The OECD Survey process

The OECD’s biennial report on the New Zealand economy was out yesterday.

I noticed that Treasury has put out a blog post on the late phases of the process, in which New Zealand officials go to Paris to engage with other countries’ representatives on the analysis and recommendations, and to haggle over the numerous differences the authorities and staff will have.

I participated in this phase of the process on perhaps half a dozen occasions over almost 25 years.  In anticipation of the 2015 survey, I wrote a post along similar lines.

Being public servants, who have to keeping dealing with the OECD, the Treasury piece errs occasionally on the side of gush.

Every two years the Treasury assists some of the world’s best economists and policy analysts from the OECD with their study of New Zealand.

I, being of a more sceptical, perhaps contrarian disposition, and not any longer being a public servant, emphasised some questions.

It is, in other words, quite a political process. And that, of course, is also how these OECD Surveys are used.  Opposition parties have liked calls for, say, capital gains taxes.  The Reserve Bank likes references to overvalued exchange rates.  The government likes positive comments on fiscal consolidation.  And so on.  The Reserve Bank doesn’t much like references to leverage ratios, or the Treasury references to fiscal councils, but then no one much cares either.

What is the quality of the Surveys like?  I’m somewhat sceptical.  The OECD does have some fairly unparalleled databases, and quite a knack for compiling and presenting interesting charts.  I’m a data junkie, and I find those cross-country data comparisons fascinating, and labour-saving.  But the quality of the policy analysis and recommendations is rather more questionable.  I’ve looked at draft reports for New Zealand and for other countries over the years, and often found the argumentation quite unpersuasive, even in areas where I lay no claim to being a specialist or an expert.  These days there is a strong tendency to favour what I’d call “smart active government” solutions, and a disinclination to put much weight on markets and market processes.  That isn’t the image the OECD has often had in New Zealand – the late Roger Kerr often used to cite “OECD orthodoxy” to back his own arguments about what should be done in New Zealand.  But a few years back, I pointed out to the head of the Country Studies Division that the OECD could probably be best characterised as the technocratic wing of the more market-oriented strands of European social democratic movement.   He looked askance, and then somewhat reluctantly acknowledged my point.    Reasonable people will differ on how to read the evidence on the appropriate role of government, but OECD papers aren’t inclined to put much weight on questions of why governments fail so often and how policy should be shaped in the light of that.

All of which is by way of saying that no one should put too much weight on anything in any particular OECD survey.  Sometimes they will be right on the mark –  out of interest I went back last night and read the 1983 Survey and thought that they had done a very good job of highlighting the microeconomic and macroeconomic challenges then facing New Zealand, without any sense of imminent crisis.  At other times, they will be missing the mark, or adopting a particular recommendation based on not much more than institutional priors and the preferences of a few staffers.  As the OECD acknowledges, they have consistently failed to come to grips with why the New Zealand economy has not performed better over the last 25 years.  Without a good story about that it is hard to nest their individual recommendations in an overall narrative of what needs to be done.

Read together they’ll probably give you a reasonable sense of how these things come together.   I do hope the New Zealand Ambassador still offers as fine a lunch as ever.

Wheeler, the BNZ, and Joyce

A few days on and there has still been only scattered public comment on the systematic attempt by Graeme Wheeler and the senior management of the Reserve Bank to “silence” (materially alter the tone and content of what he writes) the BNZ’s Head of Research, Stephen Toplis, that came to light thanks to the Official Information Act and the efforts of BusinessDesk’s Paul McBeth.

(My previous post are here, here, and here.)

As I noted the other day, the letter in response to Wheeler written by the BNZ CEO Anthony Healy was quite strikingly deferential.  It wasn’t even as if Wheeler’s letter was the first Healy had heard of the issue.   In fact, Wheeler’s letter records that, having sent his Deputy and Assistant Governors out one by one to cajole Toplis, remonstrate with him, and induce repentance,

When this failed to address the situation I met with you and passed on examples of the material.

Presumably, the Governor hadn’t simply been told to go away, and get a thicker-skin, then either.

People are human, and sometimes over-react.  In the last few days I’ve remembered, and been reminded of, various past reactions by Reserve Bank Governors to criticism they didn’t like from bank economists.    In one case, a Governor took offence at criticism of his body language at a speech, and wrote to the economist’s boss to complain.  But in the decades since liberalisation I’ve never seen or heard of anything like the sort of sustained campaign to censor a leading economist that we get a glimpse of in these letters.

To what end?  Well, we don’t know what happened when the Governor and Mr Healy eventually talked again.   But in a story the other day Bloomberg reported that they did get an emailed response from Mr Healy.

In a separate emailed statement, Healy said “economists have an important role to play in providing opinions, and it’s important that they are independent and have a view which isn’t influenced by the wider organization.”

“However, we have acknowledged that from time to time, we may not get the right tone and will always take on board any feedback where our intent or message is not reflected in the language used,” he said.

So the CEO apparently has no concerns –  or at least none he is willing to be open about –  about the Reserve Bank Governor, and BNZ regulator, engaging in a sustained campaign aimed at changing what (and how) one of Mr Healy’s senior employee’s writes?

But, on the other hand, he does seem concerned to assure us that he has taken on board the Governor’s concerns, and will see to it that the product is different in future.  Perhaps they are just weasel words, but “take on board” seems rather more active than some bland observation that “we always welcome feedback”.    And I don’t think there is anyone –  whether or not they agree with what Stephen wrote –  who thinks that in the MPS preview that upset the Governor so much his “intent or message is not reflected in the language used”.   He said exactly what he thought, in a typically strident way.

So it begins to look as though Graeme Wheeler might have won (at least with the BNZ/Toplis) if not with a wider market.  In some ways, that would be even more disconcerting than the fact of the initial Wheeler-led campaign in the first place.   Time will tell, and I’m sure people will be watching Toplis’s future pieces with interest.

There was, for example, a new substantial piece out earlier this week, Capacity Constrained!  It is an interesting note, with some points to reflect on even if (like me) you aren’t that persuaded by his “hawkish” case.  But what I found striking, and a little disconcerting frankly, is that in five pages there is not a single mention of the Reserve Bank or monetary policy –  and yet, the research report is about aggregate capacity pressures and, hence, inflation risks.  The final sentence…..

But, that said, we strongly warn that businesses, householders, Government and investors alike need to better understand the capacity constraints that New Zealand currently faces and, in turn, recognise that whether or not expected inflationary pressures arise, growth is likely to moderate.

…..surely cries out to have “and the Reserve Bank” included in it?    Perhaps Toplis has just been told to lie low until the fuss passes, and then normal service can resume.  But even if that is “all” it is, it would be pretty disconcerting for Healy, his Board, and his parent, to have passed such a win to the Governor, him having exerted intense and illegitimate pressure to achieve it.

Then again, perhaps it was just an oversight, and Toplis really meant to include the Reserve Bank in his warning all along?   Perhaps.

There have been a few other comments in the last few days:

  • one prominent business person, evidently a BNZ customer, commmented here, and while carefully avoiding direct comment on the Reserve Bank, observed that “any material change of approach by Stephen or Anthony would be unfortunate for BNZ’s customers and in due course BNZ.”
  • on interest.co.nz, David Hargreaves has a very forceful and well-written piece, in which he calls for “a new Reserve Bank Governor who is thick-skinned and accepts that people will disagree with them” .    Mostly I strongly agree with Hargreaves – eg  “People in high office need to, in the colloquial vernacular, grow a pair, and accept that not everybody will agree with them. That’s what they are paid the big bucks for. ”     Having said that, he suggests that an “implied intellectual snobbery” at the Reserve Bank has got worse under Wheeler: for all his many faults, I don’t really agree with that comment (partly because I wince to remember some of the episodes I was involved in over the years in which at times we treated people who disagreed with us with absolute disdain….in public or in private….even if we didn’t try to censor them).

One line I really liked from Hargreaves was this

If you are going to take the drastic, actually, no…extraordinary… step of asking a bank that your organisation regulates to effectively censor the views of one of their (senior) employees you’ve got to be prepared for some consequences.

I’d certainly agree.  But it increasingly looks as though, in modern New Zealand, you don’t really need to be prepared for any consequences at all –  apart perhaps from a bit of criticism from the odd peripheral blogger.

Because the other person who has commented in the last couple of days is the Minister of Finance.  Again, interest.co.nz has the story.

Speaking to media Thursday, perhaps ironically at an event at the Reserve Bank museum, Joyce said he just was “not going to go into that,” He said doing so would be an “unproductive use of my time.”

“That’s a matter for the Reserve Bank Governor, as to how he conducts his communications with the banks and their economists,” Joyce said. He had not reached out to the Bank’s board on the matter.

Perhaps people were supposed to take it as something like “what are you asking me for, after all the Governor is his own man, and he has his own Board.  Really none of my business.”

Even if that were the legal position, it would be pretty disconcerting that the Minister of Finance would reveal himself, at least publicly, unbothered by such coercive conduct by a senior New Zealand public servant.   It would add to the sense that Alfred Ngaro was only slapped down because there was a political firestorm, not because the government was really uncomfortable with the sort of implied approach –  don’t criticise or else – Ngaro was enunciating.

But the legal position involves the Minister of Finance a lot more than he implied in answering those questions.  As I noted in my post the other day, the Reserve Bank Act is built on a difficult-to-maintain balance between, on the one hand, huge powers placed exclusively in the hands of the Governor, and on the other hand, a countervailing provisions that are supposed to provide a high level of accountability.  Some of that is in the form of serious scrutiny from outsiders (including banks and financial markets).  But the legal bits are about the relationship between the Board, the Minister and the Governor.

For a start, the Minister appoints the Governor (even though he can only appoint someone the Board nominates).  The Minister also appoints the Board –  gradually, as they serve staggered five year terms.    The Minister now writes annual letters of expectation to the Governor, and to the Board.  In writing directly to the Board he recognises that the main statutory role of the Board is as agent for the Minister –  and the public  –  in monitoring and evaluating the Governor’s performance.  The Board isn’t part of the Bank –  it is part of the review and assessment process, to strengthen accountability for the considerable power the Governor wields.

And not only does the Minister appoint the Governor but he can (via an Order in Council –  in other words with the consent of his Cabinet colleagues) dismiss the Governor on performance grounds.  In international central banking legislation, that is quite an unusual provision.  In most advanced countries, central bank governors can’t be dismissed for poor performance and certainly not just by the Minister of Finance. It will often take parliamentary action to remove a Governor, and even then only for defined really serious problems (imprisonment, mental or physical incapacity, corruption).  The whole point of our legislative model was that if the Governor alone was to have great power, there needed to be serious accountability.

And it is not even as if the Minister of Finance can simply hide behind the Board.  The Board certainly has clear responsibilities to monitor the Governor’s performance, and can if things get really bad recommend dismissal of the Governor.  Of course, they have a range of other possible sanctions, public and private, short of what is really a “nuclear option”.

But whereas the Minister can only appoint as Governor someone the Board recommends, he isn’t constrained that way when it comes to problems with, or concerns about, the Governor. He can recommend dismissal –  again the nuclear option, but there are other options –  without any recommendation from the Board.   Which pretty clearly suggests that he has statutory responsibilities himself for being satisfied that the Governor is doing his job, and doing it in an acceptable manner.    The Act is mostly concerned with the policy functions of the Bank, including the Policy Targets Agreement,  but the tests for the Minister include whether he is satisfied that “the Governor has not adequately discharged the responsibilities of office” or that “the Governor has been guilty of ….serious neglect of duty or misconduct”.

Using the power of your office to attempt to coerce a private institution, regulated by you, to censor one of its staff when writing critical evaluations of the Bank, and instructing your senior subordinates to actively involve themselves in such efforts, don’t look like the sort of standard –  the sort of discharge of the responsibilities of office –  that the Minister, or citizens, should reasonably expect, or tolerate.

I’m not suggesting that the Minister of Finance should fire the Governor.  But to simply pretend that the conduct of the Governor in this area is no concern of his, and not even to ask the Board for its views, looks like neglect of the Minister’s own responsibilities.  And it sends a dreadful message to citizens about the sorts of behaviour his government appears to be willing to, at very least, turn a blind eye to.

One of the obscure provisions of the Reserve Bank Act, that as far as I know no one has ever quite known what it means, is section 169.  It reads

169 Bank to exhibit sense of social responsibility

It shall be an objective of the Bank to exhibit a sense of social responsibility in exercising its powers under this Act.

That, too, is one of the Governor’s responsibilities in office (the Act makes him responsible for it all). It is hard to see how, in a free and democratic society, attempting to suppress a vocal critic, just because he happens to work for a body the Bank regulates, quite fits with that social responsibility.

As for the Bank’s Board, on the normal schedule they will have been meeting yesterday, upstairs just  a few floors above where Steven Joyce was washing his hands of the affair.  As I noted the other day, the Board members seem like decent and honourable people, and it should be a surprise if they were remotely comfortable with the Governor’s sustained attack on the BNZ and Toplis.    Then again, they have form, and mostly just seem to give cover to the Governor whatever he does (the OCR leak episode being a particularly clear example).  Perhaps some journalist should consider ringing the Board chair, Professor Neil Quigley, and asking him about the Board’s view of such behaviour.  Quite likely, he would simply refuse to comment, but that in itself would be telling.

UPDATE: There is new piece out from Oliver Hartwich, Executive Director of the New Zealand Initiative.  He notes

Central banks have a crucial role to fulfil in our economies. This role thus deserves public scrutiny and debate. Given the RBNZ’s independence, external commentary on its actions is the most effective check on its operations.

For these reasons, it is not acceptable for the governor of the RBNZ to attempt to stymie such scrutiny. With his complaints about a bank economist, the governor has overstepped his role.

A true believer from the OECD

The OECD released today its biennial Economic Survey of New Zealand.  I will write about it in due course, but there are 170 pages to read.

Usually these reports are just released on the website from Paris.  But today the OECD’s Chief Economist, Catherine Mann was in town, to help promote the OECD’s view of the world.  There was a press do this morning apparently, and then a Treasury guest lecture presentation, attended by all manner of past and present bureaucrats, and some others with an interest in what Catherine Mann had to say.

She gave us some brief observations on the state of the world economy, before turning to present the New Zealand survey –  the OECD’s story about what is going on here, and what should be done to make things better.  To their credit, the OECD is quite open about the ongoing severe underperformance of the New Zealand economy –  as they note, the productivity gaps to the richer OECD countries are large and, if anything, are getting larger.  Here was my variant (from a post last week) of the sort of chart she showed.

douglas 3

But the point of this post is about the bit where she took my breath away.  I couldn’t quite believe what I was hearing.  I don’t think even the Minister of Finance or the Prime Minister would have made such bold –  but unsupportable –  claims.

She presented a chart showing growth in real GDP per capita in the OECD as a whole in the US, the euro area, and in New Zealand.  As she noted, growth in all regions is still lower than it was in the 20 years or so prior to the 2008/09 recession.     In the other three regions, the OECD is picking that per capita GDP growth will pick up in 2017 and 2018, but in New Zealand they are picking it to slow a bit.  I looked at the chart and didn’t make much of it –  there is plenty of year-to-year volality, and I wouldn’t put much weight on just two years’ data.

But Mann couldn’t help herself.  She was here to tell a good news story, and proceeded to try to do so.     You might, she said, look at that chart and think it wasn’t a very good story for New Zealand –  real per capita growth was picked to slow after all –  but, no, in fact it was really a good thing.  Perhaps, I thought, she was going to say that the economy was overheating and needed to level out.    But it was a bigger bolder claim even than that.

Her argument was that per capita growth was just slowing “mechanically” because we’d acquired so many more people, and were forecast to keep on doing so.  Of course, she said –  advancing no story for why – this would weaken per capita GDP “arithmetically” in the short-term.  But –  and here I scurried to write down as much as possible her actual words –  because we were taking in so many more people to work and study, who would add value, bring fresh ideas, and create new businesses we were creating the underpinnings of a longer-term stronger economy.

Apparently, high levels of immigration were now bad for per capita income in the short-term, but would be good in the long run.  It was pretty much the opposite of the conventional New Zealand evidence –  that demand effects exceed supply effects in the short-term.  But set even that to one side for the moment.

[UPDATE:  On reflection, perhaps she had in mind some of the European countries with waves of refugees crossing borders, adding to population and probably not doing much for economic activity in the very short run.  But that is nothing like New Zealand’s immigration system –  most people arriving either have a job to go to, or are paying for a course of study about to begin.]

Because, in fact, she reckoned she had evidence that we were already seeing significant benefits.  And what form did these benefits take, in the assessment of the chief economist of one of the world’s premier international economic agencies?   Why, it was wage increases.

She had another chart, showing real wage growth for the US, the euro area, and New Zealand.   On this measure, real wages had been rising strongly in New Zealand in the last two years –  more strongly than the average for the 20 years prior to the recession.  (And over the same earlier 20 years New Zealand had had the lowest average real wage increases of any of the regions she showed).  And what was her story to explain this?  Why, it was the immigrants.  We were bringing in highly skilled immigrants, who will be earning higher wages, and –  look at the chart –  we see it in the data already.

Many of you will no doubt be wondering about this alternative universe.  But it is real data.    And, in fairness, comparing wage increases across countries is quite difficult, because countries measure things different ways.  In this case, she used a measure of “labour compensation per employee, adjusted for the GDP deflator”.   Ideally, one would want to use wages per hour worked, rather than per employee, but set that to one side for now.   More importantly,  in commodity exporting countries –  where the GDP deflator (value of the stuff produced here) inflation rate goes all over the place, no one but no one thinks that the GDP deflator is a meaningful statistic to use to deflate anything year to year.    When dairy prices plummet, on that measure real wage inflation rises, and vice versa.  From year to year, it tells one nothing meaningful.  And this, recall, was a presentation specifically focused on New Zealand.

Here’s an alternative –  much better –  measure of real wage inflation for New Zealand.  It uses the private sector LCI (analytical unadjusted measure) adjusted for the Reserve Bank’s preferred measure of core inflation, the sectoral factor model.  There is some short-term variability, so I’ve used annual average increases.

wages OECD

Not much sign of the recent high rates of wage inflation the OECD’s chief economist was touting.   The QES –  an actual compensation measure – is even weaker.

Of course, there isn’t much sign of the really highly-skilled migrants either.  Mann seemed to have forgotten that the OECD skills data –  which they use quite a bit in this report –  shows that while New Zealand’s immigrants are relatively highly-skilled compared to migrants to other countries, they  are on average less highly-skilled than the natives.  There hasn’t been a sudden change in immigration policy in the last couple of years that has generated some step-change increase in the skill level of migrants.

A sceptic sitting near me whispered, “just drink the Kool-Aid Mike”……

I was puzzled by all this, and waited for the question time at the end of her presentation.  I asked Mann quite what her optimistic take was based on  –  that while immigration would apparently be denting per capita GDP now, it would soon lead to an acceleration.  After all, I noted, we’d had large immigration inflows for decades, and on the numbers she had presented we’d had the lowest productivity growth and lowest real per capita GDP of the countries she had shown.    I wondered if she could explain her optimism in terms that took account of New Zealand’s experience over the previous 30 years or so  (not my chosen period, but the one she was using in her own presentation).

It was a pretty astonishing response.   She argued that this was an “immigration-driven economy”, and asserted that the skill characteristics of the immigrants were high, repeating that the evidence for this was the high real wage increases we’d seen in the last couple of years.  Moreover, she asserted, the pre-recession period wasn’t that relevant because we had so many more immigrants now (and presumably could therefore expect much larger future real economic gains).  She seemed not to be aware at all that the largest single component of the increase in the net PLT inflow had been the reduction in the number of New Zealanders leaving.  Or that the new analytical immigration data suggested there wasn’t anything very exceptional about the inflows of non-citizens we are seeing now (there was something similar 15 years ago).   Was she aware that there had been no increase in the residence approvals targets –  indeed a cut more recently  –  and that a significant chunk of the rest of the increase in the net inflow wasn’t more people chosen for their high skills, but (eg ) working holidaymakers and students mostly studying in relatively low-level courses.   It was a quite extraordinary degree of ignorance in someone holding forth so confidently on the undoubted gains New Zealand would see from the large immigration flows.   I don’t expect the chief economist of the OECD to be across all the details of New Zealand (a rather small and minor member of the OECD), but if she isn’t, she shouldn’t be holding forth with such breezy confidence on such a major issue of New Zealand economic policy and economic performance.  Instead, she seemed to have a doctrine, and patched together something that superficially appeared to make the data fit the doctrine.

It went on, because she attempted to explain away why our real wage inflation had been less than that of the US or the euro-area in the couple of decades prior to the recession.  It was, she claimed, because the historical US numbers were (somehow –  it wasn’t made clear how) biased upwards, and the New Zealand numbers were biased downwards.  Perhaps, but it was a new claim on me, and not one for which there was a shred of evidence produced.

It was an astonishing performance.  She then invited the OECD’s desk officer for New Zealand to add any comments.  I felt a little sorry for him – especially as he was an old friend of mine.    He noted that the actual slowdown in real per capita GDP growth the OECD was picking  for this year and next was mostly to do with them using the expenditure measure of GDP, and the gap that had opened up between the expenditure and production measures (ie just technical stuff).  He certainly wasn’t running an immigration story for that, as Mann had attempted to do.

He (who knows my story reasonably well) went bravely on attempting to address my question about how this optimism about the economic effects of immigration fitted against the backdrop of the last 30 years.  But it was clear that neither he, nor the institution, had any sort of narrative explanation that would even begin to fit the bill.  He seemed reduced to quoting the recent IMF cross-country empirical piece on immigration.  As he noted, in that sample (which included New Zealand as one of 14 countries), immigration did appear to have boosted per capita GDP.   But, as I pointed out in a post when the work was published even if that result was true on average for all the countries in the sample, there was no reason to be confident it had been so over this period for New Zealand (since these are average results).  More importantly, perhaps, the same study actually found negative effects (although not statistically significant) of immigration on both labour productivity and total factor productivity –  again, on average across this sample of countries.

I’ve seen quite a few leading international economic agency senior officials in my time.  This was one of the worst performances from such a senior person I’ve ever seen.   She may well have been quite good in her own area –  international economics –  and in fact I went along mostly because she had a very good academic reputation, and had performed well when I’d seen her previously.  But when she lapsed into advocacy and cheerleading for New Zealand’s immigration policy, without getting fully familiar with a credible story that fits the New Zealand data and experience, she probably did herself, and the cause, more harm than good.

[UPDATE: For anyone interested, her presentation slides –  including the charts I tried above to describe – are here. ]

 

Market rents

In the aftermath of the London fire, in some ways my heart isn’t in writing much about housing.  Disasters don’t often get to me, but this one has.

Nonetheless, the Dominion-Post led with housing this morning, and when I saw that the first word in the entire article was “greedy”  (followed by that other emotive term “landlords”) it wasn’t promising.    Just because people scoff when Fox News talks of being “fair and balanced” doesn’t mean the rest of media should abandon the aspiration.

Faced with rising demand for rental accommodation –  in a city where central and local government have again combined to make housing supply not very responsive to changes in demands –  owners (or their agents) of residential rental services businesses have faced excess demand for the limited stock available.  The typical response you might expect would be for rents to rise.

There are different sorts of pricing structures used for different goods and services.  Typical dry goods in a supermarket will have a fixed price, and occasionally the supermarket runs out of stock –  which can be mildly annoying to you or me, but is presumably easier to manage for them.  The value of New Zealand dollar (the exchange rate) is constantly changing, typically by quite small amounts, as pressures from potential buyers and sellers ebb and flow.   Even at a retail level, petrol prices now change very frequently.   There are whole literatures on the reasons why different structures are adopted in different markets (and I’m certainly not expert in that field).

Housing is typically nearer the variable pricing end of the spectrum.  In the market for actual house purchases, fixed price adverts, “buyer enquiry over”, tenders, and auctions all co-exist.   In the last two, the seller can reconcile supply (one house) to demand, simply by using the amounts bid.  In a fixed price advert, if there is more than one interested party, the seller might have to use some other decision criterion (although I imagine that typically even then one bidder will offer more).

It is, as I understand it –  not owning rental property, and not having rented one in this country for many decades –  customary to advertise rental properties with a fixed rental price.  Holiday home websites operate that way too –  and, in effect, they just operate on a “first come, first served” basis.    In a normal market, it probably often works quite well –  if there are plenty of people offering rentals, and plenty of potential tenants, even if one misses out on one property, there is another not far away.  If the property owners sets his or her price too high, they find there is little or no interest in renting their property, and eventually have to re-evaluate and revise the fixed asking price.

But the current situation seems to be one where lots of people are enquiring eagerly about almost any rental property on offer.  Fixed asking prices are, in that sense, too low to clear the market.   Over time you’d expect that those fixed asking prices would rise –  and thus take care of that particular element of the problem –  but that doesn’t deal with the property owner’s issue on the day: when 20 people want one rental.

Wellington Central MP Grant Robertson knew of two cases of renting tenders in Wellington – both from around the start of the year when students were returning to the capital.
“I think it is barely legal,” he said.
At one, would-be renters turned up to view a flat with an advertised price. “When they got to the property they were asked, ‘how much are you prepared to pay?'”

At the other there was no advertised price and would-be renters were simply asked how much they were prepared to pay.
“I think it is abhorrent. It is exploiting the fact we have a real shortage of rental homes in Wellington at the moment – exploiting people in vulnerable positions.”

So how is the property owner or agent supposed to respond?  Just ignore the excess demand and draw straws to determine who should get the flat at the –  evidently –  too low advertised price?  It is a market, and the property owners aren’t running charities for the homeless, but private businesses.

As is noted in the Dom-Post article, auctions aren’t always an ideal mechanism –  as an owner you are likely to care about the quality of the tenant as well.   But simply drawing straws doesn’t seem to have any particular merit –  moral or practical  – in this climate.

Don’t get me wrong.  The housing market in New Zealand is, in many, respects a scandal, and the problems flow largely from the choices of successive waves of central and local governments.  Since we are talking about right now, in this case it means the National-led central government, and the Labour-dominanted Wellington City Council.   But attacking a symptom –  rising rents, and alternative techniques to reconcile supply and demand –  isn’t a particularly meaningful response.   Owners of rental properties are, in many respects, the last people who should be being blamed here.

But I also learned something new from the article.    The journalists approached, and got some comment from one of their officials

Ministry of Business, Innovation and Employment national manager tenancy compliance and investigation Steve Watson said the practice was allowable under the Residential Tenancies Act.

“Any party who feels that they are being asked to pay rent that exceeds ‘market rent’ has the ability to apply to the Tenancy Tribunal who can review and determine the appropriate amount of rent for a residential property,” Watson said.

Really?   I know there has been centuries of philsophical and theological debate around concepts of “just prices”, but have we (or rather our Parliament) really legislated to provide for cases where some arbitrarily determined “market price” differs from a price being paid in….well…the market.  It seems that our politicians had done just that.

Here are the relevant bits of section 25 of the Residential Tenancies Act

25 Market rent

(1)  On an application made to it at any time by the tenant, the Tribunal may, in accordance with the succeeding provisions of this section, on being satisfied that the rent payable or to become payable for the tenancy exceeds the market rent by a substantial amount, make an order reducing the rent to an amount, to be specified in the order, that is in line with the market rent.

(2) Notwithstanding anything in subsection (1), no application may be made under that subsection in respect of the rent payable under a fixed-term tenancy later than 3 months after—

(a)  the date of the commencement of the tenancy or (in the case of a tenancy that was subsisting immediately before commencement of this Act) the date of the commencement of this Act; or

(b)  the date of the last review of rent,—

whichever is the later.

(2A) …..

 (3)  For the purposes of this Act, the market rent for any tenancy shall be the rent that, without regard to the personal circumstances of the landlord or the tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for the tenancy, taking into consideration the general level of rents (other than income-related rents within the meaning of section 2(1) of the Housing Restructuring and Tenancy Matters Act 1992) for comparable tenancies of comparable premises in the locality or in similar localities and such other matters as the Tribunal considers relevant.

Initially I wondered if this might be some historical provision to deal with, say, a situation in the Great Depression where there was a long-term fixed rent, and the general price (and wage) level fell sharply.  But that can’t be –  at least for fixed term tenancies these provisions can only be used within three momths of the tenant taking up the tenancy, or of the most recent rent review.

It just looks like an extraordinary piece of “feel good” law.     The standard (in 25(3)) is the rent that “without regard to the personal circumstances of the landlord or tenant, a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay, for the tenancy, having regard to the general level of rents”.

It isn’t clear at all why the “personal circumstances” should be irrelevant.  If someone desperately wants to live on a particular street, because they want to be close to aged parents (say) why shouldn’t that be something that can reflected in the price they pay for a rental tenancy?    One bag of flour might be much the same as the next one.  But except perhaps in high-rise blocks, almost every rental property is different from the others, even if only by location –  and location preferences are often quite idiosyncratic and personal.

I have no idea how often this provision is used –  perhaps more often now  having been highlighted on the front page of a major daily paper.  Various readers have a lot of exposure to running rental businesses, and I’d be interested in any perspectives they can offer.     But you also have to wonder why the MBIE official felt it appropriate to add in this information when he commented.  After all, the one common element, agreed (it would seem) by all parties in the story, is that the rental market in Wellington is very tight.  The general level of rents is presumably rising.        (And if, perchance, someone does agree to pay a level of rent “above the market rent”, it was a contract voluntarily –  even if grudgingly –  entered into: not great perhaps, but better –  for the renter –  in their own assessment, than the alternative.)

I was interested to see Grant Robertson stating that Labour will soon be announcing a package to “strengthen renters’ right”.  There may well be merit in some of that.   But the best way to protect the position of renters, and all others coming into the accommodation market (whether as renters or buyer) is surely to fix up the land use and housing supply markets.  Abundant responsive supply in the face of  changes in demand is the best assurance of genuinely affordable and secure accommodation.

(On which note, a reader sent me a link the other day to a stimulating piece on housing and land markets from a UK academic. I don’t agree with everything in it, but for those interested in the debate –  and in recognising the similar issues in other countries –  it is worth reading.)

 

 

The Wheeler letter

(I’ve had to spend much of the day at the Reserve Bank, in a meeting chaired by one of their Board members, attended by one Deputy Governor, and where the Governor himself just might turn up – he’s a member, but will no doubt find himself too busy on the day and send an alternate.  In the interests of that meeting –  which will be contentious enough anyway just on its own subject matter – this post is pre-scheduled to appear when I’ve got out of the building.)

On Monday, the Reserve Bank posted the full text of the Governor’s letter to BNZ CEO Anthony Healy, and of Healy’s initial reply to the Governor.  Valuable as Paul McBeth’s initial article in NBR was, it is always worth reading the full text of such documents if one can.    Some of this ground was already covered in my post on Saturday, but after a bit of comment on the letters themselves, I want to offer some other thoughts after a few days to reflect further on the issue, and the reaction to it.

First, the Governor’s letter.    What is clearer with the benefit of seeing the full letter is the extent to which it wasn’t anything like a one-off fit of pique on a bad day, but rather a culmination of a sustained campaign from the Governor and his senior management to put pressure on the BNZ to “silence” (materially alter what he was saying and how he was saying it) Stephen Toplis.  It is interesting that the letter was dated 11 May, the day of the release of the Monetary Policy Statement itself.  One might have supposed that the Governor would have had higher priorities that day, between a press conference, an FEC appearance and so on.

The first couple of paragraphs of his letter focus just on the specific Monetary Policy Statement preview that Stephen Toplis had written and published a few days earlier.

I am writing to you to draw your attention to the language used in the BNZ Markets Outlook of 8 May 2017, which appeared to bring into question the integrity of the Reserve Bank.  While I appreciate that you will not have reviewed the document in detail, I expect you would also be concerned at the nature of the language used.

As I noted in my earlier post, the Governor offers no evidence or examples to back his suggestion that the commentary concerned “questioned the integrity of the Reserve Bank”,    There was, in fact, nothing in the commentary that any reasonable reader could have read as impugning the Bank’s integrity.  Competence, diligence, or focus perhaps, but not integrity.  So the Governor was off to a poor start.   Perhaps he’d just got so worked up about Stephen Toplis over such a long period that he ending up seeing/reading stuff that just wasn’t there?

The document claims that the Bank would be negligent if it didn’t conform to the views of the BNZ economists.  Negligence is a serious accusation and implies that the Reserve Bank would not exercise reasonable care in the discharge of its responsibilities.  The document also makes other claims that the Reserve Bank would not implement monetary policy in the best interests of New Zealanders.  For example, we would not adjust our policy stance even if our analysis indicated that appropriate, if it in some way embarrassed the Reserve Bank.  To bring into question the Bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulates policy is unacceptable.

To repeat, there is nothing in the document that any reasonable detached reader could take as impugning the integrity of the Bank.  There is also nothing to support the suggestion that BNZ claimed that the Reserve Bank “would not implement monetary policy in the best interests of New Zealanders” (although in fact the Bank’s statutory mandate is rather narrower than that anyway).    The commentary did suggest that the Bank would be reluctant to raise rates in May, whatever the data showed, because of how strongly they had previously adopted a fairly neutral bias.   Well, take it from me, having sat around monetary policy decision tables for decades, those conversations do actually happen in central banks.  Ask the Bank’s chief economist –  there are whole literatures on interest rate smoothing, consistent signals etc.  And, however much we sometimes like to pretend otherwise, no monetary policy decision is ever totally clear-cut, simply because no one knows the future.     What’s more, as I noted the other day, the Reserve Bank more or less did what BNZ said they needed to do –  they did show a track with (eventual) OCR increases in it.  So having made a conditional statement, that the Bank would be negligent – or remiss, or not adequately doing its job –  if an upward-sloping track wasn’t shown, they showed one.  So quite what was the Governor’s specific problem?

Perhaps Toplis could have chosen another word than “negligent”, but “negligent” is a synonym for various words for not doing a job well, and with due attention to responsibilities.  That is exactly what the Reserve Bank Act charges the Bank’s Board with assessing – it even makes brief reference to “neglect”.  The whole statutory accountability framework is built around quite personalised assessments of that sort.  If the Board can do such assessments why can’t the rest of us?

At this point, the Reserve Bank escalates the issue from a simple expression of concern to a not-very-veiled call for tighter control on Toplis, to suit the Governor’s preferences.

The Reserve Bank makes a considerable effort to explain its monetary policy processes, engage with market participants, and communicate clearly its monetary policy stance.  Given these efforts, I would have expected the BNZ economists to be more accurate and careful in their choice of words [is this a suggestion Toplis had been “negligent”?] I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by the Reserve Bank.

Quite why the Reserve Bank’s “efforts” should affect the evaluations of the Reserve Bank that the BNZ economists (or anyone else) make is a bit of a mystery.  Many people have criticised aspects of the Bank’s communications –  or policy –  over many years, rightly or wrongly.  They are free to do so.  They are also free to suggest that the Reserve Bank might not be doing its job adequately, if it did this, that or the other thing.  Only the other day, for example, I suggested that some of their regulatory interventions looked as though they might be ultra vires.

And then what is it with the suggestion of vetting and legal sign-off on market commentaries?  A preview for the Monetary Policy Statement, isn’t exactly a prospectus for a bond issue, or an official disclosure statement, with lawyers scrutinising every line to ensure statutory responsibilities are met.  It is an opinion piece, in a field where reasonable people’s views at times differ widely, and where the Reserve Bank has no privileged knowledge about what choices will prove to be right.

The next paragraph is mostly inoffensive.

I should stress that we respect the forecasts made by market analysts and play [sic] close attention to their views in our monetary policy processes.  We do not always expect to agree on outlook or policy responses, but instead seek that differences of view are reasoned and understood.

Well, fair enough I suppose, but anyone really is free to disagree with the Reserve Bank on any grounds they like.  It simply isn’t up to the Reserve Bank –  in a free society –  to decide what sort of disagreement is acceptable and what is not.      If the BNZ puts out consistently poor commentary –  in the eyes of its management and clients –  presumably there will, over time, be a diminution in the demand for that commentary.     There is a competitive market in opinion and analysis, including that on the Reserve Bank.

And then we learn that actually the pre-MPS commentary was just the last straw for the Governor.

You will recall that my fellow Governors each met separately with [withheld –  but presumably “Stephen Toplis”] to convey their concern at the personal nature of the criticism being expressed by the BNZ.  When this failed to address the situation I met with you and passed on examples of the material.  I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of the other banks.

So Grant Spencer –  head of financial stability and responsible for regulation of BNZ –  Geoff Bascand, and John McDermott each met with Toplis –  not together, but in a succession of separate meetings.  Not apparently to discuss or debate the substance of the BNZ commentaries or concerns –  many of which have, over time, been quite well justified in my view –  but to demand repentance and amendment of ways.    That is what the Governor says –  “when this failed to address the situation” , or “when the BNZ economists still refused to comment the way I wanted them to”.  And the Governor complains about a personalised tone, even though he holds a very powerful position in a system which, as he knows, puts all the Bank’s power in his hands personally.

It is all rather extraordinary –  perhaps redeemed only by the fact that the Governor actually put it in writing and thus (upsetting as it apparently is to him) eventually making it known to the public.    The BNZ’s approach has certainly been more forceful than that of most other banks,  but it simply isn’t for the Governor to tell a bank how it is allowed to review or criticise him.  Lese-majeste is an offence in Thailand, but (a) this is New Zealand, and (b) Wheeler isn’t king.   Probably no one would think it amiss if the Bank found Toplis’s tone so obnoxious that they refused to meet with him –  no one has a right to meetings with the Governor or Chief Economist –  but even then you need a thick skin in this game, and to recognise that over time scrutiny, even if not written in quite the tone you might like, has benefits (for society, and probably even for the institution).

Finally

I would like you to be aware of our serious concerns about the inappropriateness of the language used in the document and would ask that you bring it to the attention of those responsible for the editorial quality and any legal sign-off.

So twice in a single page letter, we have the heavy-handed call for censorship and references to lawyers.  It is an extraordinary demand for a public servant to make of a private business in a free society. Extraordinary, having lost all sense of perspective, and quite –  to use the Governor’s  own words –  “unacceptable” and “inappropriate”.  And the Governor works for us –  it is quite reasonable for us to hold him to account –  while the BNZ does not work for the Governor.

I’ve had various discussions with people in the last few days about quite what was going on here. I’ve had people suggesting that maybe Wheeler wasn’t really responsible, but instead it was the Bank’s Communications Department, or one of the other Governors.    Only they will know, but based on my knowledge of, and exposure to, each of those individuals that seems very unlikely.  The Comms Dept can get prickly and precious at times, but they’ll have been only too well aware of how this would backfire if it ever got out.     Graeme Wheeler is the one who has demonstrated a thin skin, a reluctance to expose himself to scrutiny, and a reluctance to engage with alternative perspectives.   I’m pretty sure this was largely Wheeler-driven –  perhaps he just got to the end of his tether as his troubled five year term finally draws to his end.  Sadly, it seems that his colleagues were too weak to either convince him that he was over-reacting, or to refuse to be an active part in his censorship efforts.  I don’t like to believe they’d have been encouraging him, but perhaps they were.

What of Healy’s response?   It is mostly a holding response, but wasn’t written until several days after the Governor’s letter was sent, so presumably his lawyers, his regulatory affairs people, his Board, and perhaps his head office in Melbourne will all have been trying to work out how best to respond.

In an ideal world, perhaps, Healy would have written back along the lines of

“Dear Governor, Thank you for your letter of 11 May.  The contents and style of our economic commentaries are matters for us to determine, not for you.  We encourage and welcome robust debate, and we would hope you do too.”

But he was writing back to the chief executive  –  and single decisionmaker – of his regulatory agency.   I should be clear that I do not read Wheeler’s letter as any sort of direct threat to BNZ itself –  comply and censor Toplis or we will withhold this or that specific regulatory approval.  Even the supine banks would probably have taken him on over anything that overt.  But the banks need Reserve Bank say-so on numerous things large and small each year (people, models, instruments etc), and they are pretty cautious about getting offside with the boss of the regulatory agency, lest other disagrements risk colouring the attitudes of the Governor when he makes regulatory decisions.

And so Healy wrote

I refer to your letter of 11 May 2017 expressing concerns about commentary in the BNZ Markets Outlook  of 8 May 2017.

I would like to acknowledge both the sentiment and concerns you have expressed in your letter and assure you that [withheld –  but presumably either “Stephen Toplis is” or “the economics team are”] treating this matter with the utmost seriousness.

We will be reviewing the contents of the BNZ Markets Outlook and the concerns expressed in your letter in detail.  Once that process is complete, I would appreciate the opportunity to have a call with you to discuss the outcomes of that review.

Please let me know if a call in the week of 29 May would be possible and I will ask my Regulatory Affairs team to arrange this.

Thank you for bringing your concerns to my attention and I look forward to hearing from you.

[UPDATE: A commenter points out that the RB doesn’t appear to have quite fully deleted the name, and what appears still be showing suggests it can’t be “Toplis”]

Pretty weak and deferential really –  and the man knows this is the regulator he is dealing with, not just someone who disagrees with the team’s commentary.  It isn’t his PA arranging the call, but his Regulatory Affairs team.

Healy, no doubt, finds himself in a difficult position.  I guess the proof of his good intentions is that Toplis is still employed, and not obviously using a different tone or analysis in his reports.  Then again, there hasn’t been another MPS since this episode.   It would be interesting to know what was said in that phone call later in May, but I suspect it would be futile for anyone to try to OIA that information.  Again, in an ideal world, BNZ would front up to the media on this attempt by the central bank to intimidate them and censor their commentary.  I  don’t suppose anyone will be holding their breath waiting for that.  But failure to front up implicitly accepts and condones this sort of conduct by the Governor, whatever they might be saying in private.

Of course, one mystery in all this is how the story got to the media.  Perhaps the BNZ themselves prompted Paul McBeth to lodge his OIA request.  If so, well done.  Presumably the Reserve Bank hierarchy didn’t want the news known, but I have heard stories that junior Reserve Bank staff were discussing the issue in Wellington bars.

In this episode, it is worth thinking briefly about the people involved.  In some respects, Stephen Toplis isn’t a person who will naturally command lots of sympathy –  highly paid economists of foreign banks, some might think, can simply fight their own battles.  And his style can be, and has been, somewhat abrasive, not just with the Reserve Bank.

And, on the other hand, Graeme Wheeler is three months from leaving office. For all the failings in his term of office –  and this is just another one –  why bother when he’ll soon be gone from public life?

It seems to me that the response on both counts is about precedents.  If powerful public officials attempt to shut down prominent economists, just think what they could do to other people.   And if Graeme Wheeler gets away with this attempt –  perhaps just having got the end of his tether –  what message does it send to other regulators, officials and politicians in our system?  Of course, others will try to keep their intimidation attempts quiet –  as no doubt Wheeler did – but if there is little downside when things do come out, they might as well just keep on exerting that improper pressure.   On this occasion it was about an almost unbelievably trivial thing –  use of the word “negligent” –  but on some occasions it will be more important things: the Muldoon attack on Len Bayliss was about serious and genuine differences of view about big picture economic policy.    Such behaviour just shouldn’t be acceptable in a free society, and the powerful need to know it.   And of course, the other reason to be concerned is that Geoff Bascand appears to have been fully involved in this, and he is widely expected to be a serious contender for Governor next year.

Very few people seem to have attempted to defend Wheeler’s behaviour –  at most a few have minimised it (“not a good look”).  But, given that fairly widespread apparent private disapproval,  what is quite disconcerting is the deafening public silence over Wheeler’s attempt to “silence” Toplis and the BNZ.    The BNZ itself hasn’t spoken out, and nor have any of the other banks or other bank economists.  I can understand how difficult it might be for some prominent individuals to take an open stand.  Then again, holding prominent positions carries with it responsibilities.  And if, say, all the banks spoke out together –  eg through the Bankers’ Association –  what could the Reserve Bank possibly do in response?

It is to the credit of Paul McBeth that he got the original OIA material and ran the story, but it was reported as straight news.   Where are other local media in deploring this attempt to limit open public debate and constrain critical review of a powerful institution?  So far, there seems to have been more interest abroad.  The story has been run on the Central Banking magazine’s website –  premier publication for central bankers, and one which has honoured the Reserve Bank in the past (central bank of the year in 2015).    I’ve spoken to one other foreign journalist who is quite stunned at the local silence (so far?) – not, it was put to me, what would have happened if an episode like this had happened in, say, the UK.

It isn’t a parliamentary sitting week, and Monday was Labour’s immigration policy day.  But not a word of protest or unease has been heard from representatives of any political party.  Of course, this isn’t a big vote-grabbing issue –  defending institutions such as freedom of speech, and the need for self-restraint by the powerful, rarely is.  Is this the worst offence in the world?  Perhaps not, but we preserve our institutions and conventions by taking a stand on even modest breaches; when people step over the mark, perhaps even without quite fully realising what they were doing.

And then of course there is the question of the Reserve Bank Board.  I know a few of the members, and they and the others look, on paper, to be people of decency who take their roles seriously.  It is difficult to believe that many of them can really be comfortable with the Governor’s attempts to intimidate the BNZ.  But if they aren’t, they have a responsibility to say so.  They don’t work for the Governor.  Their role isn’t to have the Governor’s back.  It is to act as agent for the Minister and the public, in ensuring that the Governor is doing his job, and not overstepping those marks.

Similarly, where is the Minister of Finance in all this?.  It would be a simple matter to let it be known that such behaviour is quite unacceptable in senior New Zealand public servants.  If he won’t make that clear, he leaves us wondering whether in fact the government thinks such behaviour is acceptable, or just “the way of the world” (memories of Alfred Ngaro).   That is the way the best elements of our free society are slowly but inexorably corroded.

As a final thought, I leave you with this quote

Financial markets, the business media, and other economic commentators all play a part in scrutinising and making sense of the Reserve Bank’s monetary policy choices. It is not difficult to make monetary policy choices that turn out to be wrong – indeed, in the nature of things, many will turn out to have been less than ideal. But the presence of the extensive market commentary, on every major piece of data and on OCR decisions themselves, means that if the Bank takes a position that even a significant minority of outsiders disagree with, the difference is likely to be highlighted. This not only allows for public debate and scrutiny, but also provides information that the Board themselves can (and does) use in questioning and evaluating the Governor.

It was the first thing that came up when I googled “monetary policy accountability and monitoring”.  As it happens, I wrote those words 10 year or so ago, but they are still sitting on the Reserve Bank’s website, as an official document in the “About monetary policy” section.  But after the Toplis affair, it is a little harder than it was to take it seriously as a representation of how the Reserve Bank thinks about the value of market commentary, alternative views, challenge and dissent.  If so, that would be a shame.

The Reserve Bank Act isn’t built around a philosophy of deference, but around a difficult- to-maintain balance between the huge amount of power given to the Governor, and a countervailing place for searching scrutiny –  by the Board, by the Minister, and by the public (including media and markets).    Whoever the new Governor is next year really needs to devote a lot of effort to rebuilding an open and engaging culture that welcomes, and relishes, debate and challenge.  At times, no doubt, it will be trying and frustrating, but that is how institutions in a democratic society are supposed to work.  Life for the powerful isn’t meant to be comfortable.

A BNZ economist and the powers that be

No, not Stephen Toplis.

This is a story about an earlier BNZ Chief Economist, Len Bayliss.   A commenter on my post on Graeme Wheeler’s attempt to silence Stephen Toplis reminded me of how Bayliss’s career at the BNZ ended, victim of intense pressure from the then Prime Minister and Minister of Finance, Robert Muldoon, and a pusillanimous Board and management of what was then a wholly government-owned bank.

Len Bayliss was one of New Zealand’s leading, and most prominent, economists from the 1960s to the 1980s, particularly as the BNZ’s chief economist for 15 years or so.   A few years ago I did an interview about his career with him for the newsletter of the New Zealand Association of Economists.   As he records it, that interview and some follow-up questions from me prompted him to put together a volume of documents and recollections  –  Recollections: Bank of New Zealand 1981-1992  – dealing with his ouster from the BNZ and his later term as a government-appointed director of the BNZ as it descended into crisis and near-failure in the late 1980s and early 1990s.   I’m fortunate enough to have a copy.

Bayliss and Muldoon had, at one time, worked very closely together, with Bayliss having served as a member of the Advisory Group in the Prime Minister’s Department when National returned to office at the end of 1975.  A lot of financial liberalisation went on over the following couple of years, and Bayliss appears (there are conflicting accounts, but I’ve found Bayliss’s persuasive) to have played a key role in that.

Decades on, in that interview I did with him, Bayliss could still record of Muldoon

Excellent. He was the best boss I’ve ever had. Absolutely decisive. I wrote his speech for the Mansion House dinner, the most important speech he’d made after becoming PM. I gave it to him. He said send it to Treasury and see if it’s all right with them. They wrote back wanting something changed and wrote a little memo and he just put ‘No’. And he always was very proper. He may have been tough to his political opponents but as Bernard Galvin used to say, certainly in the time I was there, it was a very happy group. He never tried to force you to do anything. In a sense, he treated you just like a public servant, as a politician should treat them. He was decisive. He would argue very intelligently. Watching him at the Cabinet Economic Committee, he really tore strips off ministers who hadn’t done their homework. And I saw him several times in debates with Noel Lough [senior Treasury official]. Noel Lough was a lovely bloke but Muldoon really won the debates.

But after Bayliss’s return to the BNZ, and as New Zealand’s economic difficulties became increasingly apparent –  with Bayliss among those openly highlighting the issues – the sentiments certainly weren’t reciprocated.

The crisis began to come to a head after Bayliss was interviewed on Radio New Zealand’s Morning Report on 14 August 1981.   After a lengthy introduction, setting the scene for a discussion of the value of the exchange rate, the presenter turned to Bayliss

Bayliss:    I think we have to do a number of things.  We have to change the exchange rate, we’ve got to get our budget deficit reduced, we’ve got to get better control of the money supply and we’ve got to replace import controls by tariffs, and we’ve got to get more competition into the economy.

Reporter: Well, you’re talking about the exchange rate. You’re talking devaluation are you?

Bayliss: That would be it, yes.

The interview went on, concluding thus

Reporter:  Well, this artificially high value of our currency has been held for many years I mean its not a recent thing. You know, why do we keep on doing it?

Bayliss:  I think the reason we keep on with it is two-fold.  First of all if you just devalue and do nothing else….you get a very short-term gain and in six months’ time the rate of inflation is worse. I think the second reason is that we’ve built up a system in New Zealand where a large number of industries and sectors and firms and so on are subsidised and naturally these people fight hard to maintain their subsidies……. The New Zealand economy has had nil rates of growth for about five years and rising levels of unemployment and this is a pretty deplorable economic performance……If we are going to improve our economic performance then we have to make some pretty dramatic changes in economic policy.

The Prime Minister was not happy at all.   That shouldn’t have surprised anyone –  who likes have their approach openly criticised?  But the Prime Minister didn’t just complain to his colleagues, thump the desk, and get on with his day.  Instead, he wrote a letter to the chairman of the Board of the BNZ.  News of this letter got out  –  it took a while –  and on 15 October there was parliamentary question about it.  Answering on behalf of the Prime Minister, Jim Bolger stated

“I wrote to the Chairman of the Bank of New Zealand on 25 August 1981 expressing concern that Mr Bayliss’s comments were not only misleading and not factually based, but that they would also have an adverse effect on our international credit.  Both the management and the Chairman of the bank have told me they regretted Mr Bayliss’s comments”

Opposition MP Stan Rodger then asked

“Can this be taken as as indication that the Government is adverse to having open debate in society within the news media on economic developments and on economic factors affecting New Zealand society?”

Bolger:  “No it most certainly cannot be taken as an indication that we do not welcome public debate on issues.  The question that was posed is whether or not the issue that was being debated was being debated factually, whether it was being debated in a manner that would not be harmful to New Zealand.  As the answer was written by the Prime Minister, it was his belief that the NZ comments would affect New Zealand’s international credit.  That is something that is of some moment.”

Another Labour MP, Michael Bassett continued

“When the Prime Minister wrote to teh Bank of New Zealand was it his intention to silence Mr Bayliss altogether, or was it simply to ensure that he debated the economy on terms that were agreeable to the Prime Minister?”

Bolger:  I cannot answer the question in the way it was posed because I do not know the precise intention of the Prime Minister when he wrote the letter. However, I am sure the Prime Minister will welcome debate on this issue or any other based on facts, not on any other basis.”

At the next meeting on the BNZ Board, (according to a contemporary file note) the Board apparently spent “considerable time discussing public statements on economic matters by the Chief Economist – in particular forthcoming speech to Hutt Chamber of Commerce”.    The chief executive informed Bayliss that “in future contents of any public statement on economy by Chief Economist should be such that they provoke no criticism whatsoever by Prime Minister.”

Bayliss responded (again, according to the file note) “impossible to make accurate, balanced and professional analysis of economy under such criteria –  a view which would be shared by all economists and many others. Board placing Chief Economist in impossible position –  best to cancel speech.”

To which the chief executive is recorded as responding “Can’t do that –  must make speech. Cancellation would damage image of BNZ and provoke public questioning of Board’s attitude. Only consideration must be BNZ’s public reputation.”

And so it went on in subsequent days.   Bayliss eventually informed that BNZ that under these conditions he would probably feel obliged to resign, and did so early the following year.   Both the Board of the BNZ and the Prime Minister disavowed any responsibility.

Bayliss includes in his collection of documents, a letter he received shortly after his resignation from John Stone, then the Secretary to the Treasury in Australia (and still vigorously contributing to the debate in Australia in his late 80s).  Stone wrote

“I learned yesterday of the announcement of your impending resignation from your present position with the Bank of New Zealand.  The reports which I saw of that development were naturally only of a general kind – the suggestion being that there had been some reaction from the political heights to the outspokennes and straight-speaking on the New Zealand economy which over recent years you have become well (and let me emphasise favourably) known.

“Whether or not there is truth in those kinds of speculation I naturally do not know. If there were I would think it is a sad reflection upon a country for which as you know I retain a considerable affection.

Indeed.

Graeme Wheeler was a junior Treasury official in late 1981. I wonder what he made of Muldoon’s attack on Bayliss?  Did he even imagine that one day he’d be writing to the BNZ to complain of another economist whose style and/or substance had offended him, as high public servant and powerful regulator?  Surely not.

 

 

Two sides of the same coin

When, a couple of months ago, the current National-led government announced plans to tighten immigration policy in several areas, I summed up the changes as “a modest step that ignores the big picture“.

Yesterday, the Labour Party announced the immigration policy it will campaign on.  I’d use exactly the same words to describe their proposals.  Some of the changes –  the largest ones –  seem broadly sensible, but they won’t come close to tackling the real problems with New Zealand’s immigration policy.

In some ways the biggest difference between the two parties’ approaches is that National provided us with no estimates about what impact their changes would have on numbers (and the Prime Minister apparently claimed yesterday they would,  in fact, have no impact on numbers), while Labour is touting large numerical impacts but not acknowledging that they will actually have little or no medium to long-term effect on the net inflows of non-New Zealand citizens.

In many ways, none of this should be a surprise.  The “big New Zealand” strategy, revitalised over the last 25 years, has been a bipartisan project.   On either party’s policy, it remains one.   There is really no material difference between them –  just details which, while not unimportant, don’t affect the underlying strategy.  A strategy which, to the extent it had an economic performance objective behind it (recall how MBIE used to call our immigration policy, “a critical economic enabler”), has simply failed.  There is no reason to expect anything much better if future if we keep on with the same policies.

What determines the medium-term contribution of immigration policy to population growth is the residence programme, which aims to give out around 45000 residence approvals each year.  The government cut that target a little last year.  Labour’s policy doesn’t even mention it.   At 45000 approvals, the programme is roughly three times the size, in per capita terms, of the equivalent programme is the United States (where about one million green cards are issued each year).

But what of the proposals Labour did put forward.  Their policy document is here.   It is misconceived from the first sentences where they state

Migrants bring to New Zealand the skills we need to grow our economy

Have they not seen the OECD data showing that New Zealanders are among the most highly-skilled people in the advanced world, and that –  on average –  immigrants are a bit less skilled than natives?    On the scale the New Zealand immigration programme attempts to operate at, the typical new additions to the labour force from non-citizen migration are not as highly skilled as the people who are already here, and our own young people who enter, and move up in, the workforce each year.   There are, of course, no doubt some exceptionally talented people.   But most are people from poorer countries looking for better opportunities here for themselves and their families –  typically, too, people who couldn’t get into the richer and more successful Anglo countries.  (None of this is a criticism of the migrants –  pursing the best for themselves and their families is probably what all of us seek to do too – but it is a criticism of the policy framework that enables such large inflows of not overly-skilled people.)

Mostly Labour’s policy seems to be about fixing some pretty dubious changes made to the student visa system over recent years.   In fact, three-quarters of the total numerical impact of their policy comes (on their own numbers) from student visa changes.

Labour will stop issuing student visas for courses below a bachelor’s degree which are not independently assessed by the TEC and NZQA to be of high quality.

Labour will also limit the ability to work while studying to international students studying at Bachelor-level or higher. For those below that level, their course will have to have the ability to work approved as part of the course.

Labour will limit the “Post Study Work Visa – Open” after graduating from a course of study in New Zealand to those who have studied at Bachelor-level or higher.

Mostly, those seem like a broadly sensible direction of change.   That said, I’m slightly uneasy about relying on bureaucratic agencies to decide whether courses are “high quality” –  in principle, surely the market can take care of reputational and branding issues?

And while it might look good on paper, I’m a little uneasy about the line drawn between bachelor’s degree and other lines of study.  It seems to prioritise more academic courses of study over more vocational ones, and while the former will often require a higher level of skill, the potential for the system to be gamed, and for smart tertiary operators to further degrade some of the quality of their (very numerous) bachelor’s degree offerings can’t be ignored.  In the student visa data we already see some slightly suspicious signs (bottom right chart) of switching from PTEs to universities  I’d probably have been happier if the right to work while studying had been withdrawn, or more tightly limited, for all courses.   And if open post-study work visas had been restricted to those completing post-graduate qualifications.

Selling education to foreign students is an export industry, and tighter rules will (on Labour’s own numbers) mean a reduction in the total sales of that industry.   Does that bother me?  No, not really.  When you subsidise an activity you tend to get more of it.  We saw that with subsidies to manufacturing exporters in the 1970s and 80s, and with subsidies to farmers at around the same time.  We see it with film subsidies today.  Export incentives simply distort the economy, and leave us with lower levels of productivity, and wealth/income, than we would otherwise have.   In export education, we haven’t been giving out government cash with the export sales, but the work rights (during study and post-study) and the preferential access to points in applying for residence are subsidies nonetheless.  If the industry can stand on its own feet, with good quality educational offerings pitched at a price the market can stand, then good luck to it.  If not, we shouldn’t be wanting it here any more than we want car assembly plants or TV manufacturing operations here.

Labour estimates that their changes to student visas and post-work study visas will reduce numbers by around 17000, roughly evenly split between the two classes of changes.  But what they don’t tell you is that these will be one-off reductions in the total number of people here on those visas.    Since the number of people who settle here permanently is determined by the residence approvals programme, and that hasn’t changed, the changes Labour is promising around student visas –  while broadly sensible –  while make a difference to the net migration flow in the first year they are implemented (the transition to the lower stock level) and none at all thereafter.   They might change, a little, who ends up with a residence visa, but not how many are issued.  If you favour high levels of non-citizen immigration but just want the “rorts” tidied up, it makes quite a lot of sense.

The changes Labour proposes to work visas are also something of a mixed bag.  They are promising (but with few/no specifics) to make it harder for people to get work visas

Since 2011/12, the number of low-skill (ANZSCO 4 and 5) work visas issued has surged from 14,000 to 22,000. For example, the number of “retail supervisor” work visas has increased from 700 to 1,700. Labour will work with firms to train New Zealanders to fill skills gaps so we don’t have to permanently rely on immigration. A developed nation should be able to train enough retail staff to meet its own needs. Immigration should be a stop-gap to meet skills shortages, not a permanent crutch.

Labour will make changes that preserve and enhance the ability of businesses to get skilled workers to fill real skills gaps but which prevent the abuses of the system that currently happen.

The broad direction seems sensible enough –  after all, the official rhetoric about the gains from immigration relate to really highly-skilled people, but what does it mean specifically?

And I get much more wary about proposals to move to a more regional approach (on top of the additional points for regional jobs the government introduced last year, thus further reducing the skill level of the average migrant).  This is what they say:

Currently, few skill shortages are regionalised. This makes it hard for a region with a skills shortage in a specific occupation to get on the list if the shortage is not nationwide. Importantly it means that work visas are issued for jobs in regions where there is not actually a shortage which puts unnecessary pressures on housing and transport infrastructure there.

Labour’s regionalised system will work with local councils, unions and business to determine where shortages exist and will require that skilled immigrants work in the region that their visa is issued for. This will prevent skills shortages in one region being used to justify work visas in another, while also making it easier for regions with specific needs to have those skills shortages met.

Where skills shortages are identified, Labour will develop training plans with Industry Training Organisations so that the need for skilled workers is met domestically in the long-term. We will invest in training through Dole for Apprenticeships and Three Years Fees Free policies.

Frankly, it seems like a bureaucrat’s paradise, and just the thing for influential business groups that get the ear of some local council or other.  It is hard enough to ensure that local authorities operate in the interests of their people, without setting up more incentives that will allow local authorities to be used to pursue the interests of one particular class of voters.

More generally, it is an approach that suggests no confidence at all in market mechanisms to deal with incipient labour market pressures.  There is no suggestion in the document, at all, that higher wages might be a natural adjustment mechanism, whether to deal with increased demand in a particular region or for a particular set of skills.  Even the Prime Minister was running that line recently  –  and he isn’t from the party supported by the union movement.

Again, changes to reduce the number of work visas granted to people for fairly low-skilled occupations aren’t a bad thing, but they won’t make any difference to the average net inflow of non New Zealanders beyond the initial (quite small) one-off level adjustment.     And there is no willingness to rely on market mechanisms –  eg set a (say) $15000 per annum fee, and allow limited work visas for jobs where the employer is willing to pay the taxpayer that additional price.

There were two other initiatives in the package.  The first was the proposed new Exceptional Skills visa.

Labour will introduce an Exceptional Skills Visa. This visa will enable people with exceptional skills and talents that will enrich New Zealand society — not just its economy — to gain residency here. 

It will be available to people who can show they are in an occupation on the long-terms skills list and have significant experience or qualifications beyond that required (for example, experienced paediatric oncologist) or are internationally renowned for their skills or talents. Successful applicants will avoid the usual points system requirements for a Skilled Migrant Category visa and would be able to bring their partner and children within the visa. This visa will help grow high-tech new industries, meet the increasingly complex needs of the 21st Century and enrich our society. Exceptional Skills Visas for up to 1,000 people, including partners and children, will be offered every year

When I first saw reference to this I was quite encouraged.  And if it makes a little easier for people who are genuinely highly-skilled to get first claim on those 45000 residence approvals each year, then I don’t have any problem with it.   But it isn’t exactly the American exceptional ability visa, and we need to be realistic about New Zealand’s relative attractiveness (or lack of it) to people with really exceptional talents.   The suggestion that the programme will “help growth high-tech new industries, meet the increasinbgly complex needs of the 21st century” is probably little more than late 20th century vapourware.

As for the proposed KiwiBuild visas, I suppose they were politically necessary. You leave yourself open if you campaign on both big reductions in migrant numbers, and massive increases in house-building, if you don’t prioritise construction workers.  In fact, of course, this programme makes a one-off reduction in the number of people here –  reductions concentrated in the population group that probably has the least housing needs..  None of the medium-term pressures will have been eased at all, even if some dodgy rules around students do end tightened.

In passing, I was also interested in this comment

We will investigate ways to ensure that the Pacific Access Quota and Samoan Quota which are currently underutilised are fully met.

I guess there are really large numbers of Pacific voters in Labour’s South Auckland heartland.    These Pacific quotas, again, lower the average skill level of those we given residence approval too (since people only come in on those quotas if they can’t qualify otherwise, all within the 45000 approvals per annum total).  I imagine, too, that the Australian High Commission will have taken note of that line.

Overall, some interesting steps, some of which are genuinely in the right direction.  But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy –  like the government’s – remain this generation’s version of Think Big.  And it is just as damaging.    The policy doesn’t face up to the symptoms of our longer-term economic underperformance –  the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance.  None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.

But that is Labour’s policy.  And that is National’s policy.

For anyone interested, the Law and Economics Association is hosting a seminar on immigration policy and economic performance on Monday evening 26 June.   Eric Crampton of the New Zealand Initiative and I will be speaking.  Details are here.

UPDATE: Here is what I said to Radio New Zealand yesterday afternoon on immigration, in a reasonably extended interview, partly on Labour’s announcement, but mostly on the more general issues.