union have the right to live and work freely in other European Union countries. Would you support or oppose similar rights for New Zealand citizens to live and work in Canada, Australia and the United Kingdom, with citizens of  Canada, Australia and the United Kingdom granted reciprocal rights to live and work in New Zealand?”

And this is their summary graphic.

CANZUK

Pretty overwhelming support in all four countries (at least as the question is worded).  Interestingly, support is strongest in New Zealand –  perhaps because New Zealanders have been the biggest beneficiaries in recent decades of freedom to go to another of these countries (Australia)?

I’ve never been quite sure what to make of the CANZUK cause. I read a lot of imperial/Commonwealth history, and ideas like this sort of free movement area among the old ‘white Dominions’ are strikingly reminiscent of calls for an imperial federation or, much later, for imperial trade preferences (which became a big thing as the UK moved away from free trade itself).  I could be a little provocative and suggest that is wasn’t entirely dissimilar to the sort of immigration policies New Zealand and Australia ran until a few decades ago, that could be  –  not entirely inaccurately –  characterised as “white Australia” or “white New Zealand” policies.  In that sense, I’ve always been a bit puzzled by Eric Crampton’s enthusiasm for this particular formulation, when he is so ready to characterise sceptics or opponents of New Zealand’s current immigration policy as “xenophobes”.   The logic of his position looks as though it should favour open borders more generally, not just among these four advanced, fairly culturally similar, countries.  And yet, for example, even as an example of Commonwealth sentiment, not even South Africa –  let alone Zimbabwe, Kenya or Namibia – appears in the CANZUK proposal.

Of course, there is a pretty straightforward answer.   Almost invariably, public opinion in almost any country is going to be more open to large scale (or at least unrestricted) migration when it involves culturally similar countries than when it involves culturally dissimilar ones. In fact, there are good arguments that, if there are gains from immigration they could be greatest from people with similar backgrounds (and of course counter-arguments to that).  Reframe the question as “would you support reciprocal work and residence rights among New Zealand, France, Belgium and Italy?”, and I suspect the support found in the CANZUK poll would drop pretty substantially –  my pick would be something no higher than 50 per cent.  Reframe it again to this time include Costa Rica, Iran, and Ecuador (let alone Bangladesh, India, and China –  three very large, quite poor, countries) and people will start looking at you oddly, and the numbers will drop rapidly towards the total ACT Party vote (less than 1 per cent from memory).

And thus my own ambivalence about the CANZUK proposition.  If I were a Canadian (of otherwise similar Anglo background to my own) I’d say yes.  The historical and sentimental ties across these four countries –  less so Canada –  mean something to me.  I’d probably even add the US into the mix.  And across Australia, Canada, and the UK incomes and productivity levels are pretty similar –  although the prediction would still presumably be that there would be an increased net flow of people from the UK to Australia (in particular) and Canada.  As it is, I’ve repeatedly noted that my economics of immigration argument doesn’t distinguish between whether the migrants come from Birmingham, Brisbane, Bangalore, Buenos Aires, or Beijing.   We’ve made life tougher (poorer, less productive) for ourselves by the repeated waves of migrants since World War Two –  in the early decades, predominantly from the UK, and in the last quarter century more evenly spread.  Even though we are now materially poorer than the UK, enough people from the UK still regard New Zealand as attractive, that free movement – the CANZUK proposition –  would probably see a big increase in the number of Brits moving here (big by our standards, not theirs).  That might be good for them –  that’s up to them –  but wouldn’t be good for us.  Perhaps the effect would be outweighed by more New Zealanders moving to the UK long-term, but I’d be surprised if that were so.

The CANZUK proposition is an interesting one, and is worth further debate.  Apart from anything else, it might tease out what people think about nationhood, identity, and some of the non-economic factors around immigration (including some of those Wilson and Fry suggest).  As I noted, at present public opinion appears to be strongly in favour, but on the specific question asked in isolation.  It would be interesting to know, if at all, how responses would change if the option was free CANZUK movement on top of existing immigration policy, or (to the extent of the new CANZUK net flow) in partial substitution for existing immigration policy.   The two might have quite different economic and social implications.

Finally, on immigration-related issues, I recorded an interview yesterday with Wallace Chapman for broadcast on tomorrow’s Sunday Morning programme on Radio New Zealand.  It was prompted by a lecture I’m giving this week for Presbyterian Support Northern in their series on different angles on responding to (child) poverty –  mine being a focus on productivity.  My focus in the lecture isn’t on specific solutions, but rather on the need to make lifting productivity a top national economic priority, since in the longer-term productivity is the only secure foundation for much higher material living standards.  I’ll put up the text of my lecture here later next week, but the interviewer was more interested in possible specific solutions and thus quite a bit of our discussion was around immigration policy issues.   Not thinking very fast on my feet that day, I forgot to respond to his suggestion that higher minimum wages might be part of the productivity answer by noting that we already have one of the highest ratios of minimum wages to median wages anywhere…….and one of the worst productivity records over many decades.  Whatever the case for some mimimum wage, raising it is not part of the overall answer to fixing our productivity failures.

 

 

Revisiting the NZSF

There have plenty of stories in the last couple of days about the expressed wish of the New Zealand Superannuation Fund to become owner, or part-owner, of new light-rail projects.

There has been a range of reactions, from the gushingingly enthusiastic to the rather more sceptical.  Count me at the extremely sceptical end of that spectrum.  In fact, it is the sort of story that confirms – again – my longheld fears about NZSF.

Towards the gushing end of the spectrum was Stuff politics journalist Henry Cooke, whose piece ran under the heading “Super Fund gives huge vote of confidence to light rail plans”, when it is nothing of the sort.

This is a massive vote of confidence in the viability of the project from some of the savviest investors in the country.

But

Their proposal would see another huge sovereign wealth fund – Quebec’s – join them in a consortium to build, operate, and own the lines in perpetuity. Exactly how they would get a return on that investment is unclear at this point,

No doubt this is true

Politically this is already a win.

And even Cooke recognises the political nature of all this

By making a proposal on such a political project the Super Fund is making something of a political bet

Concluding that

For today though, this is a vote of confidence from the kind of person left-wing governments usually find it very hard to get votes from: high powered investors. They’ll take it with a smile.

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

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

So this unsolicited (but no doubt welcome) expression of interest isn’t any sort of vote of confidence, and is probably better seen as a fishing expedition, doing what the Fund seems to be good at, playing politics.    Perhaps under the heading of “it is New Zealanders’ money” the NZSF can get a better deal from the government than others might (as NZSF and ACC presumably got a good value-transfer deal on Kiwibank, since no one else was allowed into the mix); perhaps the government might like the idea of an “arms-length” investor rather than putting in money directly and being directly accountable for the results.  Perhaps it will all come to nothing, but NZSF will have shown willing, and earned itself more political brownie points.

We also saw NZSF playing politics last year, with their decision to substantially reduce the carbon exposure in their portfolio.  Reasonable people might debate the economic merits of the judgement they took (I never found the arguments in the internal papers they released overly persuasive), but if it was simply an active management issue –  a bet on where markets would go over the next few years –  they’d have left their benchmarks unchanged, and enabled citizens to monitor risk and return on the punt they’d made.  They didn’t of course –  they claimed credit for the speculative call (which was no doubt popular with many voters, and with Labour/Greens –  and buried it in the benchmark itself, in ways that make it very hard for anyone to check whether it was a good economic call. I wonder if they are even monitoring it themselves, or whether they even care.

On the specifics of the latest NZSF initiative, my view was much closer to this

Retirement policy expert Michael Littlewood said he groaned inwardly at the news the Super Fund wanted to fund two new light rail networks.

He said light rail had a reputation for never finishing on time, cost over-runs and not making money unless it was subsidised by the taxpayer.

“Is this going to add to the security of New Zealand’s future payments of New Zealand Superannuation? I would have thought not.”

Littlewood said the Super fund was taxpayers’ money and if the rail was going to be paid for by taxpayers it should be done so directly.

“I’m not sure what the Super Fund adds to this process.”

Littlewood who co-authored a report last year that called for the fund to be dismantled, said private investments such as this would make that harder to do.

If there was ever a case for NZSF – something I’m not persuaded of (preferring the government to simply run down its debt, and leave investment risk-taking to citizens and private entities) – it had to involve scrupulously avoiding domestic politics.  It was the attraction of a passive approach to investment (hugging the respective indexes which –  among other things –  keeps costs down), mostly in offshore market.

Avoiding politics was always only going to become harder as the Fund got bigger.  I recall during the 2008/09 recession –  when the Fund was smaller than it is now –  the number of idealists and opportunists who were dreaming up schemes that the money in the NZSF could be steered towards.  It will be the same next time round, and the path NZS has been going down over the last few years of its own initiative –  Kiwibank, carbon, and now light rail –  will only increase the risk. And the pressures come from both sides.   People outside will badger governments and the Board/management with clever schemes.  On paper, NZSF is well-insulated.   But people in management and on the Board will have incentives to want to be well-regarded in the community, to be players, and to win and retain political allies.  For not many of them – Board or management –  will these not be the last jobs, last appointments, they are pursuing.   And if they can do it with sweetheart deals –  serving the interests of the government of the day, and of the Board/management but not necessarily the people of New Zealand – all the better for them individually: the return numbers can continue to be flattered, even though some of its returns to connections and to lobbying (often just a transfer among different taxpayer pockets, with lots of fees dripping off the side), not to raw investment expertise.

I’ve written in several recent posts about insights and arguments from the new book, Unelected Power, by former Bank of England Deputy Governor, Paul Tucker.  Tucker’s own expertise is in central banking, but part of the value of the book is in the way he seeks to develop a framework for thinking about the conditions under which it does, and doesn’t, make sense for government functions to be delegated to independent agencies, and the sorts of accountability mechanisms that need to be in place when such delegations are made.   Reflecting on Tucker’s delegation criteria, NZSF increasingly fails that test.

Tucker’s first criterion is whether the goal can be specified.  NZSF probably passes the test: the goal is something like maximising medium-term risk-adjusted returns.

But the second is more questionable:  “Society’s preferences are relatively stable and concern a major social cost”.   Even sticking to narrow business of investment, it isn’t clear that preferences are stable.  Sticking the money in, in effect, a big index fund is one thing, but plenty of people don’t (now) want carbon exposures, others don’t want whale exposures, others still won’t want weapons exposures, or tobacco exposures.  And others just won’t care.  (Views on NZS itself, of course, vary widely, even in the same political party from election to election.)

That relates to Tucker’s fourth criterion, that the independent agency will not have to make big choices on distributional trade-offs or society’s values, or that materially shift the distribution of political power.  When there is a big pot of money that politicians can quietly encourage their appointees to steer in ways that serve political ends, the case for independence is pretty weak.  No one is compelled of course, but it is a case of a double coincidence of desires.

The third criterion was “is there a problem credibly committing to a settled policy regime?”.  This was a key argument for an independent central bank.  It isn’t obviously an issue when it comes to an investment fund of this sort (where the amounts put into the Fund are determined politically).

The fourth criterion is not that relevant here: is there good reason to expect the policy instruments to work, with a relevant community of experts outside the institution.  Active management won’t make much money (if any) except by chance, but passive management can be expected to generate returns commensurate with the risk taken.  Unfortunately, of course, risk to the independent agency’s returns can be mitigated by within-government favourable deals.

The sixth criterion is that the legislature should have the capacity to oversee the independent agency’s stewardship adequately, and to assess whether the system is working adequately.  In almost no instance do our parliamentary committees provide the sort of effective scrutiny this sort of regime really requires for the cause of democratic legitimacy (a point I want to come back to on the Reserve Bank case).  NZSF doesn’t seem to be any sort of exception.

Politicians will make calls –  good and bad.  Often enough they will waste our money, perhaps with the best intentions in the world.  Sometimes they’ll do good with it.  But the key consideration there is that we can toss the politicians out –  or re-elect them if we reckon they are doing a good job.  We have no such ability to discipline the management or the Board of the New Zealand Superannuation Fund.  That is, of course, by design –  it is how the legislation is set up –  but it doesn’t make that design any more appropriate or legitimate.  And the behaviour of the Board/management indicates that this isn’t just a theoretical concern, but a practical one.  Anyone can see this light rail expression of interest as, in no small part, a political one –  even enthusiastic Henry Cooke recognised that.     That should be no business of an allegedly apolitical government agency, but the corrosive incentives –  such a big and growing pot of money to manage, so many vested interests keen to profit from dealing with the Fund –  seem to make it all but unavoidable.

We don’t need a New Zealand Superannuation Fund: the Crown has no vast stores of net financial wealth that need managing, the risk-adjusted returns are no better than average, and despite the name the Fund is just another pot of government funds, doing nothing for the affordability of public pensions.  All too much power –  over your money and mine –  is vested in the hands of people who themselves face little or no effective accountability, and such accountability as they may feel seems more often served by responding to the interests of governments of the day (of whichever stripe), or feel-good public moods.  Money-pots are dangerous things, in the hands of politicans or those who see their interests aligned to preferences of politicians.  As Michael Littlewood argues, and as I’ve argued previously  – it is past time to wind up the NZSF, using the assets to repay government debt.    If it is to be retained, the mandate should be revised to require them to stick closely to relatively liquid traded assets, and ones with little or no connection to New Zealand governments.

 

Something of a mixed bag

The Monetary Policy Statement was released this morning, followed by the Governor’s press conference.  It was less entertaining than I’d feared, and he mostly stayed on mandate – albeit drifting off onto answering several questions about bank conduct (with no real attempt to tie his rhetoric to the Bank’s statutory responsibilities) rather than monetary policy.  Then again, the journalists seemed to give him a fairly easy time.  I’ll come back to some of the comments and questions a bit later.

I heartily commend the Bank on one thing.  This is from the first paragraph of the MPS

The direction of our next move is equally balanced, up or down. Only time and events will tell.

That puts them in a quite different place than the financial markets as a whole, or than respondents to the Bank’s survey of expectations, where almost everyone is convinced the next OCR change will be an increase.  After my post yesterday on the Survey of Expectations, the Bank sent out to respondents their slightly more detailed report.   That showed that none of the 41 respondents expected the OCR a year from now to be lower than it is today (I do, but although I printed off a copy of my answers, I seem to have omitted to submit them).    Sure, each individual respondent will have a probability distribution around their own responses, but it is a telling contrast to the Bank that not one has a central expectation of a lower rate.  Presumably the Governor’s willingness to be so upfront about this even distribution of risks over the next year or two (albeit not substantively that different from the line the Bank has taken previously) will have contributed to the fall in the exchange rate this morning.

That said, I’d issue the same caution as I’ve made previously. The Governor claimed, in his very first line that

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come.

“Will” is a very strong statement in a very uncertain situation (domestically and globally).  Wise central bankers don’t hold themselves out as knowing more than they do.  The Governor’s hunch at present might be that the OCR won’t change for a while, but he doesn’t (and can’t) know that much, and bald statements of this sort risk leaving the Bank more unwilling to move quickly (up or down) than might prove warranted.  The contrast with the modest tone of current RBA statements is striking.

We also had an outburst of transparency. The Governor told us that the decision to hold the OCR had had the unanimous support of his Governing Committee colleagues, and his internal Monetary Policy Committee staff advisers.    It is nice of him to tell us.  Graeme Wheeler did that once, apparently to buttress the case for the move he was then making, but then adamantly refused to release the same information about other (historical) decisions –  I discovered recently that the Ombudsman is still working his way towards a decision on my request that he review Wheeler’s decision.  Perhaps the new Governor could change courses and make this information routinely available, with a suitable (but modest lag).   Disclosure of information can’t threaten the national economic interest –  Wheeler’s assertion –  just when it happens not to suit the Governor for it to be released.

There was plenty of gush about the economy.  This line took me a bit by surprise

The recent growth in demand has been delivered by an unprecedented increase in employment.

But this is the chart of the HLFS employment (corrected for the series break in 2016).

HLFS E

Perhaps he just meant “unprecedented” since the last growth phase?

And amid all the talk about employment –  and the welcome (overdue) focus on labour market indicators –  the word “productivity”, and the near-complete lack of any growth it over recent years, appeared not once in the text of the entire document.  Nor in the Governor’s discussion of what he saw as puzzlingly low wage inflation.

In the course of the press conference, the Governor talked about his goal being to communicate better and more widely –  not just to “four bank economists” –   and about how the Bank would have to learn to communicate in plain English.  It is a laudable goal I guess, but it did sound a lot like the lines Graeme Wheeler was using only a few years ago.  Wheeler avoided one on ones with journalists of course (at least ones that might ask awkward questions), which Orr does not seem likely to do, at least in his early stages.  But Wheeler also made much of the number of speeches he and his staff were doing up and down the country in his early years.  Communication seems easy when you are starting out, and aren’t on the back foot.

I mentioned earlier that the Governor mostly stayed on mandate in the press conference.  There were a couple of small exceptions.  The first was when he was asked about what the obstacles were in the housing market, and his first clear simple response was “lack of affordable land”.   Graeme Wheeler was simply never that clear, and it was never clear if he actually appreciated the importance of the land issue and the associated regulatory failures.  Housing policy isn’t a matter for the Bank, but it is encouraging that the new Governor appears to recognise, at an analytical level, the core failure.   The other exception, which seemed to pass unnoticed (or not followed up anyway) was when the Governor suggested that with interest rates at current levels the government should be doing more investment spending.  Those aren’t calls for the central bank, on an issue where there will considerable partisan division of views.

Two aspects of the monetary policy responses puzzled and disconcerted me.

Bernard Hickey asked the Governor what he thought of the argument that central banks should be raising inflation now, so as to raise nominal interest rates, to provide more policy leeway in the next serious recession.   Orr’s rather glib response was that “I don’t think much of it at all”, suggesting that (a) central banks should just do what is right now, and (b) that there are other tools, methods and instruments.   Which is fine except that core inflation – even in New Zealand –  has been well below target for years so that, at least with hindsight, the central bank hasn’t been doing the right thing now.  Partly as a result market measures of inflation expectations are well below target.  And there is no other country where supplementary instruments (eg QE) have been so demonstrably successful that core inflation has quickly got back to target, even in a gradual recovery phase.   The Governor needs to get to grips with preparing more seriously for the next recession.  It will be along, perhaps before too long.

Perhaps even more startling, was his response when asked a question in which it was noted that Graeme Wheeler had failed to hit the inflation target midpoint, and Orr was asked whether he would be happy to be judged on his performance against that metric.  That seemed to set the Governor off in defence of his predecessors, claiming that the economy was in near-ideal cyclical sweet spot, and that he could not imagine a better place to start from as Governor.  A bit later he chipped in that he thought the Bank had been doing a ‘remarkable” job in forecasting core inflation –  a variable that hasn’t been anywhere near the explicit 2 per cent target since that target was put in place by Bill English almost six years ago.  I wouldn’t have expected him to criticise his predecessors explicitly –  although he more or less did so when discussing communications approaches –  but surely we should have hoped that the new Governor might have regretted that inflation had so persistently undershot, and committed to do everything in his power to avoid a repeat?   His failure to do so is a little disconcerting to say the least.    Even with a focus on employment/unemployment, the Governor’s own charts suggest that the labour market was allowed to run with quite unnecessary excess capacity for several years because the Bank misjudged the extent of inflation pressures.

Once again, we have a set of Bank projections that suggest things are just about to come right.  Productivity, for example, is just about to pick up, and so is inflation.  The Bank thinks that in two years time we will be almost back to 2 per cent inflation.  The problem, of course, is that the Bank has been running the same line for years now, and it just hasn’t happened.  Partly perhaps because he embraced the record of his predecessors, the new Governor gave us no reason to be confident that this time things really will be different.  That is quite a gap.

I see that ASB, continuing the plays on the Governor’s name, deems it an “Orrsome start”.  I wouldn’t call it an “Orrful start”, but if there are some encouraging aspects, there is plenty of room for improvement.  The Governor  –  being fluent –  seems to be prone to speaking a bit more quickly than he thinks.  Over time, that won’t necessarily serve him, or the Bank, that well.     But the absence of solid answers about why this time inflation really will get back to target –  in an economy that seems unlikely to grow even as fast as (the modest rates) managed over the last few years –  remains the most obvious gap.  Perhaps MPs could consider asking the Governor this afternoon about why we should believe him and his colleagues this time?