Europe’s economic performance

Michael Reddell Economic history, Euro area, New Zealand economic performance, Productivity

A commenter on yesterday’s Brexit post raised the question of how Europe (EU, euro area or whatever) had done overall relative to the rest of the advanced world.   The question sparked my interest, not just about the last 20 years or so (since the euro was created, and the comparison in yesterday’s post) but about somewhat longer spans of history.

At around the turn of the 20th century no one would have doubted that Europe dominated the world geopolitically, and it no longer does that.  That geopolitical rise was built on technology and associated economics, but just because the geopolitical moment has passed doesn’t necessarily mean the economic one has.

But who to compare Europe with?   Relative to the situation 100 years ago, some east Asian countries (in particular) have caught up considerably.  In most respects that is to be welcomed, and doesn’t tell one anything particularly enlightening about the performance of western Europe.   And some (most?) of the European countries that aren’t in the EU are nonetheless in agreements with the EU that mean that in many respects the policy regimes are similar.

And so here I’ve focused on a comparison with the European “offshoots”, notably the Anglo-shaped ones (the United States, Australia, Canada, and New Zealand), but with some reference also to Argentina, Chile and Uruguay.  Prior to World War One, Europe may have been the geopolitical centre of the world, but individuals in the typical offshoot countries enjoyed a better material standard of living than their peers in western Europe.

europe 1

The first two columns are the group of 11 western European “established” euro area member countries in yesterday’s post, and a subset of those that I’ve got interested recently (France, Germany, Belgium, Netherlands, and Denmark) which today have much the same level of average labour productivity as the United States.

In 1913, the Anglo countries were top of this particular economic heap, and the western European countries weren’t much different than average living standards in Argentina, Chile and Uruguay.  In 1929 and again in 1955 (allowing some time for recovery from the war) the picture still wasn’t so different.  The five top European countries were doing better and the UK a bit worse, but average GDP per capita in the 11 European countries group was only about 10 per cent higher than those in the Uruguay, Argentina or Chile group.

And here is the same chart for 2017, using Conference Board data.

europe 2

It doesn’t take too much study to see where the (relative) decline has been centred: the European offshoots and the UK.  The picture is most vivid for the southern cone countries in Latin America, but isn’t less real for the Anglo countries.  It isn’t that, as a group, they’ve been surpassed by continental western Europe, but that western Europe has caught up. (Since this isn’t a New Zealand-centred post, we will quickly pass over the way those countries now outstrip New Zealand.)

But what about some time series charts for more recent periods?  In this chart I’ve shown the same two European groupings relative to the median for the Anglo offshoot countries (US, Australia, Canada, and NZ) using OECD data which start in 1970.

europe 3.png

(I don’t quite know what was going on around 1990, although I guess it is probably about the recession in many of the Anglo countries).

Over the full period since 1970, Europe has gained ground relative to the Anglo offshoots, on both groupings.  But there is, of course, a big divergence in the two series in the last decade or so.   For the top-5 north European countries, performance has remained pretty strong.  The median of those five countries now has average per capita incomes almost equal to those of median Anglo offshoot country (and, as it happens, the Europeans work fewer hours per capita to achieve that outcome).  But for the wider group, things have gone badly into reverse –  the influence of the poorly performing tail (Greece and Italy in particular, but also Spain and Portugal).

What about a similar chart for productivity?   The OECD doesn’t have labour productivity data for the whole period for Austria and Greece, so in this chart those two countries drop out of the comparison.

europe 4

It is a somewhat different picture.  The cylical effects large drop away, but (not unrelatedly) so does the marked difference between the two groups of euro-area countries over the last decade.   On this measure, Europe’s labour productivty growth has fallen behind that of the Anglo offshoots grouping over the last decade (although not in the first few years of the euro).  But perhaps the bigger story remains just how much average productivity in Europe has improved relative to that in the Anglo offshoots world over the whole period since 1970.  It is a huge relative gain for (western) Europe.

And what of a simple comparison between the leading group of European industrial countries and the US?  After all, if Europe has its laggard, the Anglo world has New Zealand (and Canada).  Here’s that chart.

europe 5

It is interestingly different.  Relative to the US, these leading European countries did poorly last decade.  But the underperformance hasn’t continued into this decade, despite the euro-area crises, even if little of the ground has been made up again.  But again, taking the longer view, surely the bigger story is one of the improvement in Europe’s relative performance since 1970.

And of course, amid all of this there has been no mention of the rest of Europe, the bits that spent decades in the Soviet orbit, and weren’t beacons of prosperity prior to that.    Many of those countries have been making progress in catching up with the Western European leaders even as, over longer runs of time, western Europe has been catching up with the (former) Anglo leaders.

And as one final chart here is snapshot of Conference Board estimates of the levels of labour productivity last year.

europe 6

Five of the top six are European, even if Singapore is almost at the heels of the European leaders.  (Ireland, Luxembourg, and Norway have higher numbers again, each with their own idiosyncrasies.)  Below Singapore, I’ve just put in a few countries out of interest –  China as much because on my walk this morning I listened to a podcast interview with a former European politician convinced that by 2038 China will dominate the world, and that this will mostly be a good thing.

Europe has had its good and its (very) bad times in the last 100 years or so, but when one looks at the data as a whole it is hard not to think that in economic terms Europe’s performance (and especially that of the northern European top tier) relative to the rest of the advanced world has increasingly been as good as it has been at any time since the New World was really opened up to trade and settlement.    By contrast, over the last 100 years or so, of the New World countries only the US has more or less managed to hold its own matching or exceeding the leading group (per capita income and productivity) of European countries.

For New Zealand, Uruguay, Chile and Argentina –  and even Australia –  (the Antarctic Rim countries) it all seems to have proved just too hard.

Blathers away when directly asked

Michael Reddell China, NZ politics

Another week and another Matt Nippert article in the Herald updating us on the Prime Minister’s continued refusal to be interviewed substantively on the government’s approach to the People’s Republic of China.

A Herald request filed in May to discuss the Government’s China policy with Ardern was this week again rejected, with possible windows for an interview now pushed into early next year.

Perhaps it  –  refusal to be interviewed by a serious journalist on a major public policy issue – might not matter as much if our MPs were not, apparently, all in thrall to the PRC, such that there is no questioning in Parliament of the government’s approach on this really important issue.  But Parliament is useless –  and worse –  and the Prime Minister simply avoids (refuses to face) sustained media questioning.  Not, it seems, that many try, but to their credit the Herald has.

Cheap virtue-signalling is apparently fine: the Prime Minister was reported as (to her credit) having refused to travel in a Maserati at APEC.  But that’s only PNG, and hardly anyone here (well, perhaps a few MFAT diplomats) will question her small stand against such excess.

But she is not willing to engage seriously on the activities, including those in our own country and own political system, of a great (if evil) power.

Fortunately, an occasional journalist does still manage to ask the odd question.  But they are typically short interviews, and rarely focus in on things she is directly responsible for, and so she gets away with what can only be described as “blather”.    There was an excellent example on Radio New Zealand’s Morning Report yesterday when she was interviewed by Guyon Espiner.

It was a consistent attempt at minimising any issues, relativising everything, and never ever calling out China on anything.  It was actually pretty fundamentally dishonest to the New Zealand public, in attempting to imply that all that is really going on is a trade dispute.   Then again, I thought she was given a pretty easy run by the interviewer.

Thus, we were told that there was “significant consensus” around the APEC communique and that the issues were only a few words.  But she knows as well as anyone that most such communiques are just bumpf anyway, and the real issues always resolve around a few critical words.  It matters a lot –  tells us a lot – that neither the US nor China decided that it was in their interests to compromise on this specific point, which could almost certainly easily have been drafted around (and the results spun by each side) had there been a will to do so.  (“Unfair trade practices –  of course we disapprove of those, but our country doesn’t have any, just standard national security provisions”.  That sort of thing.)

She stated that both sides should “step back and de-escalate”, without addressing the substance of the issues at all.    But she must know that her consistent refusal to say anything of substance plays into the hands of the People’s Republic.  You might think –  as I do –  that Trump’s initial focus on bilateral trade deficits is pretty flakey, but it doesn’t detract from the wider issues around theft of intellectual property, market access, and so on.  The PRC remains one of the least open markets in the world.  And the US by contrast, for all its many faults, is one of the most open.

The government seems to see itself as having some sort of role as a ‘bridge” between the US and China.  Questioning drew on a comment to that effect over the weekend from the Trade Minister, David Parker.   The Prime Minister attempted to minimise this, talking of some specifics around WTO governance.  But perhaps the interviewer could have pushed her rather more on what it is that the government disagrees with in the recent combined (ie not just the US) EU, Japanese, and US approach

On November 12, the United States, European Union, and Japan will submit a package of proposals to the World Trade Organization’s Council on Trade in Goods that would significantly help curb China’s practices of heavily subsidizing its state-owned enterprises. They are also discussing ways to prevent China from forcing Western companies to transfer technology to Chinese firms.

The Prime Minister was asked why we wanted to be a “bridge”, to which her response was to burble on about a “values-based approach”, an independent foreign policy, and not picking sides.  Surely in any sort of values-based approach –  one where life is more than deal and political donations – you would be found on the side opposing the greater evil?  But, of course, there was none of this from the Prime Minister, just the suggestion that somehow being neutral was better, for its own sake.  To believe her, for example, you’d have to believe that Michael Joseph Savage and Peter Fraser were forced into World War Two against their better judgement, rather than as leaders of an independent country deciding to act together with other countries that shared our values, and the attitude to the presenting evil.

It is the sort of answer that wins praise from the largely taxpayer-funded propagandists for all things PRC.   It shouldn’t be acceptable to decent New Zealanders, not compromised by deals or donations.

The interviewer tried again, asking if she was really saying we (well, she) was as aligned with the PRC as with the United States (with whom, as he pointed out, we are in a longstanding intelligence relationship).  Even there she couldn’t manage a straight answer, burbling on about how “we align ourselves with a set of principles and values. Some of these things are not black and white”.  But even then she seemed to be trying to reduce everything to technical details about a trade dispute.  No sense, for example, that imprisoning a million people in Xinjiang, for being who they are, qualifies as pretty unconditionally “black”.  Or probihiting freedom of speech, scoffing at the rule of law, widespread theft of intellectual property, severe restrictions on freedom of religion, and no capacity of a country’s citizens to change their government –  and all that is mostly just the internal stuff –  are pretty black.  No other country –  let alone our own – is perfect, but in real life you choose to align with real people and real countries, and when you choose to consistently refuse to identify that New Zealand has a lot more in common –  in its values –  with Australia, Canada, the US, Japan, the UK, Taiwan, or EU –  than with the PRC, by default you side with other lot.   You give legitimacy to their evil.

The interviewer moved onto the Belt and Road Initiative, which the previous government signed us up to last year –  some sickening text (“fusion of civilisations”), but mostly a big propaganda win for the PRC.  Because although the Prime Minister tried to spin her listeners suggesting that lots of countries had signed up, we are the only advanced country – and the only Five Eyes partnership country – to have done so.   Of course, given that the deadine in the original agreement for specifics has now passed, one might deduce that the government is not too keen on doing too much under the loose aegis of the Belt and Road Initiative.  Perhaps the pressure from Beijing for some specifics is beginning to mount –  if, for example, New Zealand wants that extension of the preferential trade agreement (or the Prime Minister wants that trip to Beijing).

The interviewer moved onto matters we have full control over: our response to the PRC influence and interference activities in New Zealand.    He quoted Anne-Marie Brady’s line that those activities (“covert, corrupting, coercive”) were now at a “critical level”.   The Prime Minister simply refused to engage with specifics (she was “very cautious about labelling”), talking about the need for good and broad “legislative frameworks” –  as if the real issues were primarily legislative, rather than attitudinal ones being at least as important  – while naming nothing specific there either (although some mention of cyber-security).   We need, we were told, to be “vigilant across the board”, trying to play distraction with references to North Korea and Russia.   She was, she said, comforted that there was no evidence of interference in the election, without being pushed to engage with the fact that the current inquiry into last year’s election is being led by her own MP, Raymond Huo, who is himself associated with various United Front organisations, who adopted a Xi Jinping slogan for Labour’s campaign, and who organised the function at which Phil Goff funded a large chunk of his mayoral campaign with a “donation” (charity auction bid) from mainland China.  I wonder how the intelligence services would feel if they were called to testify to a committee chaired by Mr Huo?

And, finally, the interviewer moved on to the burglaries at Anne-Marie Brady’s home and office, and suggestions of interference with her car.   There was no clarion call in defence of the freedom of New Zealanders (academics or otherwise –  this isn’t largely about academic freedom) to write, advocate and lobby as they like, no observation that while the investigation hadn’t yet been resolved, if there were evidence of involvement of a foreign power it would be a very grave matter, which the government would need to respond to with utmost seriousness.  Instead we got attempts at obfuscation and procrastination.  She told us she didn’t comment on intelligence briefings, only for the interviewer to point out that she was first one to mention intelligence services.  Twice she attempted to point out that she had “been away”, as if she’d been communing with nature alone on top of some high mountain, not travelling on a government plane, accompanied by all manner of senior government officials.

If it wasn’t that surprising –  given what we’ve come to see of her performance –  it was disappointing nonetheless.   I wonder if we will even get a straight answer when the Police finally – next year, the year after  –  finish their investigation.  Effective freedom of speech –  let alone a stand for the core values of New Zealanders – seems to be an inconvenience next to keeping the donations going, and keeping the business interests trading with China (notably Fonterra, the universities, and the tourism sector) on side.  Her only “value” in this area seems to be the dollar.

But, of course, she gets away with it because the Opposition leader is just as bad.   She has Raymond Huo in her caucus (and in a senior select committee role), he has Jian Yang, and both seem to keep the donations flowing, and neither will call out the other.  The parties combine to honour Yikun Zhang for what, it seems, is in effect services to Beijing.

There was an interesting article in the Financial Times yesterday, reporting that the US is considering banning exports to China of a range of advanced technologies

In a document published on the Federal Register, the commerce department listed all the products it might subject to export curbs. These included items from genomics, to computer vision and audio manipulation technology, to microprocessor technology, quantum computing, mind-machine interfaces and flight control algorithms.

It is the sort of thing that illustrates that however silly the initial focus on bilateral trade deficits was, the tensions between the US and China are well beyond that stage now.  At a time when the Chinese economy is in any case looking under more threat as the longrunning credit boom appears to have exhausted itself, and the authorities seem unsure how –  if at all – to respond, surely an honest and decent Prime Minister would be more interested in levelling with the public, about the nature of the regime in Beijing, the nature of its threats here and abroad, than in engaging in some sort of weird amoral “balancing act”.   If she wants to run the “not black and white” line, at least she could honestly recognise the distinction between off-white and something very very deeply dark grey.

But not in New Zealand.  One could almost say she puts herself in something like the same category as Trump over Saudi Arabia –  with obfuscation and avoidance, rather than bluster, her chosen rhetorical style.

In closing, and having praised the Herald for persevering (I guess at near-zero cost) in its quest for a serious interview on these issues, I noticed this earlier in the day

https://twitter.com/niubi/status/1064907102412513281
Translated from Chinese by
Microsoft
New Zealand has fallen.

Bill Bishop is a pretty astute and highly-regarded China analyst (who wears his distaste for Trump pretty visibly).  I clicked the link and sure enough there seemed to be a whole series of sponsored articles (links down the right hand side of this particular article) from the People’s Daily –  main Chinese Communist Party newspaper – on the Herald website.  Quite extraordinary.

Brexit and UK economic performance

Michael Reddell UK

Flicking around the web yesterday afternoon I noticed this tweet from Matt Ridley (more formally the 5th Viscount Ridley), the British journalist, businessman and author of various smart books including The Rational Optimist: How Prosperity Evolves.  (Ridley was also formerly  –  from 2004 to 2007 when it hit the rocks –  chairman of Northern Rock.)

Ridley is reportedly strongly pro-Brexit.  In my book, that is to his credit (had I been British, I’d almost certainly have voted Leave too.  Then again, the next recession is likely to shake the euro and the EU itself to its very foundations anyway).

But it was the quote from the paywalled Telegraph article that caught my eye.  Those look like pretty impressive numbers, at least for the first 10 seconds until one realises that they are almost certainly total GDP comparisons and British population growth had been faster than that of most of the other countries of Europe.  And, of course, polling data suggests that was one of the factors that led to the Leave vote in the first place –  in and of itself, higher population growth is hardly a mark of Britain’s economic success, let alone a clear welfare gain for the British.

But it left me wondering how the UK had done on other, more relevant, economic comparisons. For example, growth in real GDP per capita and growth in real GDP per hour worked.   The euro was launched on 1 January 1999, so here are a couple of comparisons (using annual OECD data) for growth from 1998 to 2017.  The comparators are  the 10 older western European countries that are in the euro (excluding Ireland whose GDP numbers are messed up by the tax system, and don’t –  to a substantial extent –  reflect gains to the Irish, and Luxembourg) plus Denmark, which isn’t in the euro but whose currency has been firmly pegged to the euro since its creation.  I deliberately didn’t include the former eastern-bloc countries, partly because they joined the euro at various different times over the last 20 years and because something else more important –  post-communist convergence –  is going on there.)

First, real GDP per capita.

UK 1

and then real GDP per hour worked.

UK 2

It isn’t an unimpressive performance over that period as a whole, especially considering (a) all the hoopla at the time the euro was created, including from some trade economists, about the new economic possibilities, and (b) the UK productivity performance since the period encompassing the 2008/09 recession has been really poor (growth in real GDP per hour worked of only 2 per cent in total).   And, I guess, it is now more than two years since the referendum, and the real naysayers would have predicted a further worsening in UK productivty growth since then.

Of course, on the other hand, it is fair to point out that the UK is in the bottom half of these countries for its level of productivity.    On the OECD estimates, in 2017 only Italy, Spain, Portugal and Greece had lower average labour productivity than the UK.   But over the 18 years in the chart those laggard countries underperformed, while the UK did actually manage some convergence.

I don’t think these numbers themselves shed any real light on how the UK will do, in economic terms, relative to the rest of western Europe over the next decade or two (whether or not there is the brief, but perhaps initially quite costly, disruption associated with a “no deal”).  And it is interesting just how widely performance has diverged even among countries in both the commmon currency and the single market.   People make choices about nationhood, and how they want their country run, for a whole variety of reasons, and in most cases a few percentage points of GDP either way doesn’t weigh that heavily –  as I’ve pointed out previously, many post-colonial countries (notably in Africa, but including Ireland) underperformed economically after independence, but probably few really regretted the choice of becoming independent.   Brexit won’t change the twi n facts that the UK is a moderately prosperous country, nor the fact that –  inside or outside the EU –  it has productivity challenges, if it wishes ever again to be in the very front rank of economic performance.

I attended a lecture a couple of weeks ago by the historian and “public intellectual” Niall Ferguson.  He noted that he had supported Remain, for what seemed to be not entirely serious reasons (he is/was friends with David Cameron and George Osborne and thought they were doing a good job, and was himself going through a messy divorce and thought breakups were very hard).  But he had become frustrated by what he described as “the bleating, whining, grumbling of the Remainers” and suggested that he now supported Brexit for two reasons.  The first was that, in his view, the EU could only survive if it became more like a federal state (good luck with that) and the UK could never have been a part of such an entity.  And the second was a hope that Brexit would help the UK confront the fact –  captured in the data above –  that its economic challenges are there whether or not it is in the EU.

I was reading last night an 1882 lecture by French philosopher and historian Ernest Renan, titled “What is a nation?”.   It seemed relevant at present, emphasising as he does that nationhood isn’t about race or language, but about two things

One is the past, the other is the present. One is the possession in common of a rich legacy of memories; the other is present consent, the desire to live together, the desire to continue to invest in the heritage that we have jointly received. Messieurs, man does not improvise. The nation, like the individual, is the outcome of a long past of efforts, sacrifices, and devotions. Of all cults, that of the ancestors is the most legitimate: our ancestors have made us what we are.

A nation is therefore a great solidarity constituted by the feeling of sacrifices made and those that one is still disposed to make.

and

Nations are not eternal. They have a beginning and they will have an end. …..At the present moment, the existence of nations is a good and even necessary thing. Their existence is the guarantee of liberty, a liberty that would be lost if the world had only one law and one master. By their diverse and often opposed faculties, nations serve the common work of civilization. Each carries a note in this great concert of humanity, the highest ideal reality to which we are capable of attaining.

That makes sense to me.  As does, through all its challenges and mismanagement, Brexit.

 

 

Voices in support of Anne-Marie Brady

Michael Reddell China, NZ politics

Many, perhaps most, readers will have seen the article by Matt Nippert on the front page of yesterday’s Herald, about Professor Anne-Marie Brady and indications that her car may have been sabotaged.  This, of course, comes in the wake of break-ins to Professor Brady’s home and office, that are still –  months afterwards –  being investigated by the Police.  The strong suspicion has been that agents of the People’s Republic of China were involved in the break-ins, including (inter alia) because of what was, and wasn’t, taken, and letters that Professor Brady had received.  Yesterday’s article included this comment from Brady about the very slow-moving investigation.

She was unwilling to comment on the lengthy and still unfinished Police investigation, but told the New York Times in September the lack of comment or public action from government to date was “starting to look like procrastination”.

Official Wellington might be thought to have a strong interest in the investigation not coming to a conclusion, and it has (sadly) become difficult to have much confidence in the independence and integrity of the Police when it involves issues that matter to governments.

Nippert also included this section

The ongoing investigation …. had raised the temperature of local debate on the issue of China.

Commentary in local Chinese-language media has been an especially heated, with a recent op-ed by Morgan Xiao – published simultaneously by SkyKiwi, the Mandarin Pages and the New Zealand Chinese Daily News – describing Brady and other New Zealand-Chinese democracy activists as “anti-Chinese sons of bitches” who should “get out of New Zealand”.

Freeman Yu, whose New Zealand Values Alliance has started a petition urging the government to follow Australia’s lead and curb China’s local influence, was also called out by Xiao.

Yu said the language used in local debate had recently hardened, with “extreme expressions used in the Cultural Revolution”.

“The language used in their articles expressed intense hatred for different voices and the freedom of speech,” he said.

Comments sections on (for example) Stuff often don’t reveal humanity at its finest, but this is a description of a published op-ed.   New Zealanders should get out of New Zealand?

I know Professor Brady only slightly.  We’ve talked a couple of times and exchanged emails from time to time over the last year.  I’ve found her contribution to the New Zealand debate –  which seems to involve stepping a bit beyond her personal comfort zone (academics are often most comfortable behind the scenes) –  on these issues invaluable.   Such debate as there now is wouldn’t be occurring without her.

But Geremie Barmé and John Minford know Professor Brady very well.     Barmé and Minford are both emeritus professors at the Australian National University where Barmé was formerly Director, Australian Centre on China in the World and Chair Professor of Chinese History at Australian National University College of Asia and the Pacific in Canberra.   They now live near Featherston –  which perhaps accounts for the number of China books I found in a Featherston secondhand bookshop recently –  and host The Wairarapa Academy for the New Sinology.  Their website has a fascinating collection of material, which I’ve linked to occasionally.

They have today put out a statement about Professor Brady, her work, her position and so on.   I’ve reproduced it here (with permission).

17 November 2018

Re: Professor Anne-Marie Brady

To Whom It May Concern,

Professor Anne-Marie Brady is a noted specialist in China’s domestic and foreign politics at the University of Canterbury. Her work on contemporary China, and its increasingly controversial global engagement, contributes directly to the national interest of New Zealand. It is also having a considerable impact internationally, not only in academic circles but also in political debates and policy formulation among the major allies and trading partners of this country.

As teachers and mentors of Professor Brady — John Minford was one of her undergraduate teachers at the University of Auckland; Geremie Barmé was a supervisor of her doctoral work at the Australian National University — we are proud of her achievements and we strongly support her ongoing academic research work and engagement with issues of public, national and international significance.

In February this year, we were profoundly disturbed to read media reports about break-ins at Professor Brady’s workplace and of her home office, resulting in the theft of electronic equipment and research materials. The details of the break-ins, still a subject of police investigation, suggested that Professor Brady was being subjected to intimidation for her internationally recognized work on official Chinese strategies to influence the politics and societies of foreign countries, in particular New Zealand. (See: https://www.pressreader.com/new-zealand/the-dominion-post/20180219/282355450217707) We were shocked by the latest media reports — on 16 November — that, during routine Warrant of Fitness maintenance, it was discovered that her vehicle may well have been purposely tampered with. There are indications that this was done to endanger the occupants of the vehicle: Professor Brady, her husband and their three teenage children. (See: https://www.stuff.co.nz/national/108649435/professor-annemarie-brady-who-warned-about-china-interference-says-car-was-sabotaged )

The freedom from fear was long ago recognized as a basic human right; academics should be able to pursue their work, and their daily lives, without being subjected to intimidation. In any modern democracy worthy of the name, academic freedom and independent research are crucial “public goods”. They are also germane to university life.

As residents of New Zealand and as independent scholars — our main institutional affiliation is with The Australian National University as emeritus professors — we hereby express our deep concern about the on-going threats to Professor Anne-Marie Brady’s research and private life.

We hope that others whose research and teaching involves contemporary China will offer her and her important work collegial encouragement, as well as public support.

Furthermore, we also hope that the New Zealand authorities take the threats against Professor Brady seriously. We appeal to the Prime Minister, Rt. Hon. Jacinda Ardern, and her coalition partner the Foreign Minister, the Rt. Hon. Winston Peters, to address directly the issues raised by her work which she has further articulated in practicable, and succinct, formal advice to the government.

Since September 2017, Professor Anne-Marie Brady’s work has attracted overwhelmingly positive global attention. It has also been subjected to vilification by Chinese officialdom. Regardless, her work continues to influence the debate about China’s “sharp power” on the international stage, and it contributes to practical policy discussions in Europe, North America and in Australia. This work remains ever more pressingly relevant to the public life, and the future, of her homeland.

Yours,

Geremie R. Barmé
Professor Emeritus of History
The Australian National University
Founding Director, Australian Centre on China in the World
Fellow of the Australian Academy of Humanities

John Minford
Professor Emeritus of Chinese
The Australian National University
Sin Wai Kin Distinguished Professor
Hang Seng University of Hong Kong

To me, the most important lines in the statement are those addressed to our political leaders

We appeal to the Prime Minister, Rt. Hon. Jacinda Ardern, and her coalition partner the Foreign Minister, the Rt. Hon. Winston Peters, to address directly the issues raised by her work

(To which I would add “and the leaders of the National Party, so recently in government”.)

They might also speak about, for example, things like that appalling op-ed from various Chinese-language local media.

Shameful as the government’s stance on, say, Xinjiang is –  the refusal to add our voice to the protest by our friends and allies –  we can’t change China.  But we  –  they –  have no such excuse when it comes to New Zealand itself, our political system, the environment facing freedom-loving ethnic Chinese New Zealanders, and the actions of the People’s Republic of China and its agents here.

And yet Matt Nippert’s article reminds us again of the supine, scared of their own shadow, attitude of the government.

Since May the Herald has been seeking to interview Prime Minister Jacinda Ardern about the governments’ China policy in light of Brady’s research and legislative action in Australia.

The Prime Ministers’ Office has regularly put off the request

Simply refusing to engage on such vital issues with a serious journalist from our largest newspaper is astonishing, and a telling commentary on how corrupted our political system appears to have become.  Perhaps as telling is the utter silence from the National Party on the government’s refusal to engage.

UPDATE: I would strongly recommend this new piece, by the commentator on China issues who goes under the label Jichang Lulu, to anyone at all interested in the PRC influence issues as they relate to New Zealand.

 

The Prime Minister continues to shame us

Michael Reddell China, NZ politics

The Prime Minister has been attempting to defend her handling of the meeting with the Malaysian Prime Minister, following his apparently quite forthright comments on the South China Sea.  She parrots a line about not taking sides in the dispute, but surely she knows that when you don’t take sides between a bully and his (or her) victim you side with the bully.  And when you say

New Zealand’s position on the issue had been “utterly consistent”, and the country had never taken sides, she said, adding all claimants should uphold international law, and the law of the sea.

and yet fail to point out which party –  the PRC –  consistently refuses to uphold international law in this area, you make yourself a party to the abuse, the aggression, aiding the new status quo in which the PRC has taken control.  It really is like not taking sides when Germany takes Czechoslovakia or Poland.

But perhaps journalists could also ask the Prime Minister to explain New Zealand’s absence from this list

Australia, Canada, and the European Union as a whole, but not New Zealand, are part of an approach to Beijing over the abuses in Xinjiang.

Life –  even foreign policy – really has to be more than the sums of the deals, or the sum of the donations.

The Government’s stance is these areas –  much the same as the Opposition’s –  shames us.

UPDATE:  A reader sends me this (I’m not sure from which publication)

“We decided not to sign it because we have raised concerns about the situation in Xinjiang directly with Chinese authorities,” a spokesman for Ardern told Newsroom when asked if New Zealand had joined the protest.

“New Zealand concerns have been registered by the Prime Minister with senior counterparts, including yesterday with Premier Li. Concerns have also been raised at officials’ level, including through New Zealand’s bilateral human rights dialogue with China, and at the UN in Geneva,” the spokesman said.

This is pathetic.     As if none of the other countries has made direct or bilateral comments, and –  as noted here –  other countries (including the US, UK, and Australia) were much more visible and vocal at the recent UN human rights review on China.   There are those old lines about “stronger together”, and people being known by the company they keep.   I don’t think trade agreements and the like should drive our policy stances –  our values should – but you have to wonder what the EU (with whom New Zealand wants to sign of an agreement) makes of a New Zealand government so supine it won’t join its (erstwhile) friends in this process.   Perhaps unilateralism is an option for the US, but it is the same Prime Minister who regularly reminds us, and the world, about the merits of acting together.  Just not when it comes to never ever upsetting Beijing?

Making the Trump administration look less bad

Michael Reddell China, NZ politics

I’m no fan of Donald Trump.  He is unworthy of the office he holds, and almost every week there is new data to reinforce that view.   And if his character is unworthy, there is no offset in the way in which he attempts to govern or in the clarity and excellence of his thought or vision.

And yet, when it comes to the People’s Republic of China, our Prime Minister –  probably with the full support of the Leader of the Opposition –  manages, somehow, to leave the US Administration looking as though –  for the moment at least – it is on the side of the angels.   And as if it is our governments that are simply all about “the deal” –  be it an “FTA” upgrade, party political donations. or just students flowing to our public universities that have made themselves so dependent on not upsetting the thugs in Beijing.

Then there is Scott Morrison.  I guess he probably won’t be Australia’s Prime Minister for long, but a couple of weeks ago he gave a pretty good speech under the heading “The Beliefs That Guide Us”.  Sadly, I didn’t see it reported here at all (from the Australian media there is a good commentary on it here) but it comes in stark contrast to the way in which our governments (present and past) behave and talk (or simply refuse to talk).  Rhetoric is, of course, easier than action, but at least the words were good (emphasis added).

Our foreign policy defines what we believe about the world and our place in it.

It must speak of our character, our values.  What we stand for. What we believe in and, if need be, what we’ll defend. This is what guides our national interest.

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

And what does Morrison regard as the “beliefs that guide our interests”?

We believe that the path to peace and liberty demands the pursuit of prosperity through private capital, rights to own property, entrepreneurialism and free and open markets. That is what lifts people out of poverty.

We believe that acceptance should not be determined by race or religion. Rather, we accept people by their words and judge them by their actions.

We believe in freedom of speech, thought, association and religion.

We believe in peaceful liberal democracy; the rule of law; separation of powers; racial and gender equality where every citizen has choice and opportunity to follow their own paths and dreams.

A fair go for those who have a go – that is what fairness means in Australia.

We believe in the limits of government – because free peoples are the best foundation to show mutual respect to all.

We believe in standing by our mates, side by side with nations that believe the same things we do.

Few or none of those things would be embraced by the People’s Republic of China, or the Party that controls it.  As he goes on to point out, by omission in listing the sorts of nations which do.

From the United Kingdom and the democracies of Europe to the United States and Canada. From the state of Israel to the city state of Singapore. From Japan and South Korea in North Asia to New Zealand, across the ditch.

He goes on later to observe, of Australia’s participation in various conflicts

We have done this because we believe it is right. Being true to our values and principles [will] always be in our interest.

Whereas, so it seems, in our Prime Minister’s mind (and that of her Opposition counterpart) not only are the two in constant tension, but the values and principles of this nation are constantly sacrificed to some short-sighted, limited, and mercenary conception of “interest”.    It is shameful to watch.

What of the US Administration?  You might think, as I do, that the focus on the US-China bilateral trade deficit is wrongheaded and economically illiterate.  Which isn’t to say that there are no real economic issues that it is right for the US Administration to take the lead in addressing –  with, so it appears, pretty widespread endorsement across the political spectrum in the US.  Even if you think –  as I generally do –  that intellectual property protections generally reach too far, and even if you recall that most rising powers have attempted to gain an edge by purloining the technology or insights of firms/countries nearer the technological frontier, China’s approach is particularly systematic, aggressive, and unacceptable.  It needs to be called out.  China doesn’t offer anything like an open market in many areas (services and investment notably), and if  –  in the longer-run –  those choices will mostly harm the Chinese, I don’t have any problem with a big and powerful country attempting to encourage change.  They are the sort of changes most in the West probably looked towards when China was allowed into the WTO.  It was clearly a sick (if opportunistic) joke when New Zealand agreed to deem China a “market economy”, when it remains far from that –  and, in many respects, getting further from it.

But it isn’t just about trade and investment.  Last month, the Vice-President gave a pretty forceful speech on the Administration’s approach to the People’s Republic of China.    There was a trade dimension

Over the past 17 years, China’s GDP has grown 9-fold; it has become the second-largest economy in the world. Much of this success was driven by American investment in China. And the Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies doled out like candy, to name a few.

But there was so much more. The military position for example

And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale…

China now spends as much on its military as the rest of Asia combined, and Beijing has prioritized capabilities to erode America’s military advantages – on land, at sea, in the air, and in space. China wants nothing less than to push the United States of America from the Western Pacific and attempt to prevent us from coming to the aid of our allies.

Beijing is also using its power like never before. Chinese ships routinely patrol around the Senkaku Islands, which are administered by Japan. And while China’s leader stood in the Rose Garden of the White House in 2015 and said that his country had “no intention to militarize the South China Sea,” today, Beijing has deployed advanced anti-ship and anti-air missiles atop an archipelago of military bases constructed on artificial islands.

and systematic issues with a more individual impact

Nor, as we hoped, has Beijing moved toward greater freedom for its people. For a time, Beijing inched toward greater liberty and respect for human rights, but in recent years, it has taken a sharp U-turn toward control and oppression.

Today, China has built an unparalleled surveillance state, and it’s growing more expansive and intrusive – often with the help of U.S. technology. The “Great Firewall of China” likewise grows higher, drastically restricting the free flow of information to the Chinese people. And by 2020, China’s rulers aim to implement an Orwellian system premised on controlling virtually every facet of human life – the so-called “social credit score.” In the words of that program’s official blueprint, it will “allow the trustworthy to roam everywhere under heaven, while making it hard for the discredited to take a single step.”

And when it comes to religious freedom, a new wave of persecution is crashing down on Chinese Christians, Buddhists, and Muslims…

Last month, Beijing shut down one of China’s largest underground churches. Across the country, authorities are tearing down crosses, burning bibles, and imprisoning believers. And Beijing has now reached a deal with the Vatican that gives the avowedly atheist Communist Party a direct role in appointing Catholic bishops. For China’s Christians, these are desperate times.

Beijing is also cracking down on Buddhism. Over the past decade, more than 150 Tibetan Buddhist monks have lit themselves on fire to protest China’s repression of their beliefs and culture. And in Xinjiang, the Communist Party has imprisoned as many as one million Muslim Uyghurs in government camps where they endure around-the-clock brainwashing. Survivors of the camps have described their experiences as a deliberate attempt by Beijing to strangle Uyghur culture and stamp out the Muslim faith.

And the sort of influence activities that Anne-Marie Brady has written about here

I want to tell you today what we know about China’s actions – some of which we’ve gleaned from intelligence assessments, some of which are publicly available. But all of which is fact.

As I said before, Beijing is employing a whole-of-government approach to advance its influence and benefit its interests. It’s employing this power in more proactive and coercive ways to interfere in the domestic policies and politics of the United States.

The Chinese Communist Party is rewarding or coercing American businesses, movie studios, universities, think tanks, scholars, journalists, and local, state, and federal officials.

He explicitly championed Taiwan as an example of a better way –  a country, actively threatened by China, and which is not only free and democratic, but more prosperous than China.

As far as I can see a few people in the US quibbled at the margins, but there was no great dissent from the broad thrust of the speech. It characterises the regime, and its threat, in a way that many or most experts seem to regard as pretty descriptively accurate.  The PRC is a threat to its own people of course, but abroad –  to countries in the region who espouse the sorts of values Scott Morrison talked of, and in the internal political processes of countries like our own, Australia, or the US (and many others).

It wasn’t just a one-shot effort from Pence, who is representing the President at this week’s summit meetings.  In the Washington Post yesterday there was a report of new interview with Pence.  With political theatre in mind, the interview took place as Pence’s plane flew across the contested South China Sea.  The report included

The vice president said this is China’s best (if not last) chance to avoid a cold-war scenario with the United States.

In addition to trade, Pence said China must offer concessions on several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries.

and ended thus

I asked him what would happen if Beijing doesn’t agree to act in Asia in a way that can avoid a cold war with the United States.

“Then so be it,” Pence said. “We are here to stay.”

Who knows whether his boss really means it – or will still mean it in six months time –  but at least it was being said.   And there is an interesting article in today’s Financial Times, highlighting the apparent bipartisan support (including among business leaders) for a more robust stance.  There was also an interesting Bloomberg column which observed

Trump usually gets the blame (or credit, depending on where you stand) for souring relations. He’s not the real culprit, though. The man truly responsible is China’s president. Xi has altered the course of Chinese policy in ways that made a showdown with the U.S. almost inevitable, whoever sat in the White House.

Even that interview wasn’t all that can be set to the credit of Mike Pence in this sort of area: speaking out about manifest evil, actions that don’t align with the sorts of values countries like the US, Australia, and (once upon a time at least) New Zealand sought to espouse and –  rather imperfectly to be sure – operate by.  There was Pence’s meeting with Aung San Suu Kyi, where he talked plenty bluntly and openly.

“The violence and persecution by military and vigilantes that resulted in driving 700,000 Rohingya to Bangladesh is without excuse,” Pence said.

And then there is the Rt Hon Jacinda Ardern, our Prime Minister.

On the day the Chinese deputy foreign minister warned other countries not to “obstruct” China’s growing activity in the Pacific, it was as if our Prime Minister was just falling into line when, in an interview yesterday, she refused to even address the issue of China’s activities in the Pacific.

When she met Aung San Suu Kyi –  who, as far as I can see has no New Zealand economic “interests” to threaten –  her language seemed to be much more muted than Pence’s

“We, of course, share the concern of the international community around what has happened in Rakhine State, and the ongoing displacement of the Rohingya,” Ardern said following the meeting.

As the Newsroom report puts it

[Aung San Suu Kyi] has also been stripped of the US Holocaust Museum’s Elie Weisel award and Freedom of the City awards, which were revoked by Edinburgh, Oxford, Glasgow and Newcastle.

While in Singapore, Malaysia Prime Minister Mahathir Mohamad said Suu Kyi was “trying to defend the indefensible”.

But Ardern said she did not detect any defence from Suu Kyi during their meeting.

And US Vice President Mike Pence also had firm words for Suu Kyi during the pair’s meeting in Singapore.

“This is a tragedy that has touched the hearts of millions of Americans. The violence and persecution by military and vigilantes that resulted in driving 700,000 Rohingya to Bangladesh is without excuse.”

Suu Kyi was brief in her remarks, saying each country knew their own situation best. “So we are in a better position to explain to you what is happening and how we see things panning out.”

Sounds pretty defensive to me.   When the Trump Administration and Mahathir Mohamad are more willing to speak out on human rights abuses than a New Zealand Prime Minister, something is very wrong.    “Kindness” and “empathy” might be her watchwords, but I didn’t suppose she meant them for tyrants and those who abet gross and systematic abuses.

And what of the PRC regime.  Here was how the Herald reported her

Ardern said before her meeting with Premier Li that she would be raising human rights issues with him but they were kept to the closed door session.

In her opening remarks she said: “New Zealand’s relationship with China is incredibly important to us. We see that relationship being incredibly important not just from an economic perspective but from a regional perspective.”

Only sweetness and light in public –  this, after all, from someone who only a few months ago pledged stronger ties between Labour and the Chinese Communist Party –  and if she politely indicated in private the odd area of possible difference, who really cares?  I’m sure the Chinese won’t.  After all, her party president is on record –  not behind closed doors – lauding the regime and its leader.

Has she ever said tried to lead ther discussion and debate at home about the character of the regime?   Has she ever said anything openly critical about one of the most dreadful regimes on the planet –  about its activities at home (a couple of weeks ago she said she “might” raise Xinjiang privately) –  and –  more importantly –  about its activities abroad, let alone its activities in New Zealand?  Even “small” things like, for example, the presence in our Parliament of a former PLA intelligence official, close to the PRC Embassy, who acknowledges misrepresenting his past to get into the country, and who has never once said anything critical of the regime.  Decent people shake their heads in disbelief (as I do each I write this), but not the Prime Minister.   Or arranging –  with the National Party –  to award a Queen’s Birthday honour to a non-English speaking Chinese-born businessman, who associates closely with MPs (and mayors) from all sides of politics, seems to arrange party donations (partly with a view to getting additional MPs into Parliament) and who the record shows is very closely associated with the Chinese Communist Party and the regime –  back in China, and here.

The local media seemed taken with the fact that Mike Pence was reported to have asked to be seated next to our Prime Minister at one of the summit dinners.  But strangely, while the local media talked up how the PM might raise such issues as steel and aluminium tariffs, or even speculated on the (manifold) political and personal differences between the two of them,  I didn’t notice anyone speculate on the possibility that China, and New Zealand’s rather shameful and supine attitude to the PRC, might have been among Pence’s list of talking points, amid the pleasantries and fine food.  I’m sure our allies welcomed the P8 purchases, and even the additional money New Zealand and Australia are (for how long?) throwing at the Pacific, but someone who won’t utter an open word of disapproval of such a regime, who won’t even speak out about the disgrace of Opposition MP, Jian Yang, who does nothing –  and refuses to openly take seriously –  the domestic interference issues is hardly someone showing any sign of living by those sorts of values that Scott Morrison enunciated in his speech.  And yet I suspect they represent rather well the values of most individual New Zealanders –  just not our political classes, who seem to act as if “values” are just some nice-to-have for other people, not something integral to how they live and act and speak.

It is pretty shameful when the Trump adminstration –  for now at least –  puts our country in such a poor light, on such a significant (and potentially a defining) issue. I remain sceptical about Trump’s willingness to follow through (on almost anything) or indeed about US administration’s willingness to pay much of a price to, say, defend Taiwan (and, if perchance, the trade strategy puts real pressure on, the temptation to action  – and distraction – there may only increase –  the Falklands weren’t invaded when Argentina was prospering).  The South China Sea is already, in effect, lost.  And no outsider can do much about China’s awful internal record.  But words still matter.  They express what we care about, what we value (more than just a deal).

And on these issues, the Trump administration at least has the words.  Jacinda Ardern –  and Simon Bridges –  sit cravenly silent.  It is as if, to upend Scott Morrison’s words, they think New Zealand is defined solely as the sum of our deals. It is shameful.

We need better foundations for financial stability policy

Michael Reddell Financial stabilty

Adrian Orr is now 7.5 months into his term as Governor and we still haven’t had an on-the-record speech from him about either main strand of his responsibilities: monetary policy or financial supervision and regulation.  Is he just not engaged on these issues?

But yesterday, his deputy Geoff Bascand delivered  –  in Australia –  a substantive speech on financial stability issues.  There were a few good elements in the speech.  For example, I was pleased to see this in the conclusion

The capital review gives us all an opportunity to think again about our risk tolerance – how safe we want our banking system to be; how we balance soundness and efficiency; what gains we can make, both in terms of financial stability and output; and how we allocate private and social costs.

It may be that the legislation underpinning our mandate can be enhanced, for example, by formal guidance from government or another governance body, on the level of risk of a financial crisis that society is willing to tolerate.

At present, the legislation is drafted so broadly and loosely that a single unelected and unaccountable official gets to make any such choices.  He (as it typically is) gets to make choices in a pretty much unconstrained way and we (including our elected political leaders) just have to live with the consequences.    Whether the sort of formal guidance Geoff refers to in that second paragraph is (meaningfully) feasible is open to question, but we need to improve on the current situation.  If such guidance isn’t feasible –  if society can’t write down its preference and give them as a mandate for the technocrats –  the big decisions around banking supervision policy frameworks (as distinct from the application of them to individual institutions) should be made by elected politicians (the Minister of Finance).

But, sadly, most of the speech just wasn’t that good.  It had plenty of politicially popular lines, and there was even the obligatory reference to the Reserve Bank as a tree god.  On climate change we had this

Climate change presents significant financial stability risks both through the direct implications of physical events for insurers, farmers and households, the indirect effects on insurance availability and property values, and through the potential social and economic disruption it promises.

We are working on developing a climate change strategy, which will be informed by discussions with banks and insurers in due course. Our role as a regulator is to try to ensure that financial institutions are adequately managing these risks, even though the horizon for their realisation could be decades away.

Given that the best evidence for New Zealand is that projected increases in global temperature are probably neutral and at best slightly positive for New Zealand in economic terms, and that all sorts of relative price changes occur every year changing the economics of all manner of businesses banks might have lent on, all this should amount to nothing.  But we know the Governor is a zealot –  why, he bets billions of dollars of your money on particular views of the economics of climate change, while so obscuring the choice there is no effective accountability –  so no doubt there will be pages and pages of bureaucratic bumpf from an agency with no expertise in the issue (or mandate), simply adding to compliance costs (especially for small institutions).

There was a rather lame attempt to defend the Bank’s involvement in the bank conduct review.  I noticed that the Governor had a bit of spat with ACT MP David Seymour at FEC last week on just this issue, which ended with the Governor (to whom any concept of deference or politeness seems unknown) responding as follows

When Seymour persisted, Orr simply said: “I am right, you are wrong”.

My own take is that they are probably both right.  Seymour is right on the fundamental point –  the bank conduct review was about politics and perhaps about Orr advancing his standing, not about financial soundness and efficiency (the Bank’s statutory mandate).  And if Orr is correct –  about the law giving him scope to do this –  it is only because the legislation was written –  guided by Bank officials – far too broadly in the first place.

But what bothers me rather more is the Bank’s weak understanding of the nature of financial crises, systemic risks, and so on.  These are concerns I’ve raised over several years in various contexts, including the cases the Bank has made for LVR restrictions and the (longed-for) debt to income restrictions.

For example, they continue to claim that

Household sector indebtedness represents the New Zealand financial system’s single largest vulnerability.

Yes, household debt is the largest component of financial system assets, but that is a quite different proposition.  As their stress tests have repeatedly shown, banks’ housing portfolios are constructed in a sufficiently cautious way that even very large adverse shocks (rising unemployment and falling house prices) wouldn’t threaten the soundness of the banks.   They run this cross-country chart of credit to households as a share of GDP.

novspeech-figure2

Yes, there is a lot more household credit than there was. That is the inevitable consequence of things like land-use restrictions than make urban land artificially scarce (and highly-priced).  And in New Zealand’s case, household debt to GDP is still a touch lower than it was going into the last recession (and at that time the servicing burden was also much heavier).  Despite all the angst, bank housing portfolios came through that severe recession unscathed –  as they did in Australia, Canada, and the UK.

But perhaps my biggest problem with the speech is a combination of three things:

  • the attempt to suggest that the system is very fragile –  at least without wise bureaucrats –  and that crises are always just around the corner, coming for us,
  • the continued failure to pay attention to the experiences of countries that had significant asset and credit booms and didn’t have a domestic financial crises, and
  • the inexcusable failure – in a central bank –  to distinguish between countries with floating exchange rates (which greatly assist adjustment in the face of shocks) and those without.

In combination, the Reserve Bank leads us towards quite misleading conclusions about the economic costs of financial crisis.  By overstating those costs –  hugely overstating –  they seek to strengthen their own position (and our respect of them) as regulators; the people who will do everything to keep us safe. (As commonly, one never sees mentioned in the speech that in all the financial crises they like to cite, there were in fact banking regulators who no doubt thought they were doing their job well.)

Of my first bullet, they say

First, why does financial stability matter? The answer is that bank crises are frequent and bank crises hurt.

Since the mid-1970s there have been over 140 banking crises around the world.

and (without any backing for this claim)

Serious incidents (that could have led to a crisis) are more common than people realise.

Yes, there have been lots of crisis, although since (depending on your definition) there are getting on for 200 countries in the world, even the number the Bank cites is less than one crisis per country over 45 years.

But there haven’t been many at all in stable, well-managed, floating exchange rate countries.  And in countries like ours –  for example, New Zealand, Australia, Canada, Norway –  the only financial crises in 100 years have related to the period just after liberalisation when everyone was just getting grips with what a market financial system meant (and when, for that matter, regulators also didn’t cover themselves with glory).    Of course, well-run banking systems can run into trouble, but since it is New Zealand that our Reserve Bank is supposedly focused on one might expect some grounding in the Australasian experience.   That experience just doesn’t suggest danger (massive credit losses) lurks continually.

The Reserve Bank has long been keen on citing the experience of Ireland as somehow relevant to New Zealand.  It pops up again in this speech

The consequences in terms of employment are also severe. After the GFC, Ireland’s unemployment rate rose from 4.6 percent in 2006 to 15 per cent in 2012

And yet –  prosperity and geography aside –  what is the biggest relevant difference between New Zealand and Ireland?   We get to set our own interest rates, and our exchange rate can adjust freely, while Irish monetary policy is set in Frankfurt for the entire euro-area, and they have no nominal exchange rate to adjust.  The Reserve Bank knows very well that floating exchange rate exist in large part because they provide greater leeway to cope with severe adverse economic or financial shocks.  Thus it was from the beginning –  at the time of the Great Depression –  and is now too.    I did post a few years ago –  which I can’t now see –  documenting that no floating exchange rate advanced country has ever experienced an increase in its unemployment rate of the magnitude Ireland put itself through.  I could commend to the Reserve Bank the experience of Iceland (which went through a financial crisis which, in many respects, was even nastier than Ireland’s, and yet had only a fairly moderate increase in its unemployment rate).

And then there is the hoary old chestnut about just how expensive financial crises supposedly are.  Here is Bascand

Since the mid-1970s there have been over 140 banking crises around the world. And they have had large costs for the affected economies and societies.

On average a bank crisis costs a country 23% of its GDP, while public debt increases by around 12 percent.3 The amounts are higher for advanced economies.

That footnote records that the numbers are calculated as deviations of actual GDP from its (pre-crisis) trend.

They sound like scary numbers, and if true (in some meaningful sense) they might even be so  (although even if a crisis happens every 20 years, a loss of 23 per cent of one year’s GDP is roughly a loss of 1 per cent of the total GDP over that full period).  But they aren’t meaningful, on a number of accounts.

First, the calculations (implicitly) assume that any deviation from the pre-crisis trend is a result of the crisis itself –  and not, for example, the misallocation of real resources that might well have occurred even if the financial system had stayed sound.  At best, these numbers conflate the two effects.

Relatedly, the estimate ignore things that might have getting underway in the year or two prior to the crisis.  Thus, as I’ve shown before, productivity growth in the United States had already begun to slow very markedly a couple of years before the crisis hit.

fernald

A small amount of that might make its way into the pre-crisis trend measures, but most of it won’t.

And thirdly, the Bank –  and many of their peers among other keen regulators –  makes no attempt to compare the experiences of countries that went through serious financial crisis and those that did not.   US economic performance over the last decade has been underwhelming to say the least.  The US was at the epicentre of the 2008/09 financial crises.  But it is simply a step far too far to conclude that the extent to which the US has done less well than in the previous decade is the measure of the cost of the financial crisis, especially if other countries that didn’t have a crisis also did less well than they had done the previous decade or so.

I’ve touched on this issue before, including in this post last year.   Of course, finding good comparators isn’t just a matter of a random into the OECD bag of countries.  For a start, as I’ve already noted (and as the Reserve Bank knows), a fixed exchange rate tends to exacerbate the severity of any shock.  The United States –  epicentre of the financial crisis –  is a floating exchange rate country.   Some floating exchange rate countries –  notably the UK and Switzerland –  were caught up in the 2008/09 crisis primarily because of the exposure of their internationalised banking sector to the US and its housing debt instrument (rather than because of domestic credit exposures).  But there are six well-established floating exchange rate advanced countries that didn’t have a serious domestic financial crisis at all in 2008/09:  New Zealand, Australia, Canada, Norway, Israel, and Japan.

Here is how the US experience, on real GDP per capita, compares with the median of those non-crisis floating exchange rate advanced economies

crisis costs

The US experience was a little worse than that of the median of this group of countries, but the differences are small, and there is a lot of variability in the experience of the non-crisis countries (since 2007 Israel has done much better than the US, while Norway has done much worse).   And as I noted in the earlier post, the comparison still tends to exaggerate any contribution of financial crises themselves, as the US had less fiscal leeway than all the other floaters except Japan, and the US had less monetary policy leeway (running into the lower bound) than New Zealand, Australia, and Norway.

That’s GDP per capita.  But what productivity?  Quite a lot of the arguments about the cost of financial crises attempt to build a story about persistent dampening effects on innovation, risk-taking etc, reflected in the productivity numbers.  Here is the chart, showing the same comparison countries, for real GDP per hour worked (OECD data).

crisis costs 2

Perhaps this chart is a bit more favourable to the story, depending on how you read it. Over the whole period –  pre and post crisis –  the US managed faster labour productivity than the median of the six non-crisis countries.  But perhaps the slowdown in productivity growth is a bit more in the US than the others (even if, as the earlier chart showed more clearly) the slowdown pre-dated the crisis?  Then again, the level of labour productivity in the US is higher than in all but one (Norway) of my non-crisis collection of countries, so if there was a global productivity growth slowdown (for whatever reason) you might be expect the US to be hit more visibly than the other countries (that sitll had catch-up and convergence opportunities).   Even among the non-crisis countries, there is considerably divergence –  since 2007 Australia has had the strongest productivity growth and Norway the weakest.  (Remarkably, Iceland –  savage financial crisis and all –  has had faster labour productivity growth than all these countries.)

I’m not wanting to suggest that recessions and financial crises don’t have costs.  At an individual level almost inevitably they do, and at a national level recessions are rarely pleasant or welcome (that’s why we have active monetary policy).  But we deserve much more searching analysis from our central banks and financial regulators (and those holding them to account, including national Treasurys) when they bidding to persuade us to entrust them with so much power, and  the deference due to people who make so much difference (so they claim).

A good starting point remains this very long-term chart (due originally to Nobel laureate Robert Lucas)

maddisonUS

As I noted in a long-ago post

It is a quite simple chart of real per capita GDP for the United States, back as far as 1870.  These are Angus Maddison’s estimates, the most widely used set of (estimated) historical data, and as Maddison died a few years ago they only come as far forward as 2008.  The simple observation is that a linear trend drawn through this series captures almost all of what is going on.  More than perhaps any other country for which there are reasonable estimates, the United States has managed pretty steady long-term average growth rates over almost 140 years.  And yet, this was a country that experienced numerous financial crises in the first half the period.  Lists differ a little, but a reasonable list for the US would show crises in 1873, 1884, 1893, 1896, 1901, 1907, perhaps 1914, and 1929-33.  There were far more crises than any other advanced countries experienced.

And yet, there is no sign that they permanently impaired growth, or income.

If we are to have good financial stability policy, and confidence in it, it needs to be based on good searching robust and honest analysis, that recognises the puzzles and the ambiguities in the data, not the sort that rushes to support the conclusions policymakers have already settled on.

The Prime Minister: kindness, policy, and specific abuse

Michael Reddell NZ politics

In the Canvas magazine supplement to Saturday’s Herald there was a brief interview with the Prime Minister that encapsulated well for me why she might be well-suited to being, say, Governor-General or some other empathetic public role, but also why she is unsuited to be Prime Minister.   The interview was reproduced from a new edition of a book called 200 Women. 

Asked what really matters to her, the Prime Minister responds “empathy and kindness”, and going on to note “because that’s what drives social change”.   I don’t want to downplay the value of either admirable quality, in an individual.  But they are manifestly insufficient in someone who puts themselves forward as a leader – of a local community, let alone of a nation.

The Prime Minister attempts to illustrate her point

“if you break some of the social challenges we face down to individual people, New Zealanders have a huge amount of empathy at that level. I’ve always viewed the world this way –  rather than seeing political problems as these large-scale statistical issues and as differences between peoples”.

We don’t want political leaders who can’t identify with individual need, opportunity and so on.  And yet, when one is dealing with five million people –  and government policy choices affecting many or all of them  –  you need to be able to stand back and think about things differently, to analyse issues systematically, to recognise (for good and ill) the force or incentives, to think about the longer-term as well as the short term, and so on.   And even to recognise that values and interests can, and often will, be in conflict –  in many areas hers aren’t Family First’s or the oil and gas industry’s  (or mine for that matter).  Politics is partly about navigating those differences, seeking reconciliation where possible, but also about making hard choices and trade-offs.

She goes on, apparently pretending none of this is real.

There are so many issues we end up divided on, which, if you distilled them down to a simple concept, you will find we are in fact united on.   Take the issue of child poverty; sometimes you’ll hear arguments like, “Well, this is an issue of parental responsibility, is it our role to be involved?”.  There’s a perception that, at some point, someone has neglected their duty of care.  But, actually, at the heart of the discussion is a child who –  whatever perception you might have of them –  is blameless, who is just a subject of their circumstances,

So while I might argue back that you can’t talk about parental blame as long as we have a low-wage economy in which people are working yet not earning enough to survive –  at its heart we’re talking about the same child.  If you take a view of kindness towards that child, then this starts to change the way you might think about solving the problem. You strip away some of the blame and get back to the simple values that every child should have a good start in life and that every child should have what they need to thrive.

But this is just vapid stuff, which doesn’t help make any serious or hard policy choices at all.  It suggests a near-total absence of any sort of analytical framework for thinking about the economy or society, about the limits of the state (or the family), as well as some sort of bizarre ahistorical perspective on things –  at the time when real incomes are higher than they have ever been in New Zealand’s history (and global real incomes are higher than in all of human history) apparently no parent can be expected to take responsibility for anything because people don’t earn enough to “survive”.   What an insult to our ancestors.

She goes on.  Asked about what she would change if she could she responds

If I could distill it down, there are things among this enormous programme of work that I’d like to walk away from politics feeling we had changed.  These are finally having agreement that child poverty is something which shouldn’t exist in a country like ours and that we all benefit if we rid ourselves of it.  And climate change.

Not even actually eliminating child poverty –  whatever that means (in absolute terms we are long past that point, in relative terms almost by construction we can’t get there) –  just getting head-nodding agreement that “child poverty shouldn’t exist”.  Nor, in some ideal world, would many many other bad outcomes –  sickness, disease and so on.  And note that last phrase, which just hangs.  Nothing of substance follows it, nothing about the hard choices, conflicting values, economic costs and benefits.   This isn’t leadership, it is feelgood-ism.  It brings to mind the Disney lyrics

When you wish upon a star
Makes no difference who you are
Anything your heart desires will come to you
If your heart is in your dream
No request is too extreme
When you wish upon a star
As dreamers do
Fate is kind
She brings to those who love
The sweet fulfillment of their secret longing

But it isn’t the way government, and policymaking, works…..or should work if the desirable change has any prospect of being achieved.  That involves hard and disciplined work, tough choices, looking beyond the superficial, and so on.   It involves leadership in more dimensions – probably more important dimensions – than just “kindness”,   including courage, responsibility, persuasion and so on.

So just to take the child poverty issue for a moment, whatever you might want to do about income redistribution right now, it might mean recognising that much bigger medium-term differences can be made –  and opportunities created –  by doing something serious about New Zealand’s lamentable productivity record (by contrast, reports of the Prime Minister’s first meeting with her Business Advisory Council suggests neither she nor they have any concept of what the issues might be, or even how to think about them).

And whatever might be done about immediate social housing issues (“for the kids”), much bigger and enduring differences –  for this generation and the next – can be made by fixing the land use restrictions that have given us some of the worst house price to income ratios in the world.  You might even think –  as I do –  that children are almost always better off growing up with two biological parents who are committed to each other for life, and think about whether well-intentioned (“kind”) policy choices in decades past might have contributed to some of the problems we see today.

In a sense that “well-intentioned” comment applies in all these areas, and many more.  Many policy choices made by successive governments were made by people who thought they were being “kind” (eg working in the best interests of others) –  no doubt there were a few that were just self-interested by design from the start, but they will be few –  but as a decisionmaking criterion it just doesn’t get you very far.   Bad (policy) choices can be just as readily made by “kind” people.  The Prime Minister may well be a “kind” person –  I’ve never heard anyone say a bad word about her personally, which is admirable –  but it won’t help much to be the sort of effective leader New Zealand needs.

But if “kindness” is the criterion the Prime Minister wants to inject into all decisionmaking  – I’m still puzzling over how it is going to help her deal, say, with Chinese expansionism and interference in New Zealand (though perhaps it could help spark the odd genuine and open expression of concern about human rights abuses) –  there was an odd juxtaposition in Saturday’s Herald that left me wondering about just how seriously I should take even her talk of the priority of “kindness”.

The interview I’ve quoted from above was no doubt given some time ago, and presumably the Prime Minister didn’t control when it appeared in the Herald. But in that issue of the Herald was a truly awful, in-depth, story about a young man whose life may well have been destroyed by the organs of the state, for which if anyone is responsible (and accountable) it is the Prime Minister of the day.   It was this detailed account by Jared Savage, introduced this way.

EXCLUSIVE: A teenage boy wrongly accused of rape went to prison protesting his innocence. A year later, the so-called victim recanted the allegations. But the confession didn’t come to light for another 10 years. Jared Savage investigates.

But that intro barely even begins to capture the full horror of what seems to have gone on.

His constant claims of innocence counted against his rehabilitation and undermined his chances of parole. So he served every day of his 4 ½ year sentence.

But his prison time was far from over. He spent most of the next seven years bouncing in and out of prison for tripping up on the strict release conditions accompanying his status as a sex offender.

Simply saying hello to a child was enough for him to be locked up again.

“Release conditions” for something he didn’t do in the first place.    And which it was known years ago that he didn’t do.  And yet it was little more than good fortune that his conviction was finally overturned by the Court of Appeal.

I found it an incredibly harrowing read.  No doubt the young man concerned is no angel –  few of those to whom miscarriages of justice occur are –  and, as a victim of earlier abuse himself, his ability to function fully effectively in society might have been pretty compromised anyway.  But that isn’t the point.  When the state acts to take away someone’s liberty, when it imposes restrictions even beyond the end of a sentence, when it tars someone with the label “sex offender”, it needs to make utterly sure that it gets things right.  And since that level of confidence is impossible this side of eternity, when mistakes are made –  sometimes, as in this case, utterly egregious mistakes –  the agents of the state (the government) needs to be at the forefront of a generous pro-active approach to making atonement.  Nothing can restore than 10 years that young man has lost, perhaps there is slim chance now that his life can successfully be put on a high-functioning path, but that only reinforces how fundamental it should be for those in charge – our Prime Minister for example –  to take the lead in the apology, atonement, compensation and reconciliation processes.  Government agencies failed this man, but they failed us too.  These aren’t our values as New Zealanders –  locking up a young man for 10 year for a crime he didn’t commit, holding against him his refusal to give up and confess to a crime he simply didn’t commit, and so on.

At the end of the article we read

Phil Hamlin [the lawyer who took up the case] is now looking into whether Patrick is eligible for compensation for wrongful conviction, and, ironically, a separate claim against the state for abuse in CYF care.

Because of his youth and the relatively minor nature of the indecent assault Patrick admitted to, Hamlin said his client would not have gone to prison.

So most of his youth was spent in prison because of Mark’s now discredited rape allegations.

“I think it’s extraordinary it’s taken so long to be sorted out,” said Hamlin.

“The consequences have been huge. It’s wrecked his life.”

As for Patrick, he doesn’t really care about any compensation money.

“All I just want is for people to believe me. Then I can move on.”

Which is fine in its way, but where is the pro-activity of the state, the leadership of the Prime Minister and the Minister of Justice?  Someone who has been put through a dreadful ordeal of the sort this young man experienced shouldn’t have to go on bended knee now to the Crown.  If anything, senior government ministers should be going on bended knee to him (and his representatives), asking what they can do to make atonement for the specific and longrunning abuses of this young man by the New Zealand government and its agents.

And yet what have we heard from the Prime Minister or the Minister of Justice?  Nothing.

(For that matter, what have we heard from the opposition party leaders –  National’s leader and deputy having previously been Associate Minister of Justice and Minister of Courts, and Minister of Social Development and Minister of Police.  Nothing.)

Does no one say anything because the victim of this injustice is not some safe, blameless individual (as conventional politics would describe it)?  I don’t know, but the silence –  several days on now (and I’m not sure when that Court of Appeal ruling came down) –  is shameful.

This is one of those very specific episodes where “kindness” –  above and beyond the minimalist provisions of the law –  might begin to make a real difference in one person’s life, and in demonstrating to citizens (and public servants and government agencies) the sorts of egregious abuses we simply won’t stand for, no matter who they committed on.  Story always beats no-story.  Here she can really make a difference, and be seen to walk the talk.

I was interested to see Herald journalist Matt Nippert tweet about this story

I really hope he is right.

Show your workings: KiwiBuild, the Reserve Bank, and the Ombudsman

Michael Reddell OIA, Reserve Bank

The Reserve Bank is a powerful public agency, whose views receive a lot of coverage, and some respect in some quarters. The views taken by the Bank affect where interest rates are set, and thus the short-medium term path of the economy itself.  They aren’t just commentators –  they are players too –  but they aren’t less than commentators.  They use a lot of public money to undertake analysis that is supposed to underpin their commentary and decisions.   It should be pretty much Open Government 101 that citizens –  who pay for the analysis and are directly affected by how the Bank uses it –  should be able to see that analysis.     The Reserve Bank has never seen it that way.  Over decades –  when I was closely involved, and still now –  they’ve taken the view that the Bank is different, and special, and that all we should be entitled to see is what they choose to tell us.   Even Xi Jinping reaches that low bar.

Sadly, the Bank has had the Ombudsman –  supposedly the watchdog for citizens to ensure, specifically, that the Official Information Act is complied with (in letter, but ideally also in spirit) –  wrapped around its little finger for decades now.  Through successive Chief Ombudsmen and successive Governors, the Ombudsman’s office has provided cover for one of the most powerful agencies of government, one still (for a few more months) run as one man’s fiefdom (single decisionmaker regime).

KiwiBuild is a case in point.  As I noted, the Reserve Bank is a powerful public agency.  KiwiBuild is a major element in the current government’s policy, and one very relevant to the Reserve Bank given the role fluctuations in residential investment often play in business cycles.   What the Reserve Bank thinks about the impact of KiwiBuild matters for monetary policy.  It can matter also to the government, especially now that its flagship programme appears to have run into political difficulties.

The Reserve Bank first opined on KiwiBuild in its November Monetary Policy Statement last year.  That document was finalised shortly after the new government took office, and in it the Bank reported –  in highly summary form –  the assumptions it had made about four strands of the new government’s programme minimum wages, fiscal policy, immigration, and Kiwibuild).   Here is what they had to say about KiwiBuild (emphasis added).

The Government has announced an intention to build 100,000 houses in the next decade. Our working assumption is that the programme gradually scales up over time to a pace of 10,000 houses per year by the end of the projection horizon. Given existing pressure on resources in the construction sector, the aggregate boost to construction activity from this policy will depend on how resources are allocated across public and private sector activities. The Government intends to introduce a ‘KiwiBuild visa’ to support the supply of labour to high-need constructionrelated trades. While accompanying policy initiatives may alleviate capacity constraints to some extent, our working assumption is that around half of the proposed increase will be offset by a reduction in private sector activity.

It wasn’t necessarily an unreasonable working assumption, but it was very early days for the new government.  Presumably the Bank had had the benefit of perspectives from, say, MBIE and Treasury that the public were not privy to, and they must have applied their own (considerable) analytical resources to thinking hard about how, at any economywide level, crowding out would work.  It didn’t seem unreasonable that if the central bank was going to weigh in like this, and make policy on the basis of such assumptions, we should be able to see a little more of their supporting analysis.  After all, if the correct number wasn’t a 50 per cent crowding out, but (say) 25 per cent, 75 per cent or even 100 per cent, it could have material implications for monetary policy.

And so, a few days after the Monetary Policy Statement was released, I lodged a request for

copies of any analysis or other background papers prepared by Bank staff that were used in the formulation of the assumptions about the impact of four specific policies of the new government minimum wages, fiscal policy, immigration, and Kiwibuild), as published in the November 2017 Monetary Policy Statement.

Somewhat predictably, the Bank refused and I appealed the matter to the Ombudsman.

The Bank justified its refusal on two conventional grounds, and one on which the Ombudsman has never provided substantive guidance.

The Reserve Bank is withholding the information for the following reasons, and under the following provisions, of the Official Information Act (the OIA):

  • section 9(2)(d) – to avoid prejudice to the substantial economic interests of New Zealand;
  • section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of the Reserve Bank in the course of their duty; and
  • section 9(2)(f)(iv) –  to maintain the constitutional convention for the time being which protects the confidentiality of advice provided by officials.

Anyone with a modicum of interest in open government, and even the slightest familiarity with the Reserve Bank, financial markets etc, would recognise that the claim that releasing such background supporting analysis would prejudice the “substantial economic interests of New Zealand” is laughable.

The Reserve Bank continues to comment on KiwiBuild, and the implications of that programme for the overall outlook for residential investment and for economic activity.   The views taken by the Bank still matter, both substantively (monetary policy) and in terms of the growing political controversy over the programme.     And they continue to provide almost no substantive analytical underpinnings for their views.  Here is the relevant extract from last week’s MPS. 

The Government’s KiwiBuild programme is expected to contribute to residential investment over the second half of the projection.

and

The KiwiBuild programme is assumed to add to the rate of house building from the second half of 2019.

And that’s it. No description of any analysis they (presumably) must have undertaken.

The issue came out in the press conference, where it was even enough to win the government a favourable news story, Reserve Bank backs KiwiBuild targets… mostly.  Here is some of that story

But the Reserve Bank’s quarterly Monetary Policy Statement noted that the “KiwiBuild programme is assumed to add to the rate of house building from the second half of 2019”.

That’s big news. The Bank puts extensive resourcing into coming up with its economic forecasts, and it’s essential that it does so. The Bank’s forecasts guide it’s setting of the official cash rate which is one of the main levers that sets the pace of the economy. Get it wrong, and the consequences can be severe.

That’s why it’s worth noting that the RBNZ now appears to back the view that most of the KiwiBuild homes built will be in addition to the current housing supply, which is roughly 30,000 houses delivered on the private market.

Critics have assumed that all or most of the 12,000 houses KiwiBuild will deliver each year, once fully deployed, will come by sucking resources from the 30,000 builds currently taking place. New Zealand will still build 30,000 houses a year, but 12,000 of them will be KiwiBuild, they say.

But the Bank disagrees, saying its forecasts have “assumed some minor set off”, but that KiwiBuild is overall likely to increase housing supply.

This is a change from the Bank’s MPS from last November. At the time, RNZ reported the Bank’s preliminary calculation was that as many as half of KiwiBuild’s projected 100,000 homes would have been built anyway.

Housing Minister Phil Twyford responded then that “there may be some offset but I doubt it will amount to very much”.

It now seems the Reserve Bank largely agrees, although as an independent entity it is duty bound to stay out of politics.

It doesn’t totally back the Government’s aspiration to deliver all the KiwiBuild homes in addition to existing supply.

Reserve Bank Chief Economist John McDermott said there would still likely be some “crowding out” as KiwiBuild sapped workers and resources from the private sector.

“You can imagine when one part of the economy starts to increase demand it will crowd out some other parts but overall we will start to see quite a lot of activity over the next few years in residential construction,” he said.

This stuff matters, Orr and McDermott are opining on it, Orr is making monetary policy on it, but they can’t or won’t supply any supporting analysis.  Not a year ago, and not now.     Perhaps they are right, but what confidence should we have in their views when they won’t show us, so to speak, their workings.  Old exam question used to specify that if you wanted credit for your answer (to, say, some maths problem) you needed to show your workings.  It isn’t obvious why the bar should be so much lower for a powerful public agency like the Reserve Bank.

Sadly, they have persuaded the Ombudsman to agree with them.  In my post on Thursday, I included some text from a submission I had made a few months ago to the Ombudsman on his provisional determination on this issue.  On Friday I received a letter from Peter Boshier, the chief ombudsman, conveying his final decision.  In it, he fully backed the Reserve Bank’s stance of refusing to release any of the background papers.

In my submission I had attempted to draw a parallel between background papers provided to the Governor on matters relating to MPSs and OCR decisions, and material provided to the Minister of Finance in respect of, notably, the Budget.  Each year a huge amount of that latter material is pro-actively released.  I noted

Thus, Cabinet papers underpinning key government announcements are frequently released, sometimes in response to OIA requests and at other times pro-actively.  But so too is advice to a Cabinet minister from his or her department.  That is so even when, as is often the case, officials have a different view on some or all of the matters for decision from the stance taken by the minister.   A classic example, of course, is the pro-active release of a great deal of background material, memos, aide-memoires etc compiled and submitted as part of the Budget formulation process.  Many of the working papers in that case may never even have been seen the Secretary to the Treasury but will have been signed out to the office or minister at the level of perhaps a relatively junior manager.  Many will have been done in a rush, and be at least as provisional as analysis the Governor receives in preparing for his OCR decision.  I’ve been personally involved in both processes.

Is it sometimes awkward for the Minister of Finance that his own officials disagreed with some choice the minister made?  No doubt.  Do ministers sometimes feel called upon to justify their decisions, relative to that official alternative advice? No doubt.  But it doesn’t stop either the provision of such dissenting (often quite provisional) analysis and advice, or the release of those background documents.

The sorts of arguments the Reserve Bank makes, and which Mr Boshier appears to have accepted, could well be advanced by Cabinet ministers (eg clear messaging about this or that aspect of budgetary or tax policy –  all of which are substantial economic interests of the NZ government).  If they have advanced such arguments, they have generally not succeeded.  And nor should they.  Doing so would undermine effective accountability or scrutiny, even though the Minister’s formal accountability might be to Parliament (he has to get his Budget passed).

The relationship between the Minister and his or her department officials is closely parallel to that between the Governor of the Reserve Bank –  the sole legal decisionmaker (who doesn’t even have to get parliamentary approval of his decisions) –  and the staff of (in this case) the Economics and Financial Markets departments of the Bank.  One group are advisers, and the other individual is the decisionmaker.  The fact that they happen to both part of the same organisation, doesn’t affect the substantive nature of that relationship.   Managers and senior managers in the relevant departments are responsible for the quality of the advice given to the Governor, in much the same way that the Secretary is responsible for Treasury’s advice to minister (and at his discretion can allow lower level staff to provide analysis/advice directly to the Minister or his office)   I would urge you to substantively reflect on the parallel before reaching your final decision, including reflecting on how (if at all) official advice on input to the OCR is different than official advice (including supporting analysis) on any other aspect of economic policy.

Remarkably, in his determination to protect the Reserve Bank,  Boshier simply ignores the parallel to Treasury budget advice altogether.  Perhaps it isn’t altogether the appropriate parallel (although I think the situations are extremely analagous), but instead of engaging and identifying relevant similarities and differences, the Chief Ombudsman simply ignores the argumentation.  He seems to think it is okay for powerful public agencies to make policy based on critical assumptions, and opine on matters of political sensitivity, and yet to be under no obligation to show any of their workings, even when (as in this case) such material clearly exists (the responses make that clear).

If that weren’t bad enough, the Ombudsman plumbs new depths with this paragraph from his letter

You contend that the formal accountability of the Governor is relatively weak and that public scrutiny and challenge is the most effective form of accountability. However, that view would seem conflict with your previous stated view that it was the Reserve Bank Board, rather than market commentators, who was best placed to hold the Governor to account.2 Your paper makes a very strong case for the merits of the formal accountability mechanism, the disadvantages of market commentators, and the legitimate variance of views that can arise.

I was initially a bit puzzled about what he was going on about, until I looked at footnote 2.  It was a link to this paper on monetary policy accountability and monitoring, which I had written for the Bank, as a Bank employee, in about 2005 or 2006, making a defensive descriptive case for the Bank, including highlighting how open and accountable it was.  The article has actually been amended slightly in recent years, but even at the time it wasn’t my own view –  it was the official Bank line.  That is what public servants are paid to write.  (Heck, I’ve given presentations making the case for OCR decisions I strongly disagreed with –  it is what public servants do.)     As I recall it, the article had been intended for publication in the Reserve Bank Bulletin, and my own bosses had been reasonably comfortable, but the Bank’s Board was most definitely not comfortable, and insisted both that it not appear in the Bulletin and that before it appeared anywhere it be amended to play up the importance of the Board’s monitoring and accountability (relative to the way things were presented in the draft).

I couldn’t believe that a serious person –  and Peter Boshier used to be a senior judge, and as Ombudsman is entrusted by Parliament with protecting citizen’s interests –  was actually going to run so feeble an argument.   Perhaps it seemed like a “gotcha” argument to some junior person in his office, but review processes are supposed to winnow out such lines. I’m still sitting here shaking my head in disbelief.  The Ombudsman seriously wants us to believe that because a Bank official, writing for the Bank –  a decade or more ago –  says it is highly accountable via the Board, it is in fact so.  Only someone determined to provide cover for the Bank could even think to take such a line seriously.  But that seems to be a description of the Ombudsman.

As tiny sliver of hope, the Ombudsman did point out that his decision had to be made as at the time I initially lodged the request,  ie was it reasonable for the Bank to have withheld the information last November/December, a few weeks after the relevant MPS. As a year has now passed, I have submitted a new request to the Bank, for exactly the same information from last November. I fully expect the Bank to decline that request, and then the Ombudsman can determine whether even after a year citizens should be entitled to see the working analysis powerful public agencies use when they opine on, for example, controversial government policies.  The Official Information Act is well overdue for an overhaul, but decisions like these simply reinforce the case, with more evidence of how ineffective the administration of the Act (including by the Ombudsman) often is in delivering on the purpose statement in the Act itself.

Meanwhile, Orr and McDermott opine on KiwiBuild and (apparently) make policy on their opinions, but refuse to provide anything of the analysis that underpins their views.  That simply isn’t good enough.

ADDENDUM

For anyone interested in another small example of how the Reserve Bank has the Ombudsman wrapped around their little finger,  consider the release last Thursday in the Monetary Policy Statement of this chart.

OCR advice

When I’d first seen it I offered a little bit of praise to the Governor for publishing it.  It happened to be quite similar to information I had requested more than 2.5 years ago, and which the Bank had refused to release.

As I noted in the post on Thursday, I learned a few minutes after publishing that praise of the Governor that, in fact, they had published the material only because –  after a mere 2.5 years –  the Ombudsman had got round to asking them to reconsider.   But it got worse when I got the formal letter from the Ombudsman on Friday.  They did actually apologise for taking 2.5 years and noted

As you may appreciate, this investigation has involved several meetings and much correspondence with the Reserve Bank concerning the use of a rarely-used withholding ground.

(From memory this is the “substantial economic interests” ground, which the Ombudsman thus again avoids formally ruling on.)

But this was the bit that really caught my eye

To preserve market neutrality, the Reserve Bank asked me not to inform you of its decision to release this information until after the November MPS.

This simply confirms that the Ombudsman and his staff have no concept of what might, or might not, be market sensitive.   Anyone with the slightest familiarity with the issue will recognise what actually happened.  The Bank decided to put the information in the MPS so that it might perhaps attract a little praise (for new interesting information) –  and it even managed to get some from me – while avoiding a situation where, having released the information to me –  me having requested it 2.5 years ago – I could have put it out first here, with some digs about the process, the obstruction, and the interests of transparency.

As it happens, I have no problem at all with the Bank putting the material in the MPS. It gave the material more visibility than it would get here –  and there was even a question at the press conference –  but no one, but no one (other than presumably the Ombudsman’s office, which appear not to know what it doesn’t know) would have bought the line about this old information being in any way market sensitive, or hence the alleged need for “market neutrality” about its release.  The Ombudsman’s office, again, allowed itself to be used by the Bank.  Relevant Bank staff will no doubt have been quite pleased with themselves.  But if anyone from the Ombudsman’s office is reading this –  and perhaps I’ll send them a copy –  they might use it as a prompt to begin to rethink the extreme deference they’ve displayed towards the Bank over the years.

 

 

Some thoughts on the Monetary Policy Statement

Michael Reddell Monetary policy

First, some more kudos (albeit slightly ambivalent) to the Governor.  As of this Monetary Policy Statement they have started publishing a spreadsheet with detailed quarterly forecasts for about 30 variables.  I remain unconvinced of the value of such forecasting (especially up to 3.5 years ahead) –  which has a non-trivial opportunity cost – but if they are going to do such forecasts it is only right that we should have access to them.  The forecasts won’t be right but they will shed a little more light on how the Bank is thinking about how the economy is (or might) work, and the usefulness of the table will increase as a time series of such forecasts is built up.     And one day perhaps they’ll develop sufficient confidence to release, with a lag, the staff background papers that contributed to the forecasts.

Watching the webcast press conference, it was curious to see the Governor introduce his chief economist with the description “the wisest man in the Reserve Bank”, just a few days after the Governor had stripped the same individual of his Assistant Governor title and demoted him –  by putting another senior manager between McDermott and the Governor.   Perhaps wisdom isn’t greatly valued at the the top of the Reserve Bank?  More probably, it was just another cheap Orr line.

As I’ve noted previously, McDermott often isn’t that convincing in speeches and press conferences.  We had another example yesterday.   The Bank seemed to be a bit on the defensive over recent very short-term forecast errors, and this time I was mostly inclined to sympathise with them: there are significant uncertainty margins in how things are even measured, and you get the sense reading the SNZ commentary that (for example) even they don’t really believe the size of this week’s reported fall in the unemployment rate.  But McDermott went on to over-egg things claiming, as if his name was really Pangloss, that “the outcomes for monetary policy are as good as it gets”, asserting that things were turning out just as planned.  They had cut the OCR in 2016, we were told, and what we see is what you’d expect having done that.

I doubt the Governor was particularly taken with that line of argument.  He –  rightly –  pointed out several times that inflation is still below the target midpoint, and their job is still to get it back up.  They need considerable capacity pressures to achieve that.

Of course, there is a modicum of truth in what McDermott had to say.  Having stuffed things up in 2014, raising the OCR when it wasn’t needed (with the full support of McDermott, as yesterday’s chart on the advice to the Governor confirms), they had to cut the OCR, by quite a lot in the end.  Do that and of course you should expect inflation to pick up gradually –  take your foot off someone’s throat and they start breathing more freely again too.

But, of course, the Bank has been telling us for years that they are aiming to get inflation back to 2 per cent, and it was the year to December 2009 that their (often preferred) sectoral core factor model measure of inflation was at 2 per cent.

The Bank doesn’t publish forecasts of core inflation, but the medium-term inflation forecasts they do publish are good proxies (since two years out one doesn’t usually know about petrol price or tax shocks that throw headline inflation around).  Two years ago, at the end of the Bank’s OCR-cutting phase, they forecast that (core) inflation would be back up to 1.9 per cent by now.  In fact, it was only 1.7 per cent in the year to September.   A year ago, in the November 2017 MPS, they were forecasting inflation would be either 1.9 or 2.0 per cent in all their medium-term horizons.   But in the latest projections they don’t seem to see (core) inflation back to 2 per cent until mid-2020, long enough that they will have been below the target midpoint for more than a decade.

Perhaps one shouldn’t cavil too much about current outcomes, but it has been an awfully long time coming, and the wait needn’t have been anywhere as long if the Reserve Bank’s senior managers had been doing their job better.  Oddly, I also heard the Governor twice suggest that “only six months ago people were suggesting we weren’t doing our job [and should have cut]”.  I’m not sure who he is referrring to here –  I don’t recall a groundswell of calls for rate cuts six months ago –  but if I’m among those he is responding to, I hold to my view: we would have had better inflation outcomes (the primary job of the Bank) had the OCR been lower in 2016 and 2017. (That isn’t the same as saying I’d cut right now.)

And eight or nine years into this economic expansion, it isn’t as if the Bank is well-positioned should another serious recession come along soon.  The Governor was asked again about this yesterday, and gave his (now customary) complacent response.   There was, we were told, nothing to worry about.  The OCR didn’t really matter that much, because it was not much more than happenstance that that was the instrument currently being used.  There was lots of handwaving, and (still) not a lot of convincing argumentation.  And never an acknowledgement that if other countries are even somewhat constrained (or feel they are) that will markedly worsen the environment we face.   Perhaps one day the Governor could devote a speech to the subject, or is he not ever going to do a speech on what is, still, his primary statutory responsibility?

There was reference again to a Bulletin article the Bank published a few months ago, which I wrote about here.   I stand by my conclusion

In summary, I welcome the fact that the Reserve Bank has begun to talk more openly about the potential limitations in its response to the next recession, but it is disconcerting that they still seem to be trying to minimise the potential severity of the issue.   In that, they aren’t alone.  I’m not aware of any central bank that has yet laid out credible plans to minimise the damage (although senior officials of the Federal Reserve have been more willing to talk about the issues openly).  In that, they are doing the public a serious dis-service, and risking worse outcomes than we need to face –  repeating the sort of reluctance to address issues that saw the world drift into crisis in the early 1930s.  Fortunately for the central bankers perhaps, it won’t be central bankers personally who pay the price.  That won’t be much consolation for the many ordinary people who do.

Since politicians, and not central bankers, are accountable to the voters, the Minister of Finance should be taking the lead in requiring a more pro-active (and open) set of preparations to be undertaken by the Reserve Bank and The Treasury.

(There was also a brief exchange –  not entirely audible on the webcast – about a peculiar episode in the last recession when it appeared that the Bank had convinced itself the OCR couldn’t safely be cut below 2 or 2.5 per cent.  I was at The Treasury at the time and when we heard of this stance, it struck us as distinctly odd.  The argumentation  –  repeated yesterday –  apparently was that if they cut further the exchange rate could fall very sharply.  And yet in an open economy, with well-hedged foreign debt, a fall in the exchange rate is a natural and normal part of the stabilising transmission mechanism.  I mention it here mostly as an example of the sort of central bank caution –  here and abroad –  that has contributed to such weak inflation over the last decade and (at the margin) at muted recovery.  Even if the specific floor has changed, it isn’t clear how much the mindset has.)

Perhaps one of the most interesting aspects of the projections yesterday was the inflation numbers. Usually –  for decades now – the published projections for inflation have involved a gradual return towards the midpoint of whatever the inflation target range is at the time.   Sometimes that return path looked rather slow –  in the Bollard years when core inflation was around 3 per cent, Alan was happy enough to publish projections showing inflation only back to 2.5 per cent at the end of the forecast horizon – but it was, almost without exception, a convergent process.  If you were starting from 3 per cent with a target midpoint of 2 per cent, the end-point forecasts were 2 or a bit above, not (say) 1.8.  And the same when, as in recent years, the starting point has been below the midpoint.

But not now.    Here are the medium-term inflation projections (those two and more years ahead), which monetary policy can do a lot about if it chooses.

med term projections

Mostly –  and the more so the further out –  above 2 per cent.    Looking back a couple of years I did find an MPS where the final projections were at 2.1 per cent, but it was clearly a case where the then-Governor had chosen to portray a dead-flat OCR track.  By contrast, in these latest projections the OCR has risen by 66 basis points by the end of the forecast horizon.

The Bank doesn’t seem to have explained quite why it (well, the Governor) is making this choice, which is clearly a conscious and deliberate one.  There seem to me to be two possibilities:

  • the first is that, given the new employment dimension to the mandate, and that they had expected unemployment to stay around 4.3 or 4.4 per cent for the next 18 months (prior to this week’s HLFS numbers), the Governor was deliberately choosing to prioritise further reductions in unemployment over meeting the midpoint inflation target, or
  • alternatively, given the risks going into the next recession he is deliberately aiming for inflation in the upper half of the inflation target range to pull inflation expectations up more securely, and provide more leeway in the next recession.

There were hints of something along these lines in the reports of the off-the-record speech Orr gave on such matters a few months ago, but we’ve had nothing open and official.  That isn’t good enough.

(I’m quite comfortable with leaving the OCR unchanged at present –  relative to the alternative of signalling an early tightening –  as I’d still be surprised if, between domestic pressures and external threats, we saw anything like the growth the Bank is forecasting over the next year or two.  But the actual policymaker owes us a more considered explanation for the choices and tradeoff he personally is making with our economy.)

And whatever the explanation, the Governor clearly has some way to go to convince people putting their money on the medium-term inflation outlook.  Here is the chart of the breakeven inflation rate from the government bond market for the second half of this year.

breakeven 2018

The data are up to yesterday, so include both the unemployment and MPS news.  Expectations of medium-term inflation, as reflected in market prices, remain stubbornly low.

As I said at the start of this post, the new table of forecast data the Bank is releasing enables to illustrate a little more clearly how the Bank thinks things are working.   For example, this chart shows their projections for quarterly growth in potential output and for annual net immigration (working age population) –  the latter being a series we won’t even have on any sort of timely basis in another month or so.

productivity

Population growth (of working age) is one of the biggest single contributors to any sense of what potential output growth might be. But the Bank expects the net migration inflow to more than halve, while potential output growth is barely changed. (And for anyone who responds “but isn’t that what you say we should expect”, the Bank’s forecasts have no further reduction in the exchange rate and has, in time, increases in real interest rates.)   Using their GDP and employment forecasts, productivity growth (GDP per person employed) averaged 0.6 per cent per annum over the last decade, has been non-existent over the last couple of years, but is expectedly to rebound strongly to around 1.5-1.6 per cent per annum in 2020 and 2021.    Without any real sense of the channels at work that might bring about this startling rebound, it feels like little more than wishful thinking.  That isn’t new –  I’ve highlighted in repeatedly, under both Wheeler and Orr.  It might even be convenient for the government, but only until  –  most probably – the outcomes again disappoint.