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role="banner"> <div class="site-branding"> <a href="https://croakingcassandra.com/" class="site-logo-link" rel="home" itemprop="url"></a> <h1 class="site-title"><a href="https://croakingcassandra.com/" rel="home">croaking cassandra</a></h1> <h2 class="site-description">Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective</h2> </div> <nav id="site-navigation" class="main-navigation nav-horizontal" role="navigation"> <button class="menu-toggle" aria-controls="primary-menu" aria-expanded="false">Menu</button> <div id="primary-menu" class="menu"><ul> <li class="current_page_item"><a href="https://croakingcassandra.com/">Home</a></li><li class="page_item page-item-1"><a href="https://croakingcassandra.com/about/">About Michael Reddell’s blog</a></li> <li class="page_item page-item-66509"><a href="https://croakingcassandra.com/book-reviews/">Book reviews</a></li> <li class="page_item page-item-58338"><a 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href="https://croakingcassandra.com/2025/03/10/on-the-way-ahead/" rel="bookmark">On the way ahead</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/10/on-the-way-ahead/" rel="bookmark"><time class="entry-date published" datetime="2025-03-10T11:32:47+13:00">March 10, 2025</time><time class="updated" datetime="2025-03-14T16:45:45+13:00">March 14, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/governance/" rel="category tag">Governance</a>, <a href="https://croakingcassandra.com/category/reserve-bank/" rel="category tag">Reserve Bank</a>, <a href="https://croakingcassandra.com/category/reserve-bank-board/" rel="category tag">Reserve Bank Board</a></span> </div> </header> <div class="entry-content"> <p>In my post last Thursday I offered some thoughts on changes that should be initiated by the government in the wake of the Governor’s surprise resignation. (Days on we still have no real explanation as to why he just resigned with no notice, disappearing out the door and (eg) leaving his international conference in the lurch, but this post is entirely forward looking.) Here I want to elaborate on three points, having benefited from a few days to reflect and a few useful conversations/exchanges:</p> <ul> <li>the position of the Board chair, Neil Quigley,</li> <li>policymaking on bank (and related) regulatory matters,</li> <li>the Funding Agreement.</li> </ul> <p>Board members, including the chair, of the Reserve Bank cannot be removed at will by the government. That puts them in a different position than the boards of many other government agencies. Whatever the pros and cons of that model (and there are both) it is the law as it stands. </p> <p>Last year the government – for reasons never made clear – extended the term of the chair of the Board, Neil Quigley, for another and apparently final two year term. Quigley has been on the board for a very long time now, and has been chair since 2016. By usual standards of corporate governance that would really be too long anyway, even allowing for the fact that the role has changed over time. But it was pretty clear when the reappointment was done last year that with Quigley getting another two years but Orr having (then) almost four years to run, the government expected – and appropriately so – that a new chair would be in place to lead the search for, and transition to, a new Governor (Governors are now limited to two terms).</p> <p>It should be untenable for Quigley lead the search (and transition) process now. He drove the selection and appointment (and reappointment) process for Orr in the first place. And frankly, however Orr appeared to the interviewers in 2017, that did not turn out well, and did not end well. The Board – and especially the long-serving Board chair – has to take some responsibility for that (including the chaos of last week, including Quigley’s own unconvincing belated press conference, which one person put it to me was bad enough to warrant dismissal for cause – sadly, not really a statutory option). In addition, Quigley – whose responsibilities have been to the public and the minister – has had the back of the Governor throughout his term, and there has never been the slightest hint in any Board Annual Report of any concerns at all. Worse, it appears that Quigley championed that blackball back in 2018 which – unlike any serious central bank in the world – saw anyone with current or future research interests in or around monetary policy banned from consideration for appointment to the Monetary Policy Committee (and yes, there is chapter and verse on this). Much more recently, whether deliberately or through careless forgetfulness (and failing to check records) he actively misled Treasury and, in turn, the public on this matter, claiming there’d never been such a ban (see, eg, <a href="https://croakingcassandra.com/2023/09/07/just-making-stuff-up-the-chair-of-the-rb-board-and-the-blackball-on-expertise/">here</a> and <a href="https://croakingcassandra.com/2023/10/05/mpc-appointments-2/">here</a>).</p> <p>It is time for Quigley to go, and for cleaning house to begin in earnest. Quigley can’t be dismissed, but it shouldn’t be beyond the wit of the Minister of Finance to have it made clear to him that it isn’t tenable or appropriate for him to lead the next stage. Quigley himself is a wily political operator and could no doubt read tea leaves were they presented to him. And he seems still to want that medical school. Willis also has an existing board vacancy to fill now, and 2 more positions become vacant on 30 June.</p> <p>(Assuming she isn’t willing to amend the Act to make the appointment of the Governor wholly a choice for her and the Cabinet), Willis should be looking to move in short order to put in place a new Board chair, someone not compromised by the Orr years, someone of stature (appointments need to be consulted with other parties in Parliament), but also someone trusted to be sympathetic to the general direction the government wants to go with the Bank. (If that seems threatening or politicised, it isn’t intended that way, but we are a democracy and governments, in Parliament, get to make the big picture policy and organisational directional calls). In any case, the Minister should look to issue a new letter of expectations to the Board making clear what she is looking for as regard budget discipline, policy priorities, and the qualities to be sought in a new Governor.</p> <p>What about prudential regulatory policy? In most areas of government, policy is set by ministers, and implementation is done by agencies, including Crown entities, operating (implementing/applying) at arms-length from ministers. That is both efficient (ministers have limited time etc) and consistent with good governance generally – we really do not want ministers playing favourites for their donors or mates in the application of the standard rules, and we really do want accountability to Parliament and public for policy choices.</p> <p>In prudential policy in New Zealand things are different. For the most part, the Reserve Bank itself gets to set the rules (big picture social risk tolerances and all) and apply them. Prudential regulators of course tend to like such a model, and there is plenty of literature from sympathetic former regulators, and from academics, in support of it. On the other hand, it looks pretty dubious through a democratic accountability lens. I’ve written here previously about former Bank of England Deputy Governor Paul Tucker’s book on delegating power, including but not exclusively so, to central banks. Bank regulatory policy simply does not pass the test – the various sensible principles Tucker lists – for being delegated to technical experts. And, as it happens, in New Zealand the power doesn’t even rest with technical experts, but with the Reserve Bank Board, which has been very light indeed on expertise or experience in these areas. </p> <p>It has become clear that the government is unhappy with elements of Reserve Bank policy choices in these areas. Some of the apparent discontent – eg last year and the secretive advice re remuneration of settlement account balances – doesn’t make sense. Some other counts seem weak, and others rather more persuasive. But here’s the thing: the government is the government and, hand in hand with Parliament, is supposed to make our laws, and be accountable for them. The government, for example, sets the inflation target (while delegating OCR calls needed to deliver inflation near target). </p> <p>It seems highly likely that prudential policy issues are going to be front of mind in choosing a new Governor (all that ongoing select committee inquiry and all). Which is fine, but a much more direct way to do things would be to seek a simple amendment to the Deposit Takers Act to make clear that in setting prudential standards the Reserve Bank first needs the consent of the Minister of Finance (at present, the Bank needs to inform her – not consult – and even failure to inform doesn’t invalidate the new rule). Then the government could be confident that whoever became Governor would be (a) providing advice, and b) ensuring the implementation of the rules, but that policy itself would be being set by the government. People we can toss out. We shouldn’t want a yes-man (or woman) as Governor – it shouldn’t be in the Minister’s interests either – and it is critically important that the Minister gets robust, technically expert, advice from the Bank (informed by research and critically-reviewed analysis) before making prudential policy decisions. But big picture policy calls should be for the Minister.</p> <p>I’m not a parliamentary process expert so perhaps it might take a few months to make such an amendment. It is likely to take a few months to appoint a new Governor anyway, but any appointment could then be made with the new Governor knowing that those would be the terms on which they were taking the job.</p> <p>The final of my three points is about the Funding Agreement, widely believed to be one of the factors that led Orr to storm off. As a reminder, the Reserve Bank isn’t (but probably should be) funded by annual parliamentary appropriation (yes, we want operating autonomy but we still fund the Police that way), but through an agreement that determines how much of its profit the Bank gets to keep and spend. This is a deeply flawed model – a legacy of late eighties disputes. Not only does Parliament not get a say at all (with hundreds of millions of operating spending involved) but the Bank does (government departments simply get told by ministers what their appropriation will be). But worse it is not compulsory for there even to be a Funding Agreement, and the <a href="https://www.legislation.govt.nz/act/public/2021/0031/latest/LMS325523.html">law states</a> that if there isn’t one the board simply has to use its best endeavours to keep spending no more than in the last year of the previous agreement. Which, I suppose, caps further growth in bloat and budget, but could be used to simply to refuse to accept a cut in budgets (when almost every other government agency has had or faces cuts). I’m not suggesting the Bank would negotiate in bad faith, but….the law is the law, and it gives them much more power and formal leverage than most agencies have. It should be changed, and in short order, to ensure that if the five year funding model remains, a) the Minister sets the amount, and the allocation among Bank’s statutory functions, and b) that all is subject to parliamentary debate and ratification as other government spending is. </p> <p></p> <p>Changing tack, who might eventually be chosen as the new Governor? There isn’t any obvious standout candidate – which may be a poor reflection on how our system has worked, including the way successive Reserve Bank Boards have operated over the last couple of decades. Various articles have listed a reasonably predictable list of possible names, including Arthur Grimes, John McDermott, Christian Hawkesby, and Prasanna Gai [UPDATE: and Dominick Stephens was also on those lists]. I tossed into the mix on Twitter the other day the name of former Government Statistician and (more recently) Deputy Governor, Geoff Bascand. One name I have been a bit surprised not to have seen mentioned – casting the net necessarily wide – is Carl Hansen, who was appointed to the MPC last year, but who has both Reserve Bank and Treasury experience, and chief executive experience.</p> <p>All those people are economists by background. Neither the current head of the Fed nor the current head of the ECB is an economist. That is pretty uncommon these days, but both the Fed and ECB have deep benches of economics expertise in very senior roles. But might, for example, there be a case for a strong non technically expert change manager becoming Governor, perhaps with the intention of doing only 2-3 years (on the pattern of Brian Roche at PSC)? I’d be wary – perhaps a good Board chair could best do some of that – but….there is no standout candidate.</p> <p>An obvious question is what about New Zealanders abroad or indeed foreigners (eg the Australian government has appointed a Brit, with no past ties to or experience of Australia, to the Deputy Governor role at the RBA). I used to be pretty staunchly opposed to a foreign appointment when the Governor was the all-powerful single decisionmaker, but legislative reforms have – at least on paper – spread the power. Someone with no past ties to, or experience of, New Zealand would still face a big adjustment hurdle, and it would be quite risky (and there are adverse selection issues: the most able globally might reasonably think their best opportunities were not in New Zealand). New Zealanders abroad might be more of an option, although one I used to champion as warranting serious consideration (including in 2017) – David Archer, former Assistant Governor, former senior official at the BIS – might have almost aged out by now (although is probably only about the same age as Grimes) and has been away for a long time. There will be others.</p> <p>I’m not going offer my thoughts on the pros and cons of any of these individuals. Suffice to repeat that, and especially given the broad role as it is currently specified, there doesn’t seem to be a compelling candidate in any of the lists. Perhaps even more than usually, in coming up with their final pick, the Board and the Minister might want to be thinking in terms of a team at the top, the sort of people a possible new Governor would choose to fill the couple of most senior posts (policy and operational/administrative) around him/her.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/10/on-the-way-ahead/#comments">18 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72755" class="post-72755 post type-post status-publish format-standard hentry category-adrian-orr category-mpc"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/08/a-letter/" rel="bookmark">A letter</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/08/a-letter/" rel="bookmark"><time class="entry-date published" datetime="2025-03-08T15:54:15+13:00">March 8, 2025</time><time class="updated" datetime="2025-03-08T16:35:05+13:00">March 8, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a>, <a href="https://croakingcassandra.com/category/mpc/" rel="category tag">MPC</a></span> </div> </header> <div class="entry-content"> <p>After the Reserve Bank’s appearance on 20 February at the Finance and Expenditure Committee (the Governor, his macro deputy Karen Silk, and his chief economist Paul Conway) on the previous day’s <em>Monetary Policy Statement</em>, I wrote a post here about it, focused on a number of areas in which Orr, either actively abetted or silently accompanied by his senior colleagues, had been stringing along or actively misleading (or worse) the Commitee. The post was headed <a href="https://croakingcassandra.com/2025/02/21/orr-at-it-again/">Orr at it again</a>, a reminder that there had been all too many such cases from the Governor over recent years – mostly misleading FEC (a rather serious matter) but also not infrequently any media outlets that ever posed slightly awkward questions. It is a long list and I won’t bore you with details (you can search: Google and “croaking cassandra, Orr, misleading” appears to work well).</p> <p>There have been many specific points over the years. Some are quite complex to explain, and many get lost in longer posts. But on 20 February there had been a very specific, easy to explain, readily verifiable, factual claim. </p> <p>“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing” said the Governor.</p> <p>He’d made versions of the first bit of it previously (many times) but the second claim seemed new.</p> <p>So I thought it might be useful to devote a single post just to rebutting those two specific claims. It would be easy to refer people to in future (and to find myself). It was headed, plaintively, <a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/">Why is such rank dishonesty tolerated?</a></p> <p>I didn’t give it much more thought. But someone else who is equally frustrated by Orr’s record of playing fast and loose with the facts got in touch suggesting that it might be worth raising the matter with the Finance and Expenditure Committee. I don’t have much confidence in any of our institutions these days, but the person who contacted me tends to be a bit more optimistic about things. Reflecting on the suggestion a bit more I decided it couldn’t really do any harm. There was, after all, a new chair of FEC, and it was possible he was neither aware of the extent to which his committee hearing had been misled, or of past form.</p> <p>And so I wrote to Cameron Brewer, the National MP newly appointed to chair the committee, copied to Labour’s finance spokesperson Barbara Edmonds.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-17.png"><img data-attachment-id="72763" data-permalink="https://croakingcassandra.com/2025/03/08/a-letter/image-378/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-17.png" data-orig-size="2080,867" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-17.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-17.png?w=700" width="1024" height="426" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-17.png?w=1024" alt="" class="wp-image-72763" /></a></figure> <p>I heard nothing at all from Edmonds (perhaps Oppositions don’t bother with scrutiny of government agencies these days?). There was an automated reply from Brewer which assured correspondents that</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-18.png"><img data-attachment-id="72765" data-permalink="https://croakingcassandra.com/2025/03/08/a-letter/image-379/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-18.png" data-orig-size="1028,48" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-18.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-18.png?w=700" width="1024" height="47" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-18.png?w=1024" alt="" class="wp-image-72765" /></a></figure> <p>More than five business days have now passed, and not even the courtesy of a reply. </p> <p>Now, in a sense some of the specific concern has been overtaken by events. The Governor has resigned, effective from 31 March, and disappeared on leave for the rest of month with no explanations. But a) Orr is still a public official, and b) his two colleagues who sat alongside him while he made these claims are still in office (both statutory officeholders on the MPC). The chief economist at least must have known his boss was simply making stuff up, but did nothing to clarify things for the committee members.</p> <p>Is Parliament, is FEC specifically, really so unbothered about being misled by such senior officials? Revealed behaviour over the years suggests so, but there is always (idle?) hope when a new person takes over. Perhaps some might take Parliament and its committees seriously as more than just a chance for performative display and bonhomie, and with an expectation that senior public officials, exercising a huge amount of power, might account for themselves in an honest, transparent, and positively helpful manner. It is what we should expect from members of Parliament – our representatives – and from the public officials. Too often it isn’t what we get. </p> <p>Perhaps if someone in power had called Orr out previously we might never have got to Wednesday’s very messy departure, that seems to diminish both him, the Bank, and those (Board, minister, MPs) paid to hold him to account.</p> <p>Appendix:</p> <p>In case people have trouble reading the photo of the letter above, here is the body of the text:</p> <blockquote> <p></p> <p>Dear Mr Brewer,</p> <p> </p> <p>I am writing to you in your capacity as chair of Parliament’s Finance and Expenditure Committee (cc’ed to the senior Labour Party member of the committee).</p> <p> </p> <p>At your hearing on Thursday 20 February on the Reserve Bank’s latest Monetary Policy Statement, the Governor, Adrian Orr, in response to a question from Dan Bidois stated of the Bank and MPC </p> <p> </p> <p>“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing”</p> <p> </p> <p>This was simply not so, on either count (tightening or loosening). Moreover, it is not the first time that he has made similar claims to FEC, particularly in respect of the tightenings that began in late 2021. </p> <p> </p> <p>I am a former senior Reserve Bank official, served formerly on the board of the International Monetary Fund (and serve now as a director of the central bank of Papua New Guinea). Among other topics, my economics blog devotes considerable space to monetary policy and central bank governance issues. In a post yesterday, I documented again how indefensible the Governor’s claims around 2021 were, and that the claim about being “one of the first to ease” (a new claim from him) was even less defensible. In fact, in both episodes the Bank acted around the middle of the pack of OECD central banks (having allowed the economy first to become materially more overheated than most of their peers had).</p> <p> </p> <p><img src="//plenenahmcbmckcigmnfohjdajncaakd/images/tooltip/webicon_green.png" /><a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/" target="_blank" rel="noreferrer noopener">Why is such rank dishonesty tolerated? | croaking cassandra</a></p> <p> </p> <p>There are strong grounds to believe that the Governor makes these claims to your committee either knowing them to be false, or holding a position (and with resources at his disposal) in which he should be reasonably be expected to know that they are false, Within the limited time each member inevitably gets in these FEC hearings, and with none of the MPs involved being specialists, he appears to count on getting away with it because none of you will have precise facts at your fingertips.</p> <p> </p> <p>You are new to the FEC role. Unfortunately, over the last few years there has been a succession of claims to the Committee by the Governor that are demonstrably false or misleading. Many of these have been documented on my blog, and I would be happy to provide further detail.</p> <p> </p> <p>Conduct like this tends to diminish both the Reserve Bank (once highly regarded internationally, now more often regarded with eye-rolling despair) and, more importantly, Parliament itself. FEC scrutiny has been a key element of the autonomous Reserve Bank model since it was first set up in 1989, and effective parliamentary scrutiny of any public agency relies on the honesty and integrity of senior public officials. You will know better than me the very serious view that Parliament has historically taken of either MPs or witnesses at select committees misleading Parliament or its committees.</p> <p> </p> <p>At very least, I would urge you to follow up this matter with the Governor, inviting him to provide solid substantiation for his very specific claims.</p> <p>Yours faithfully</p> <p> </p> <p> </p> <p></p> </blockquote> <p></p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/08/a-letter/#comments">4 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72709" class="post-72709 post type-post status-publish format-standard hentry category-monetary-policy"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/" rel="bookmark">Bernanke on inflation targeting</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/" rel="bookmark"><time class="entry-date published" datetime="2025-03-07T16:25:01+13:00">March 7, 2025</time><time class="updated" datetime="2025-03-08T08:11:34+13:00">March 8, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/monetary-policy/" rel="category tag">Monetary policy</a></span> </div> </header> <div class="entry-content"> <p>Former chairman of the Federal Reserve Board of Governors (and FOMC) Ben Bernanke was yesterday the <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/events/2025/economics-conference/day-1/0225-on-inflation-targeting---bernanke-march-6-v2.pdf">first of two keynote speakers</a> at the Reserve Bank’s conference to mark 35 years of inflation targeting, which <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/events/2025/economics-conference/day-1/0225-on-inflation-targeting---bernanke-march-6-v2.pdf">first became a formalised thing here in New Zealand</a>. He indicated that he’d be speaking about inflation targeting in general and then about “some lessons from the recent global inflation”. (I’ve linked to his text above, but you can also find the full session including the Q&As on the Reserve Bank’s Youtube channel). </p> <p>Bernanke was the first speaker of the morning and he began his remarks, perhaps somewhat bemusedly, noting that it was “the first conference I’ve ever attended that was preceded by a concert” (half an hour or so of it apparently, including singalongs, and reportedly described by senior Reserve Bank staff as “beautiful”). That, I guess, was the Orr-led central bank to the last. </p> <p>I’ve seen suggestions from a couple of people that Bernanke may have been paid some staggering amount of money to speak. He certainly still seems to command a high price on the US lecture circuit. But I’d be surprised if Bernanke cost taxpayers more than return business class airfares and associated accommodation etc. This conference was a non-commercial event inside the central banking world. And a year or two back Bernanke did a major review of forecasting for the Bank of England, and <a href="https://www.bankofengland.co.uk/freedom-of-information/2024/cost-of-bernanke-forecasting-for-monetary-policy-making-and-communication-a-review#:~:text=Disclosure%3A,Bernanke%20and%20his%20research%20assistant.">seems to have been very generous with his time</a> and own resources. Call it a loss leader, or just something he was interested in. Either way, the British taxpayer didn’t pay much at all. [UPDATE: An <a href="https://fyi.org.nz/request/28725/response/111731/attach/5/OIA2425%20041%20Response.pdf">OIA response</a> from some months ago appears to confirm the fares & accommodation only basis for Bernanke.]</p> <p>Unfortunately, if Bernanke didn’t cost much, he didn’t offer much beyond his name. It was a fairly short speech (7.5 pages of text), the first two-thirds of which was about inflation targeting in general. It would be really surprising if anyone at the conference either learned anything new from that section or was prompted to think differently about any aspect of monetary policy or inflation targeting. It was almost entirely descriptive, with no attempts to suggest refinements or even to knock down what he might think were dead-end suggested variants. There wasn’t even a mention – amid the observation that the Fed’s target is “well understood by financial markets, legislators, and other observers” – of the questionable experiment with “flexible average inflation targeting”.</p> <p>Close readers might note that he apparently takes for granted that “clarity about the strategy – <strong>and internal debates about the strategy </strong>[emphasis added] – also helps the public understand and predict how policy is likely to change when…the world evolves in unexpected ways”. If anyone had noticed, no one questioned him about this observation, which is of course quite at odds with how the New Zealand Monetary Policy Committee has operated since its inception. There is little sign that debates even exist, let alone the nature of them.</p> <p>He also noted that inflation targeting “does not prevent policy mistakes”, but then he didn’t identify any of those, whether from his own experience or from his subsequent observation as a scholar, let alone discuss the nature of mistakes, or how we learn from them or how policymakers might be held to account. </p> <p>All in all, it was very much a complacent end-of-history and inside-the-club sort of treatment. I suppose everyone wants to feel good about what they do, and Bernanke is certainly an eminent person to bestow his blessing (Nobel Memorial Prize and all). But it was advertised as a research conference – something about learning, improving, evaluating etc. And there was none of that from Bernanke. Unfortunately it reminded me of his 2022 book, <em>21st Century Monetary Policy,</em> which also erred sufficiently on the complacent side as to make it of little interest beyond perhaps an undergraduate (or similar) audience.</p> <p>There was perhaps more interest in the final 2.5 pages devoted to the inflation of the last few years. Unfortunately his story – which, admittedly, might have warmed the heart of the Governor if he’d been there and hadn’t resigned and stormed off the day before – wasn’t very convincing either.</p> <p>In fact, it was really quite astonishing that there was no analysis and almost no discussion of monetary policy at all. There was not even any mention of central bank responses during the early stages of the pandemic itself. What there was was the claim – supported by no analysis at all – that “my overall conclusion is that, in terms of actual policy choices, most central banks did about as well as they could in the post-pandemic period, given what they knew at the time”.</p> <p>Which is pretty remarkable when you realise that, to take just the US as an example, annual core PCE inflation – core PCE is the one the Fed tends to focus on, and which removes food and energy – peaked in February 2022. The Fed’s first increase in its policy target rate came in March 2022.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-10.png"><img data-attachment-id="72725" data-permalink="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/image-371/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-10.png" data-orig-size="1313,718" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-10.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-10.png?w=700" width="1024" height="559" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-10.png?w=1024" alt="" class="wp-image-72725" /></a></figure> <p>Bernanke devotes considerable space to the question of whether (pandemic and post-pandemic) fiscal policy caused the outbreak of inflation. Of course it didn’t, because monetary policymakers (a) know about fiscal policy news, and b) move last. Except at the extremes of fiscal dominance – not even close to being reached in advanced economies in recent decades – fiscal policy is never the primary culprit. If it was, we wouldn’t have made central banks independent. You can have bad or good fiscal policy, necessary, wise, or otherwise, and monetary policy is supposed to counter the (core) inflation effects. And no one really doubts that monetary policy settings once the pandemic really took hold – and for a couple of years thereafter – were expansionary not contractionary.</p> <p>With hindsight – and only really with hindsight – it might at least be reasonable to note that the initial monetary easing was unnecessary and inappropriate (central banks – and markets – simply didn’t understand pandemic macro well enough). And it is pretty universally acknowledged now that (almost all) central banks were slow to begin to tighten again (even Orr has reluctantly acknowledged that the RBNZ should have started sooner). But apparently that wasn’t something Bernanke wanted to touch on even in passing, perhaps taking politeness to your central banking hosts rather to an extreme.</p> <p>The essence of Bernanke’s arguments is here</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-11.png"><img data-attachment-id="72726" data-permalink="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/image-372/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-11.png" data-orig-size="967,424" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-11.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-11.png?w=700" loading="lazy" width="967" height="424" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-11.png?w=967" alt="" class="wp-image-72726" /></a></figure> <p>This <a href="https://www.nber.org/system/files/working_papers/w31417/w31417.pdf">paper</a> got a fair amount of attention when it was published in 2023. The Reserve Bank even did a version <a href="https://www.rbnz.govt.nz/hub/publications/analytical-note/2024/a-bernanke-blanchard-model-decomposition-of-new-zealand-inflation--the-pandemic-and-beyond">here</a> which, as Bernanke notes, found a larger role for demand – and thus monetary policy – factors. The paper looked at quite a range of variables, but the centrepiece was around headline CPI inflation. Headline inflation, of course, gets affected by the sorts of supply shocks to prices (energy and food) that we saw, in particular, around the time of the invasion of Ukraine. As he notes, headline inflation in Europe was particularly badly affected by the extreme gas price shock (something not affecting NZ at all, detached as we are from the global LNG market).</p> <p>Central banks though (rightly) tend not to focus on headline inflation – worrying only about whether headline effects spill into inflation expectations and then into price and wage-setting behaviour over longer horizons. Now, simply excluding food and energy inflation isn’t the only sort of core measure central banks and other analysts like to look add in difficult times, but it is what we have reasonably consistent international data for. </p> <p>Bernanke claims as evidence for his story that “most economies faced similar levels of inflation, independently of their fiscal choices”. But even on headline inflation that isn’t really so. </p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-12.png"><img data-attachment-id="72730" data-permalink="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/image-373/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-12.png" data-orig-size="922,621" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-12.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-12.png?w=700" loading="lazy" width="922" height="621" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-12.png?w=922" alt="" class="wp-image-72730" /></a></figure> <p>which is a much greater degree of cross-country variation than we were seeing pre-Covid, even if one discounts the (geographically specific) gas price shock countries at the far right of the chart. </p> <p>As for core CPI inflation (ex food and energy), the OECD databases have become painful to use, but I dug this chart out of an old post (ideally I’d show all the euro-area countries just as a single observation, although you can see the overall euro area number towards the left of the chart)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-13.png"><img data-attachment-id="72733" data-permalink="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/image-374/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-13.png" data-orig-size="1009,563" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-13.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-13.png?w=700" loading="lazy" width="1009" height="563" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-13.png?w=1009" alt="" class="wp-image-72733" /></a></figure> <p>Quite some cross-country variation (even excluding the monetarily wayward Turkey). Is it, for example, pure coincidence that the two OECD central banks that didn’t ease monetary policy going into Covid – Japan and Switzerland – managed the lowest inflation? And to the extent that there was similarity- recall, this is in core inflation – across some countries (eg US, NZ and Australia) mightn’t it possibly reflect something about common mindsets and approaches to policy (and even, across those three countries, a fairly common pace of rebound in GDP following the initial 2020 lockdowns etc)?</p> <p>And if the primary driver for (core measures) of inflation was really supply shocks (that should be largely looked through) rather than central bank choices, there must surely be at least two outstanding questions:</p> <ul> <li>Why is it that all (or certainly almost all – someone can to point me to an exception if they know of one) advanced country central banks would still today describe their monetary policy stance as being on the restrictive side of neutral? The ECB eased today, to 2.5 per cent, and repeated that interpretation of their policy rate, and it is certainly the RBA and RBNZ stance. (For the US things might be different. Policy is still described as restrictive, but while Bernanke noted that the CBO estimate of the output gap for the US in 2021 and 2022 never got very large (IMF estimates show the same thing), the <a href="https://fred.stlouisfed.org/graph/?g=f1cZ">most CBO recent estimates</a> for the end of last year now point to a large and growing positive output gap.)</li> </ul> <ul> <li>If the story of the surge in inflation really was mostly about supply shocks why, given that those shocks have now fully reversed hasn’t the price level dropped back? Even in nominal USD terms, world oil prices are back to around where they were in 2018 and 2019, the same goes for wheat, and even European gas prices don’t seem dramatically higher in real terms than they were before the pandemic and war. In all cases, real prices have fallen a lot (shipping and componentry disruptions also largely sorted themselves out), and there simply has not been any period in which headline inflation has substantially undershot the core measures, while the price level – headline or core – remains well above the trajectory implied by central bank targets projected forward from 2019. Central banks don’t pursue price level targets, but successful flexible inflation targeting, that simply looked through the ups and downs of supply shocks to prices (when shocks fairly quickly reverse), would look a lot like medium-term price level targeting. Here is what a chart for New Zealand looks like</li> </ul> <p><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/path-of-2.png"><img data-attachment-id="72740" data-permalink="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/path-of-2/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/path-of-2.png" data-orig-size="798,591" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="path of 2%" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/path-of-2.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/path-of-2.png?w=700" loading="lazy" class="aligncenter size-large wp-image-72740" src="https://croakingcassandra.com/wp-content/uploads/2025/03/path-of-2.png?w=700" alt="" width="700" height="518" /></a></p> <p>In broad outline, this sort of chart for many other advanced countries would look quite similar.</p> <p>I don’t think anyone accuses central banks of malevolence during the last few years (Covid and inflation). No doubt they were all trying to do their best. But the evidence just isn’t there to support Bernanke’s claim that they did as well as they could have with the information they had (unless that last phrase is somehow shorthand for “on the mental models they happened to be using”, which unfortunately too often turned out to be wrong).</p> <p>You can’t cover everything in a fairly short speech, but it was also worth noting that there was no mention of the (really large) losses incurred by taxpayers from the QE-type operations (bond purchases) undertaken by central banks during the Covid period, when bond yields were already at extraordinarily low levels. In his book, finished about three years ago, he affected a fairly blithe indifference, noting that any losses this time could be considered against the gains central banks had made on earlier QE. That seemed a pretty rash approach to public sector risk-taking, and would be small comfort to taxpayers in places like Australia and New Zealand where the central banks had not previously done QE. (In fairness, one can make a slightly stronger argument for the QE – beyond the immediate crisis of March 2020 – in the US, where long rates really matter, than here.)</p> <p>And of course, because pretty much all the chaps (of either sex) had really done their best, there was of course nothing in Bernanke’s discussion about practical accountability. It might at least have been interesting to hear him on that in principle – what would or should it take for powerful independent decisionmakers to warrant losing their jobs? Again, the US system is different than ours (and in fact each country has different specific provisions for removal) but the price of operational autonomy was supposed to be serious accountability – something more, at least when inflation targeting was conceived and idealism was afoot, than just marking your own performance after the event, with barely a hint of contrition. </p> <p>It was a shame. Surely Bernanke could have offered something deeper and more stimulating (it didn’t even stimulate searching questions from the floor). Then again, I guess Orr and his team had chosen him deliberately. And they’ll have been rather pleased with that “did as well as they could” summary assessment. Wouldn’t want any awkwardness now would we? (Other perhaps than the unplanned unexpected absence of the Governor from his own “celebration” – the word Acting Governor Hawkesby had used in introducing Bernanke.)</p> <p>Doing monetary policy well in tough times isn’t easy. Glib lines about “it is only about 25bps up and down every so often” are just that – glib. Humans make mistakes, but they – and their institutions – learn when they are willing to confront and explore them. </p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/07/bernanke-on-inflation-targeting/#comments">10 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72686" class="post-72686 post type-post status-publish format-standard hentry category-adrian-orr category-reserve-bank"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/06/11-billion-and-out/" rel="bookmark">$11 billion and out</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/06/11-billion-and-out/" rel="bookmark"><time class="entry-date published" datetime="2025-03-06T09:08:39+13:00">March 6, 2025</time><time class="updated" datetime="2025-03-06T15:51:42+13:00">March 6, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a>, <a href="https://croakingcassandra.com/category/reserve-bank/" rel="category tag">Reserve Bank</a></span> </div> </header> <div class="entry-content"> <p>I’d been thinking last week of writing a post looking ahead to the end of Adrian Orr’s term (due to have run until March 2028) and offering some thoughts on structural changes the government should be looking to make, to complete and refine the Reserve Bank reform programme kicked off by the previous government in 2018. Some of that is now overwhelmed by events, but the importance of the issues – and the medium-term opportunities to deliver a better central bank – hasn’t. So although I will offer a few thoughts at the end of this post on yesterday’s shock news, and the unsatisfactory handling of it, and perhaps even fewer on Orr’s overall tenure, first I’m going to focus on the future.</p> <p>The Reserve Bank of New Zealand is one of the relatively few central banks in the world where the government is not free, when a vacancy arises, to appoint a person they have confidence in as Governor. One can mount a reasonable – although not entirely compelling – case that it should be very hard to dismiss a Governor (or perhaps even an MPC member), and it typically is. But the governorship of the central bank is a very major and influential role – affecting, when mistakes are made, all of us adversely, including perhaps the government’s own electoral fortunes. Against that backdrop our system is extraordinary: the government can only appoint as Governor someone nominated by the board of the Reserve Bank, a board which (a) has no electoral mandate or accountability, b) at least in the New Zealand experience will often have little or no subject expertise, and c) may well have been (this time is, but it was also so when Orr was first appointed) largely appointed by the government’s predecessors, reflecting their particular whims and patronage priorities. Nicola Willis – or Grant Robertson – might not be any sort of macroeconomist, but they are (were) accountable to the voters. Neil Quigley, Rodger Findlay, Jeremy Banks [oops, meant Byron Pepper] (all of whom have had questions raised about them) and the rest have neither expertise nor accountability.</p> <p>Now, it is true that the Minister of Finance can reject a board nomination, but she cannot impose her own candidate. In reality the government can send messages to the board about what they don’t want (Helen Clark was apparently pretty clear she didn’t want to be served up with the name of a Brash clone – anyone who’d been part of the Brash RB), but those views carry no formal legal weight, and a Board could simply assert itself and insist on serving up only names it preferred. The government doesn’t get any say in what sort of person is nominated – no say, for example, in the job description or personal qualities sort. It is a stark contrast to the position re heads of government departments – who usually have no significant policy decision-making power – where the government can specify what they are looking for and can in the end simply appoint their own person. The same goes for members of the MPC – supposedly really powerful positions and yet the Minister can only appoint people the underqualified board (which has no routine responsibility for monetary policy, and thus no expertise) serves up. And here it is important to remember that the Reserve Bank isn’t just the monetary policy maker, but has key policymaking roles in a wide range of banking and financial regulation, stuff for which ministers are usually responsible. These legislative provisions should be changed, so that the Minister/Cabinet can appoint their own person – stick in some boilerplate expertise criteria, and perhaps offer the Board the chance to make suggestions, allow the FEC a scrutiny hearing before the person took up the job – and be accountable for that appointment. It would be an entirely normal model internationally.</p> <p>The issue at present is compounded by the fact that the names to be recommended as the new Governor will come forward from the same Board (largely) that recommended Orr’s reappointment in 2022 (and with the same Board chair as was responsible for the initial appointment in 2017). No one outside government knows what possessed Nicola Willis to reappoint Quigley – who has a terrible record of his own, in blocking expertise when the MPC was first set up, openly misrepresenting the history later, and in covering for Orr almost throughout – but he is about the last person who should be playing a decisive role in choosing a successor. A minister who really cared about the future of the institution and its policies etc would insist that Quigley left now too, appointing a new chair to lead the search to replace Orr.</p> <p>My next suggestion is that policymaking powers around banking (and insurance etc) prudential regulation should be removed from the Reserve Bank itself and handed back to the Minister of Finance. There is a decent case for having OCR setting being done by an independent body, and a fairly compelling one for having the application of prudential policy and oversight to particular institutions be done by an independent body. But even in respect of monetary policy, the inflation target is now set unambiguously by the Minister of Finance alone (previously used to be an agreement with the Governor), and pretty all other important policymaking regulatory power in our system of government rests with ministers – the people we can throw out. There is a lot of controversy around at present about aspects of the Bank’s prudential policy choices. I agree strongly with some of them, disagree with others, and generally am not convinced that the specifics matter quite as much as some of the critics claim (and I think on that I may be closer to Orr). But the people who should be making these policy calls are ministers. We elect them. We toss them out. Of course, they need expert advisers – so this isn’t a call to diminish Reserve Bank capability (in fact it probably needs strengthening – check how few research papers (0) they’ve published in the last decade on regulatory policy and financial stability matters), but to have a clearer stronger separation between policymaking and implementation (and, given the inflation target, what the MPC does is – influential – implementation).</p> <p>I’ve also noted here before that there is a decent case for a structural separation of the Reserve Bank. When the Bank was first made independent it was basically a monetary policy agency with a few vestigial regulatory/supervisory staff. These days (even amid the general bloat) far more of the staff are on the regulatory side, and there are two significantly different (expertise and culture) prime roles. Even the sort of expertise one might need/want in a chief executive should be materially different: monetary policy is primarily a macroeconomic role, with some operational responsibility (markets, currency etc), while the supervisory side is a regulatory function pure and simple. Splitting out the regulatory functions into a New Zealand Prudential Regulatory Agency would parallel the Australian model; a system which has substantive matters, but also where alignment makes some sense when the biggest systemic risks etc here relate to Australian-owned banks. (If multiplication of government agencies was a concern, the FMA could be wound into a single financial regulatory body.)</p> <p>Those changes can’t generally be made overnight (they all require legislation), but as a direction they have a lot to commend them, and I’d urge the Minister of Finance to take time in the next few weeks to reflect on the sort of direction she wants, before the momentum of the existing model takes hold. It is a busy time for her – the Budget will be more pressing – but medium-term choices matter too and this is her opportunity to stamp her mark on a better set of central banking arrangements.</p> <p>One thing that doesn’t take legislation would be an overhaul of the Monetary Policy Committee’s charter, and particularly the culture around it. Setting up a Monetary Policy Committee was a good call by Grant Robertson – by the time it was done everyone agreed we needed to move away from the single decisionmaker model – but the specific path chosen was a fairly unproductive dead end. We had externals (three at a time) appointed – in one case solely (as OIA papers reveal) for her sex rather than expertise in the field – and then we never heard from them or saw any evidence that they made even a modicum of difference, even as they collected their not-inconsiderable fee and rounded out their CVs. This government has taken some steps to improve the quality of the externals – although they also extended again the term of an 80 year old member who was there through the worst of the costly policy mistakes on 2020 to 2022 – but there is still no sign of them making any difference in style or substance, and not the slightest accountability for their views. Much better to have a much more open system – as in the UK, US, or Sweden for example – where MPC members are open about, and accountable for, their views. Historically the Bank’s management – even before Orr- hated the idea, but in the real world everyone knows there is huge uncertainty and that processes are likely to benefit from open exploration of ideas, contest of views, and actual accountability. The Supreme Court manages to have dissenting opinions published. There is no reason why our MPC should not. And require members to front up to FEC from time to time, including in (non-binding) hearings before these powerful individuals take up their appointments. Good monetary policy is not an infallible text handed from heaven but, inevitably and appropriately, a process of discovery and challenge, in which everyone – or at least MPC members who are up to the job – would benefit from greater openness.</p> <p>What of yesterday?</p> <p>It is all highly unsatisfactory. We had brief press releases from the <a href="https://www.rbnz.govt.nz/hub/news/2025/03/rbnz-governor-adrian-orr-resigns">Bank</a> and from the <a href="https://www.beehive.govt.nz/release/minister-acknowledges-outgoing-rbnz-governor">Minister</a> but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and <a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/">just recently</a> – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. If you simply think your job is done and it is time to move on, the typical – and responsible – way is to give several months of notice, enabling a smooth search for a replacement. He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.</p> <p>Instead, it is pretty clear that there has been some sort of “throw your toys out of the cot and storm off” sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month (the provisions in the Act require a temporary Governor to be appointed by the Minister only on the recommendation of the Board, and probably Orr just didn’t leave them time). After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told – I only have a transcript – in the end he too stormed off) we still aren’t much the wiser. It will, I suppose, provide much topic for conversation among the research geeks at the conference today and tomorrow (quite what visitors Ben Bernanke and Catherine Mann – BoE MPC member – will make of it all is anyone’s guess).</p> <p>I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. Or decent and honourable people, fit to hold high public office don’t. </p> <p>The suggestion seems to be that budgetary pressures – the Minister wanting to cut the Bank’s next five-year funding agreement are at the heart of it (and a careful read of the Reserve Bank statement hints at that). I had heard a story – apparently well-sourced – that the Bank had actually been bidding for a material <strong>increase</strong> in its funding, on top of the extraordinary increases of the last five years, but whether that is true or not the Minister does seem to have signalled coming cuts, and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But every public sector chief executive in Wellington has had to deal with budgetary restraint and, so far as we can tell, not one of them has tossed his/her toys and stormed off. It isn’t as if the Bank had been relentlessly and exclusively focused on its core business, with not a penny to be spared the poor taxpayer. In any case, from what comments have been let out it seems that final future budget decisions had not even been made yet, so surely it can’t be the whole story.</p> <p>Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation – Quigley declares that he still had confidence in Orr. Surely yesterday confirms again that both of them, in their different ways, were unfit for office. </p> <p>Oh, and for those puzzled by it, the title of this post refers to the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and which not one of his MPC members – one now temporarily acting as Governor – even either dissented on or gave straight and honest contrite answers about. It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run. Successful organisations tend to promote from within. Orr (and Quigley) do not leave a successful organisation, but one of yes-men and women. The place needs a fresh broom to sweep clean. One hopes the government cares enough to ensure it happens,</p> <p></p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/06/11-billion-and-out/#comments">41 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72673" class="post-72673 post type-post status-publish format-standard hentry category-australia category-pandemic"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/05/australias-pandemic-exceptionalism/" rel="bookmark">Australia’s Pandemic Exceptionalism</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/05/australias-pandemic-exceptionalism/" rel="bookmark"><time class="entry-date published" datetime="2025-03-05T11:47:45+13:00">March 5, 2025</time><time class="updated" datetime="2025-03-05T11:59:40+13:00">March 5, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/australia/" rel="category tag">Australia</a>, <a href="https://croakingcassandra.com/category/pandemic/" rel="category tag">pandemic</a></span> </div> </header> <div class="entry-content"> <p>That’s the title of a <a href="https://www.amazon.com.au/Australias-Pandemic-Exceptionalism-crushed-curve/dp/1761170139">2024 book</a> by a couple of Australian academic economists, Steven Hamilton (based in US) and Richard Holden (a professor at the University of New South Wales). The subtitle of the book is “How we crushed the curve but lost the race”. </p> <p>It is easy to get off on the wrong foot with at least one of the authors. Each of them has a Foreword, and Hamilton’s rubs me up the wrong way every time I come back to it (as I did just now). There are 26 “I’s” in 2.5 pages (he notes “I am the first to admit I can be prone to self-congratulation”) and then this moan</p> <blockquote> <p>I do love Australia but boy do we love credentialism. Australia is a country where time served is taken far more seriously than the merits of an argument. Where, unless you have some postnominals, a regular column writing in a national broadsheet, or went to the right private school, the typical journalist won’t give you the time of day. The policy discussion is fundamentally undemocratic, and the country is poorer for it.</p> </blockquote> <p>Which seemed a little odd for someone who is an assistant professor in another country and has just had a book, on policy in Australia, published by an Australian university press. In fact, I looked up Hamilton’s bio. It has 7 pages of listings under “Opinion Writing” (130 or so pieces), and the bulk of those articles/columns were published in top Australian newspapers (AFR, Australian, SMH). Not bad for a junior academic living in another country.</p> <p>The title of the book is a bit of a puzzle. In places, the story is that Australia did some things exceptionally well (thus, low death toll) and other things exceptionally badly (that subtitle about losing the race is about the delays in securing vaccines – and the economic nationalism of trying to promote Australian-produced options – and in moving away from exclusive reliance on lab-processed PCR tests and authorising/enabling extensive use of RAT tests). But then their claim in the concluding chapter is “overall, Australia’s handling of the pandemic was exceptionally good”, notwithstanding their claim earlier in the book that the vaccine delay – similar to New Zealand’s – was “almost surely the single most costly <em>economic event</em> in Australian history”, a claim which itself makes no sense unless they are using some exceptionally narrow definition of “economic event” that isn’t hinted at in the text. And they give very little attention to the Reserve Bank of Australia’s role in pandemic economic management – none at all to the massive losses to taxpayers from ill-judged risky interventions in the bond market, and very little to the worst outbreak of (core) inflation in decades. </p> <p>My own final take on that “overall exceptionally good” claim was as follows:</p> <blockquote> <p>In some respects (including the important mortality one) Australia did materially better than most. Arguably the Australian government (like New Zealand’s) got one really big call right (the initial closing of the borders in March 2020 just in time, albeit – and as [the authors] note – later than they should have). Beyond that, the record is really rather mixed. Some of that might perhaps have been inevitable in such exceptional times. But plenty of things could have been done better, as even [the authors] (sometimes grudgingly) acknowledge.</p> </blockquote> <p>For those tempted to buy the book, if you followed events closely over 2020 to 2022 you aren’t likely to find anything new, and some of the argumentation is moderately detailed, and thus it isn’t entirely clear who the target audience was. But time moves on, people forget too quickly, and before long there will cohorts of policy advisers and even politicians for whom the pandemic period was little more than a hazy teenage memory. For them, perhaps in particular, it is likely to be a useful point of reference.</p> <p>The editor of the New Zealand economics journal, <em>New Zealand Economic Papers</em>, invited me to write a review of the Hamilton and Holden book, which was <a href="https://www.tandfonline.com/eprint/79KTDDQPDMRGKFBWJI7N/full?target=10.1080/00779954.2025.2462326">published on their website</a> a few weeks ago.</p> <p>There were a few changes before the final published version but what follows has all the substance.</p> <p><strong>Review of Steven Hamilton and Richard Holden, Australia’s pandemic exceptionalism:how we crushed the curve but lost the race, UNSW Press, Sydney, 2024, 240pp</strong></p> <p><strong>Introduction</strong></p> <p>No one can doubt that 2020 and 2021 were exceptional.  COVID-19 was the worst pandemic in a century, and the nature and scale of the policy responses were pretty much without precedent.  Those of us who’d assiduously read accounts of the 1918/19 flu pandemic got little real help in what to expect.  The discontinuities in the economic data will probably be puzzling students a century hence.</p> <p>But in their new book two Australian academic economists, Steven Hamilton (George Washington University) and Richard Holden (University of New South Wales), seek to highlight what they believe to have been exceptional about the specific Australian experiences and policy responses –  exceptionally good (the economics), and exceptionally bad (sluggish acquisition of vaccines, very slow adoption of RAT tests).  Since the overall experience of the pandemic in Australia –  policy and outcomes –  was very similar to that of New Zealand many of the arguments made are likely to be valid, or not, for New Zealand too.</p> <p>Both Hamilton and Holden (hereafter HH) had many things to say during the pandemic, and a fair number of the points they were making then were fundamentally correct. And so if the book often has a self-congratulatory tone (and Hamilton acknowledges his tendencies in his Foreword) it isn’t entirely unwarranted. </p> <p>Judged by deaths from Covid, Australia was one of the group of the best performing advanced countries. As HH recognise, these outcomes were a mix of luck and policy –  Italy, for example, felt the full force of the outbreak early, but it could have been any other country, particularly those with lots of travel to and from China.  </p> <p>Using Our World in Data, here are the advanced countries with cumulative death rates less than 1000 per million people (a longer list than you might get the impression of from reading the book).</p> <figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td colspan="2">COVID-19 death rates per million (to 21 January 2025)</td></tr><tr><td></td><td></td></tr><tr><td>Australia</td><td>963</td></tr><tr><td>Iceland</td><td>489</td></tr><tr><td>Japan</td><td>597</td></tr><tr><td>Korea</td><td>693</td></tr><tr><td>New Zealand</td><td>879</td></tr><tr><td>Singapore</td><td>358</td></tr><tr><td>Taiwan</td><td>739</td></tr></tbody></table></figure> <p>In contrast there are the United Kingdom (3404), the United States (3548), and Italy (3344), with a number of central and eastern European EU countries materially higher again. </p> <p>But how should we assess the wider policy response, in particular the economic side of things?</p> <p><strong>Assessing policy responses</strong></p> <p>The authors were among the organisers of an open letter in April 2020, signed by 265 Australian economists, arguing in support of government policy, including lockdowns, and they continue to champion the view that there was no trade-off between public health and economic outcomes in the peak pandemic period.   It is a set of arguments that, taken together, never seemed fully persuasive.  </p> <p>HH remind readers of the Goolsbee and Syverson (2021) paper that suggested quite early on, using mobile phone data, that almost 90 per cent of the reduction in movement in the United States was voluntary (was happening anyway independent of legal restrictions being imposed).  If so, and given that the legitimate public health goal was to get and keep the replication rate below 1 (ie each case passing Covid on to, on average, less than one other person), was there really a compelling case –  that would pass a robust cost-benefit test –  for fairly extreme lockdowns?  How much difference did the marginal movement restrictions produce (on the health side) and at what economic and social cost?  Presumably, on average, the least costly and disruptive reductions in movement occurred first and voluntarily?   </p> <p>Unfortunately, we do not know with any confidence the answers to questions like these.  There was little or no evidence of serious cost-benefit analysis being deployed, even in principle, in the New Zealand official advice (and the Productivity Commission ran into significant blowback when it attempted something illustrative) and nothing in HH’s book suggests things were any different in Australia.  Unfortunately, there is also no sign of any marginal analysis in this book (or in other post-event evaluations).</p> <p>Peak lockdowns in New Zealand were more onerous than those (on average across states) in Australia and, for what it is worth, the best estimates of June quarter 2020 GDP in both countries show a materially larger fall in New Zealand than in Australia<a href="#_ftn1" id="_ftnref1">[1]</a>.   Lockdowns were not the biggest part of the economic story, but it is also very unlikely they made only a small difference<a href="#_ftn2" id="_ftnref2">[2]</a>.  Output not generated in one quarter isn’t typically replaced with additional output later, even when there is a very quick recovery in activity to the pre-crisis level.   And beyond GDP effects, HH seem largely unbothered by the human costs of the more extreme provisions – funerals couldn’t be held, the dying or bereaved couldn’t be comforted, and so on.  Decisionmakers, of course, had to operate under considerable time pressure in early 2020 –  although as HH note, they were often slow to grasp the seriousness of what was emerging and so lost valuable time for reflection and analysis. </p> <p>Hamilton was among those making the case fairly early that in a shock of this sort (not having its roots in initial economic imbalances) fiscal support measures should focus not just on income support but on keeping firms and employment relationships (and the embedded firm specific capital) intact.  It wasn’t a new idea (and New Zealand governments had used that model on a small scale in the wake of the Christchurch and Kaikoura earthquakes) but as the magnitude of the Covid crisis belatedly became apparent the scale of any such support (not just dollars but the administrative capacity required) was daunting.  </p> <p>The United States serves as a foil throughout the book to help make the authors’ case for Australian exceptionalism (especially on the economic side of things).  The authors correctly note that the American political system (in which the head of government doesn’t control the legislature, and where a large proportion of powers –  including around unemployment insurance – operate at the state level anyway) could not realistically have been expected to generate quick and comprehensive whole of government responses, of the sort we saw in Australia and New Zealand.  They contrast particularly the Australian JobKeeper programme programme (somewhat similar to the New Zealand wage subsidy scheme, both emphasising retention of existing employment relationships) with the US support programmes (lump sum household grants and the Paycheck Protection Programme).</p> <p>The way government support programmes were designed is generally recognised as having had substantial implications for the extent to which the reported unemployment rate rose in different countries.</p> <p><strong>Increase in unemployment rate: end-2019 to peak COVID level (percentage points)</strong></p> <p>Australia +2.5</p> <p>New Zealand +1.1</p> <p>Canada                                            +8.1</p> <p>United States                                  +11.3</p> <p>United Kingdom                             +1.4</p> <p>Those are stark differences<a href="#_ftn3" id="_ftnref3">[3]</a>, and HH attempt to connect the difference between the  US and  Australian unemployment numbers to subsequent economic performance.  Somewhat surprisingly they do this wholly by reference to the employment to population ratio, which is higher now in Australia (and New Zealand) than pre-COVID, but is lower in the United States, with the suggestion that the JobKeeper type of programme, if not perfect, was better suited to a full and quick rebound in the economy.</p> <p>As it happens, the United Kingdom (with a very small increase in the unemployment rate) also now has a lower than pre-COVID employment to population ratio, but more importantly there is no mention at all of the respective GDP experiences.</p> <p>In fact, despite the very different pandemic experiences of Australia and the United States the tracks for real GDP per capita were remarkably similar.  Both countries regained the December 2019 level in the same quarter (March 2021) and by the end of the immediate pandemic period the cumulative growth rates had been almost identical. </p> <figure class="wp-block-image size-large is-resized"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-5.png"><img data-attachment-id="72680" data-permalink="https://croakingcassandra.com/2025/03/05/australias-pandemic-exceptionalism/image-366/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-5.png" data-orig-size="942,705" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-5.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-5.png?w=700" loading="lazy" width="942" height="705" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-5.png?w=942" alt="" class="wp-image-72680" style="width:627px;height:auto" /></a></figure> <p>Since then, of course, US productivity and real GDP per capita growth have diverged (favourably) from those of almost all other advanced economies. The reasons aren’t yet well understood, but there isn’t much evidence that pandemic-related labour market scarring has mattered much at least at an economywide level. </p> <p>As the authors highlight, Australia could reasonably be considered to have done exceptionally badly around vaccine procurement, and the approval and widespread use of RAT rest. They both devoted many column inches at the time to the breathtaking failure of politicians and officials in Australia to act early and decisively to secure access to vaccines by placing orders or buying options at scale on all the emerging potential vaccines (a New Zealand book would have to grapple with the same failure).  No one knew which would emerge as best or be available earliest, and the cost of over-ordering would have been small compared to the costs of additional economic and social disruption if the population remained largely with access to an effective vaccine.   The complacency –  in the then Prime Minister’s words “this is not a race” – reflects very poorly on ministers and officials, and came at a considerable economic cost.  Like New Zealand, Australia eventually achieved very high vaccination rates, but the operative word is “eventually”.</p> <p>Unfortunately, and inexcusable as those delays were, this is one of a number of places where HH lapse into overstatement.   They estimate that the vaccine delays cost Australia (directly and indirectly) A$50 billion and go on to claim that this meant that “Australia’s great vaccine debacle [was] almost surely the single most costly <em>economic event</em> in Australian history”.   $A50 billion is a lot of lost output but it was about 2.5 per cent of one year’s GDP.  By contrast, during the Great Depression Australia’s per capita GDP averaged almost 15 per cent below pre-Depression levels for five years (so in total something like 75 per cent of one year’s GDP), and the 1890s financial crisis (when it took 15 years for real GDP per capita to regain pre-crisis levels) was even worse.    If one wants more recent, and directly policy-related, costly economic choices, one might think of the post-war tariff walls or letting inflation get away in the 1970s. </p> <p><strong>Macroeconomic policy</strong></p> <p>HH are firm champions of fiscal policy as a countercyclical stabilisation tool, and spend quite a bit of space in the book revisiting arguments for why there should have been (but wasn’t) countercyclical fiscal stimulus in Australia’s 1991 recession and why they believe such stimulus was both desirable and successful in 2008/09.  They are sympathetic to Claudia Sahm’s proposal for additional semi-automatic fiscal stabilisers.  I’m sceptical on all three counts (including the associated claim that Australia avoided a recession in 2008/09, when the unemployment rose by 1.7 percentage points and real per capita national disposable income measures fell materially), but the connection to an event like the pandemic is not clear.  </p> <p>In a typical unexpected downturn countercyclical policy aims to stimulate business and household demand and spending.     The relative merits of monetary and fiscal policy tools can be debated but the goal is pretty clear.   The goal in March 2020 was quite different.  The aim wasn’t to stimulate demand or activity, but to tide people and firms over while the economy was more or less shutdown (more or less as a policy goal, through some mix of official edicts and private risk-averse behaviour).    That required direct transfers in one form or another, something monetary policy simply cannot do.  The fact that programmes like JobKeeper (and the New Zealand wage subsidy) worked – at vast, probably unnecessarily large, fiscal cost<a href="#_ftn4" id="_ftnref4">[4]</a> – in a unique crisis like COVID tells us almost nothing about how best to handle future conventional (aggregate demand shock) downturns. And nor do the experiences of past conventional recessions shed useful light on how best to handle shutting down much of the economy temporarily for non-economic reasons.</p> <p>One of the striking omissions in the book is any serious or sustained discussion of monetary policy and the performance of the Reserve Bank of Australia (RBA).  Monetary policy wasn’t the instrument that could or should have dealt with the income support and firm-retention goals governments rightly had through COVID.  But monetary policy moves last, and is supposed to take into account all the other pressures on the aggregate demand/supply balances, with the aim of keeping inflation near target.    Faced with the unique pressures of COVID too many central banks, including the RBA, failed badly.  Core inflation reached levels it was never supposed to reach again under inflation targeting.  And those same central banks ran up massive losses (tens of billions of dollars in the RBA case) on ill-judged and largely ineffective bond buying programmes.  These massive losses to taxpayers are not mentioned at all in the book.</p> <p>There is a brief discussion of inflation, but HH seem to treat those outcomes as just a price that had to be paid, even describing the inflation (somewhat curiously) as an “insurance premium” (such premia are usually fixed upfront against uncertain losses and are not the unexpected outcome).   They, like many central bankers  (at least judging by their public remarks), seem utterly indifferent to the huge redistributions of wealth such a severe outbreak of unexpected inflation caused.</p> <p>Various commentators, including HH, contrast the really gloomy macro forecasts that were widespread in mid-2020 with the actual outcomes.  The suggestion is that this is a testimony to policy effectiveness, but surely it is mostly a testimony to forecasting failure?  Central banks and finance ministries in the second and third quarters of 2020 knew all about the nature and magnitude of the policy support, but they simply misread the overall macroeconomic implications.   Take the RBA Statement of Monetary Policy from as late as November 2020: they forecast trimmed mean inflation at 1 per cent for 2021 and 1.5 per cent for 2022, both well below target.  Projections of that sort at that time were not uncommon (those of the Reserve Bank of New Zealand were similarly weak).  Those serious misjudgements, not the COVID support interventions themselves, gave us the serious inflation problem that central banks are still now dealing with the after-effects of.     Getting the balance between demand and supply effects right, knowing what weight (little, as it turned out) to put on adverse uncertainty effects etc, wasn’t easy, but it was the job central bank experts are paid to do.</p> <p><strong>Conclusion</strong></p> <p>Much is made by HH of  Australian “state capacity”<a href="#_ftn5" id="_ftnref5">[5]</a> and at one point they suggest that “if this book is about anything, it’s state capacity”.   On recent metrics (eg O’Reilly and Murphy (2022)) state capacity in Australia going into the pandemic was good but didn’t stand out relative to other advanced economies.  The authors are clearly right to praise the ability of the Australian Tax Office (ATO) to put in place quickly the JobKeeper programme, itself in part a reflection of efforts to modernise the agency over previous years. But since state capacity is more than just the technical abililty to implement a programme quickly and efficiently under pressure, we can’t –  and HH don’t – ignore things like the vaccine procurement and RAT approval issues, both of which were costly failures.  And what we saw, in Australia no more or less than most other advanced countries, was monetary policy authorities failing to do their core job adequately when it really counted.</p> <p>We need many more books and formal studies about all aspects of the pandemic period, national and cross-country.  That said, it isn’t entirely clear who the target market for this particular book is.  The Australian Treasury (past and present), the ATO, and the then Treasurer Josh Frydenberg will welcome it (they count as the authors’ heroes), and those already inclined to agree with the authors will nod along as they read, but without necessarily learning anything new.  In a fairly short account covering a substantial amount of sometimes-complex historical ground perhaps there isn’t room for, and they don’t attempt, fresh in-depth analysis. But memories fade all too quickly, and before long a new generation of junior policy analysts will be staffing agencies with only a hazy child’s memory of the pandemic. The book should be a useful introduction to much<a href="#_ftn6" id="_ftnref6">[6]</a> about the Australian government response. </p> <p>Which brings us to the final issue: was Australia’s overall handling of the pandemic “exceptionally good”, as the authors claim?  In some respects (including the important mortality one) Australia did materially better than most.  Arguably the Australian government (like New Zealand’s) got one really big call right (the initial closing of the borders in March 2020 just in time, albeit –  and as HH note – later than they should have).  Beyond that, the record was really rather mixed.  Some of that might perhaps have been inevitable in such exceptional times. But plenty of things could have been better, as even HH (sometimes grudgingly) acknowledge.</p> <p><strong>References</strong></p> <p>Gibson, J. (2022), Government mandated lockdowns do not reduce Covid-19 deaths: implications for evaluating the stringent New Zealand response, <em>New Zealand Economic Papers </em>Vol 56 2022 Issue 1</p> <p>Goolsbee, A. and Syverson, S. (2021), Fear, lockdown, and diversion: Comparing drivers of pandemic economic decline 2020, <em>Journal of Public Economics </em>193</p> <p>O’Reilly, C. and Murphy, R. H., (2022), An Index Measuring State Capacity, 1789–2018, <em>Economica, </em>Vol 89, Issue 355 pp 713-745</p> <p>Reddell, M., “A radical macro framework for the next year or two”, Croaking Cassandra blog, 16 March 2020 (<a href="https://croakingcassandra.com/2020/03/16/a-radical-macro-framework-for-the-next-year-or-two/">https://croakingcassandra.com/2020/03/16/a-radical-macro-framework-for-the-next-year-or-two/</a>)</p> <hr class="wp-block-separator has-alpha-channel-opacity" /> <p><a href="#_ftnref1" id="_ftn1">[1]</a> Note, however, that measurement of a locked-down economy was much more difficult than usual, particularly in non-market sectors, and outsiders can’t be sure how comparable the (inevitable) assumptions used were.</p> <p><a href="#_ftnref2" id="_ftn2">[2]</a> John Gibson (2022), written in 2020, is also relevant here, drawing on the diverse restrictions in the different parts of the United States..</p> <p><a href="#_ftnref3" id="_ftn3">[3]</a> The United Kingdom had by far the largest peak to trough fall in GDP of any of these countries.</p> <p><a href="#_ftnref4" id="_ftn4">[4]</a> HH tend to play down the validity of <em>ex post</em> observations of this sort (while accepting that there may be cheaper options that could be considered in future), but as it happened I had laid out before the New Zealand lockdown the genesis of an alternative approach that, had it been adopted, would have proved considerably cheaper (Reddell (2020)),</p> <p><a href="#_ftnref5" id="_ftn5">[5]</a> For example (p39), “the sharp contrast with the United States revealed deep reserves of state capacity that we simply had not realised were there”.</p> <p><a href="#_ftnref6" id="_ftn6">[6]</a> But not all.  One notable omission from the book was much discussion about the range of different state approaches.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/05/australias-pandemic-exceptionalism/#comments">8 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72653" class="post-72653 post type-post status-publish format-standard hentry category-nz-politics"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/03/or-not/" rel="bookmark">Or not</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/03/or-not/" rel="bookmark"><time class="entry-date published" datetime="2025-03-03T11:33:07+13:00">March 3, 2025</time><time class="updated" datetime="2025-03-03T12:26:57+13:00">March 3, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/nz-politics/" rel="category tag">NZ politics</a></span> </div> </header> <div class="entry-content"> <p>“Time has come for a four-year term of govt”, or so declared the editorial in yesterday’s <em>Sunday Star-Times.</em> I voted against the idea in the 1990 referendum, and would do so in any conceivable future referendum.</p> <figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper"> <div class="embed-twitter"><blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">If history is anything to go by, a four-year parliamentary term seems a tough sell. Referendums in New Zealand in 1967 and 1990 saw only 32% and 31% of votes for a four-year term – no electorate reached more than 43% support. Hard to see why this time could be any different? <a href="https://t.co/gEcgDmUw2D">https://t.co/gEcgDmUw2D</a> <a href="https://t.co/3bv7wOfSr1">pic.twitter.com/3bv7wOfSr1</a></p>— Charted Daily (@Charteddaily) <a href="https://twitter.com/Charteddaily/status/1837752432362750150?ref_src=twsrc%5Etfw">September 22, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script></div> </div></figure> <p>Four-year electoral terms (which is at issue, not – at least directly – “four-year terms of govt”) appeal to politicians and bureaucrats (on the latter, see how voters in Karori/Wellington Central/Ohariu were among those least opposed to four year terms in the two referenda we’ve already had). The reasons aren’t particularly hard to fathom: more time and less accountability will almost always sound good to those being held to account (think students with assignments and lecturers with a reputation for granting extensions easily), and since most Wellington head office bureaucrats tend to be more attuned to the interests and perspectives of ministers – and “getting stuff done” – than to those of pesky voters (often actually assuming they know better the interests of those voters and their families than the voters do themselves).</p> <p>But what caught my eye most in the SST editorial was a claim from a representative of a business lobby group (in this case Infrastructure New Zealand) that “three years is just not enough time to develop policy, implement legislation, and embed the necessary system changes and begin to measure results”.</p> <p>It isn’t an approach most of us would settle for in other areas of life</p> <p>Representative democracy can helpfully be seen as an agency problem. We (the voters) are the principals, who elect/employ agents to act on our behalf. But it is difficult to ensure that they do so, especially over such a wide range of issues, and the most powerful lever by far available to us is simply the ability to toss them out. They can at times simply pursue their own ends (in some cases, simply holding office might be enough), or pursue ends, or by means, which we come collectively to think are not the best way forward. Circumstances change too, in ways that neither voters nor MPs can envisage with any confidence. And while there are some other checks on what governments and Parliaments do, they are often pretty thin (the more so in New Zealand where governments form from a parliamentary majority, and Parliament is sovereign and can if it chose reverse or override the effect of any judicial rulings).</p> <p>Agency problems aren’t unique to democratic politics. Another good example is widely-held public companies, listed on a stock exchange. There are many shareholders, who delegate power to a board of directors and, through them, to management. Those agents can do a good or bad job, and they can pursue shareholders’ interests or their own (managers, for example, tend to like bigger empires which tend to raise executive remuneration whether or not they add to shareholder value). Of course, in tightly-held companies these issues are much less severe – at the extreme a founder may be both CEO and the dominant shareholder. That person might do a good or a bad job, but the main wealth affected is his/her own. Representative democracies are much more like widely-held public companies, but our exposure to things going wrong or being done badly is much greater, because for most of us there is little or no scope for diversification, and even when there is (eg dual citizenship) exercising that option can be both costly and disruptive. This is our country. We have only one.</p> <p>Listed companies are traded on the stock exchange. For companies of any size there will be transactions – and a fresh market-clearing price – each day. When management and the Board are seen to be doing a capable job – have a credible strategy to add shareholder value – the share price of the company concerned will match or outstrip the market. When doubts arise, the share price underperforms. It doesn’t tend to be too good for the chief executive’s career prospects if that underperformance becomes entrenched. Here’s one example of a New Zealand underperformer.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-2.png"><img data-attachment-id="72660" data-permalink="https://croakingcassandra.com/2025/03/03/or-not/image-363/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-2.png" data-orig-size="1078,801" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-2.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-2.png?w=700" loading="lazy" width="1024" height="760" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-2.png?w=1024" alt="" class="wp-image-72660" /></a></figure> <p>A day to day fluctuation in the share price won’t usually affect the Board or management much. Noise happens, market trends will be at work. In the political sphere, a single opinion poll typically won’t matter too much either. But over time a weakening share price is going to raise doubts among existing shareholders as to whether capital should be left in the business (retained earnings), and make it more difficult and expensive to raise fresh capital (each dollar of fresh capital dilutes existing shareholders’ interests to a greater extent).</p> <p>What can shareholders do? They can, of course, as individuals sell some or all of their shares and thus reduce or eliminate their exposure to the firm and the agents (Board/management) it had been employing. But they can also vote out some or all of the directors, or create a climate where some incumbents think it might be best if they stepped aside and did not seek re-election.</p> <p>And how often do directors come up for re-election? Well, in New Zealand the stock exchange <a href="https://assets.ctfassets.net/m5mydry9e35f/5DGQAUYVuqAuLWpZQrfNBk/548f9a53c51878a06cf7e6275a00351d/1._NZX_Listing_Rules_1.9_-_January_2025__restricted_.pdf">listing rules</a> require each director to face re-election at least every three years. </p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-3.png"><img data-attachment-id="72663" data-permalink="https://croakingcassandra.com/2025/03/03/or-not/image-364/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-3.png" data-orig-size="958,217" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-3.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-3.png?w=700" loading="lazy" width="958" height="217" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-3.png?w=958" alt="" class="wp-image-72663" /></a></figure> <p>A person I mentioned this to wondered if the three years had been inspired by the three year electoral term for our government. I don’t know the history of the NZX listing rule, but I thought I’d check the situation in some other countries. The ASX also requires directors to face election at least every three years, but then Australia also has three-year federal parliamentary terms. But what about Canada and the UK, both of which have parliamentary terms of up to five years? Listing rules in Canada appear to require annual election of all directors (a practice that was <a href="https://mcmillan.ca/insights/new-director-election-requirements-for-tsx-companies/#:~:text=annual%20director%20elections,the%20company's%20board%20of%20directors.">apparently common there </a>even before the rules changed in the 2010s). In the UK, the corporate governance code appears also to require annual elections for directors, at least for larger listed companies.</p> <p>There is simply much less at stake as regards the governance of any individual listed company than in respect of our Parliament and government (and bear in mind that no government in 100 years or more has fallen inside the three year parliamentary term, although there have been a couple of discretionary early/snap elections). And there are far fewer checks and balances (let alone easy exit options). I cannot for the life of me see why we would delegate so much greater power to MPs and ministers (and their supporting bureaucrats) for terms longer than shareholders and the market generally choose to do for those who run public companies. Parliament is sovereign, individual companies are not. Individual companies also have much clearer benchmarks for performance (something around maximising shareholder value) than is ever conceivably possible for a Parliament or government. </p> <p>Of course, there are plenty of democratic countries with longer electoral terms but (for all NZ’s faults) it is far from obvious that the general quality of government and policymaking has been any better in the UK or Canada (federally) than in Australia and New Zealand. And I don’t think either an upper house or a written constitution is any sort of solution that should make New Zealanders more comfortable with the idea of a four-year electoral term – you can’t create an alternative legitimacy simply thru a different voting (or worse, appointment) method for an upper house, and the written constitution simply hands over (lots) more power to the whims of unelected and unaccountable judges.</p> <p>When we’ve had governments that really wanted to do bold stuff (a) they’ve managed to do a lot in three years, and b) in all case I can think of they managed to persuade voters to give them (at least) one more electoral term, to either carry on the work, consolidate results or whatever. It will be 50 years this year since we last decided not to give a government a second term (and that government had lost its biggest electoral asset to death halfway through). And in that sense, things aren’t so different from a company and CEO devising and putting in place transformational strategies for a company. These things take time, and especially take time to produce secure longer-term bottom line results. But shareholders are putting their money on the line each day, directors face re-election each year, and chief executives are probably more prone to being ousted early than Prime Ministers (the last PM to be forced out by his colleagues on anything other the health/age grounds was almost 30 year ago [perhaps Palmer too, but he’d not become PM at an election], and he was I think the only one in at least a century). Part of the skill of being an able PM/Cabinet or Board/CEO is to convince your publics (voters or shareholders) that you have the skills and the plans and that you warrant being allowed to stay.</p> <p>And although, at a political level, it is easy to overstate the extent to which incoming governments typically reverse what their predecessors had done (not that much very quickly even after the 1984-90 or 1935-49 governments) it is also true that there are genuine contests of values and ideas – indeed, to a considerable extent it is what politics is about. In that sense, it is different than the listed company situation, where differences are much more about means rather than ends. On many things at any one time there are real differences across the public in values and priorities. And if public opinion shifts sharply or political leaders lose our confidence I can’t see strong reasons why they should simply have a claim to hold office for longer. They are, after all, our agents, not the principals. Good agents are really really valuable and can make a huge difference for the better. But good help can hard to find, and difficult to monitor that they are pursuing the preferences/priorities of those who voted them in.</p> <p>And if the idea of a four-year term for Parliament has no appeal whatever with the present or any recent crop of politicians (I find it hard to think of any government in my adult life that I’ve felt with conviction really warranted even a second term), the suggestion that it would have to be accompanied by longer term for local government is positively alarming. Perhaps there are good local bodies – whose councillors should then readily win re-election – but I live in Wellington.</p> <p>PS I’d also commend on this topic a <a href="https://newsroom.co.nz/2025/03/03/four-year-terms-are-a-case-of-politicians-focused-on-the-least-important-things/">column</a> by Rob Campbell in Newsroom (paywalled today, but not I think from tomorrow). I suspect he and I would disagree on a huge proportion of policy issues, but that is his point (and mine)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-4.png"><img data-attachment-id="72668" data-permalink="https://croakingcassandra.com/2025/03/03/or-not/image-365/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-4.png" data-orig-size="1166,216" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-4.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-4.png?w=700" loading="lazy" width="1024" height="189" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-4.png?w=1024" alt="" class="wp-image-72668" /></a></figure> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/03/or-not/#comments">12 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72633" class="post-72633 post type-post status-publish format-standard hentry category-exchange-rate category-monetary-policy category-new-zealand-economic-history"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/" rel="bookmark">Forty years of floating</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/" rel="bookmark"><time class="entry-date published" datetime="2025-03-01T14:42:42+13:00">March 1, 2025</time><time class="updated" datetime="2025-03-01T17:15:04+13:00">March 1, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/exchange-rate/" rel="category tag">Exchange rate</a>, <a href="https://croakingcassandra.com/category/monetary-policy/" rel="category tag">Monetary policy</a>, <a href="https://croakingcassandra.com/category/new-zealand-economic-history/" rel="category tag">New Zealand economic history</a></span> </div> </header> <div class="entry-content"> <p>Last year there was an interesting new book out, made up of 29 collected short papers by (more or less) prominent economists given at a 2023 conference to mark <em><a href="https://www.amazon.com.au/Floating-Exchange-Rates-at-Fifty/dp/0881327492">Floating Exchange Rates at Fifty</a>.</em> The fifty years related to the transition back to generalised floating of the major developed world currencies in 1973 (think USD, JPY, GBP, and the West German deutschemark, plus the Canadian and Swiss currencies). It was quite an interesting collection and even has some discussion of emerging markets. What was striking, reading it at this end of the world, was the almost complete absence of any discussion of the experience of smaller advanced countries – this isn’t just a matter of places like New Zealand or Norway or Israel or Iceland, but not even Australia gets a mention in the index. </p> <p>As it happens, this weekend marks 40 years since New Zealand floated our exchange rate. It was announced at 10:30am on Saturday 2 March 1985 (timing set for after the Friday close of the New York foreign exchange market), and trading commenced on Monday 4 March. </p> <p>I was working in the Monetary Policy Section (all 3 or 4 of us) of the Reserve Bank’s Economics Department at the time but although there had been talk of floating for months (pretty much since the devaluation in July 1984) and real policy challenges around maintaining the fix, the actual timing of the move was successfully kept very tight (I was never quite sure even whether my boss had known), and I learned of the news when later that afternoon I wandered down to the Hataitai dairy to buy my Evening Post. </p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1934.jpeg"><img data-attachment-id="72637" data-permalink="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/img_1934/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1934.jpeg" data-orig-size="3018,2577" data-comments-opened="1" data-image-meta="{"aperture":"1.8","credit":"","camera":"iPhone SE (3rd generation)","caption":"","created_timestamp":"1740824826","copyright":"","focal_length":"3.99","iso":"25","shutter_speed":"0.0082644628099174","title":"","orientation":"1","latitude":"-41.331352777778","longitude":"174.77751111111"}" data-image-title="IMG_1934" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1934.jpeg?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1934.jpeg?w=700" loading="lazy" width="1024" height="874" src="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1934.jpeg?w=1024" alt="" class="wp-image-72637" /></a></figure> <p>It was the same day as David Lange’s Oxford Union debate on nuclear issues, and the Reserve Bank’s Deputy Governor, Rod Deane, had had to fly to London to brief Lange and secure his final agreement to the move (my diary the following week records him telling us that he had been most impressed with Lange’s questioning etc).</p> <p>The Evening Post’s journalists must have been pretty busy as they’d managed to get comment from all manner of people in the couple of hours they had. Some of them are still commenting today</p> <figure class="wp-block-image size-large is-resized"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1935.jpeg"><img data-attachment-id="72639" data-permalink="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/img_1935/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1935.jpeg" data-orig-size="3024,1396" data-comments-opened="1" data-image-meta="{"aperture":"1.8","credit":"","camera":"iPhone SE (3rd generation)","caption":"","created_timestamp":"1740824862","copyright":"","focal_length":"3.99","iso":"25","shutter_speed":"0.0082644628099174","title":"","orientation":"1","latitude":"-41.331363888889","longitude":"174.77749722222"}" data-image-title="IMG_1935" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1935.jpeg?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1935.jpeg?w=700" loading="lazy" width="1024" height="472" src="https://croakingcassandra.com/wp-content/uploads/2025/03/img_1935.jpeg?w=1024" alt="" class="wp-image-72639" style="width:718px;height:auto" /></a></figure> <p>Bob Jones was another whose views were reported, claiming that by floating “New Zealand has now joined the rest of the world as a sophisticated economy” which wasn’t really true as by this point there were still lots of smaller advanced countries who weren’t floating at all (Australia had done so only a year or so previously), and many of the European countries were running their collective Exchange Rate Mechanism, designed to severely limit fluctuations.</p> <p>The comments in that old paper that most caught my eye ((bottom right story in the first photo above) were from my old macro lecturer Merv Pope who was very critical, stating that in his view “the economy would suffer severely”. </p> <p>There are books and articles that discuss the politics and bureaucracy of the period leading up to the float, and I know there are some people who read this blog who were closely involved in it all (who are welcome to add comment/context), so I’m not going to attempt to cover that. </p> <p>The journey to floating mainly dates to the events around the July 1984 devaluation and the early days of the 4th Labour government. The establishment view in early-mid 1984 was that the New Zealand dollar was seriously overvalued in real terms, and in that sense the mid 1984 devaluation had been welcomed. All that said, as was perhaps necessary in the market circumstances, the extent of the devaluation – 20 per cent – had been set to eliminate the likelihood of further downward pressure, and thus to some extent probably represented an adjustment larger than the medium-term macroeconomics might have warranted.</p> <p>Going pretty much hand in hand with the devaluation was the removal of the interest rate controls that the previous government had put in place over the past year, combined with a new willingness to fund the government’s deficit primarily by wholesale domestic debt sales, taking whatever price the market charged. With the prospect of rising inflation (if only from the devaluation itself) and large fiscal deficits, it had the makings of considerable difficulties in achieving effective monetary control. Exchange controls on capital transactions were still in place but they were porous (and more designed to limit outflows than inflows) and one of my tasks in August 1984 had been to sift carefully through the records of foreign exchange inflows looking for evidence of capital inflows drawn by the combination of high interest rates and a, possibly, undervalued exchange rate. A fixed exchange rate meant that we – the RB – were committed to buying whatever foreign exchange was offered at the fixed (against the TWI) rate, and all those purchases immediately added to domestic liquidity.</p> <p>In an <a href="https://croakingcassandra.com/2018/07/10/the-real-exchange-rate-mattered-in-1985-and-it-still-does/">earlier post</a> some years ago I noted</p> <blockquote> <p>One of the starkest memories of my first year at the Reserve Bank, fresh out of university, was being minute secretary to a meeting in late 1984 attended by the top tiers of the Reserve Bank and The Treasury. It was a just a few months after the big devaluation that ushered in the reform programme: senior officials were explicitly united in emphasising how vital it was to “bed-in” the lower exchange rate, and ensure that the real exchange rate stayed low.</p> </blockquote> <p>The risk was that if we didn’t succeed in getting monetary conditions under control, all the pain of the devaluation might go for nothing (ending up with no real devaluation at all, as in a number of past devaluations here and abroad). And yet with high market-determined interest rates, it was going to be difficult to stop capital coming in. We still had tools like reserve ratios but (a) the goal was to move away from them not become more reliant, and b) they became much less effective in a deregulated interest rate market. We sold government debt aggressively, aiming to mop up the excess liquidity, but the more debt we sold, the more tended to come in (those yields were attractive, and the exchange rate was fixed). </p> <p>Among the various Ministers of Finance (Douglas and associates) there was a desire to float, but when? It didn’t make a lot of sense to contemplate floating the exchange rate while exchange controls were still in place (although the UK had in the 1970s), and exchange control removal didn’t happen until the Friday before Christmas 1984. And no one really had a good sense as to what the market would deliver (particularly in terms of liquidity and volatility) when the float happened (I’m pretty sure no countries as small as New Zealand were floating were by then, and although Switzerland wasn’t hugely larger it was home to a fairly major banking and financial centre).</p> <p>Short-term interest rates began 1985 in the mid-teens (the Reserve Bank’s data has the overnight cash rate at 13.4 per cent and the 90 day bill rate at 15.3 per cent in early January. Capital inflows tended to dampen rates, while our monetary policy actions sought to underpin them or push them up (the medium-term goal being to consolidate fairly low and stable inflation, after 10-15 years of high and volatile inflation).</p> <p>But the backdrop turned fairly quickly. This is from the Bank’s June 1985 <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/bulletins/1985/1985june48-6quarterlyreviewofmonetaryconditions.pdf">review</a></p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image.png"><img data-attachment-id="72642" data-permalink="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/image-361/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image.png" data-orig-size="507,366" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image.png?w=507" loading="lazy" width="507" height="366" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image.png?w=507" alt="" class="wp-image-72642" /></a></figure> <p>Pressures built further in February and by 15 February short-term rates had increased by another full percentage point. But it was in the final week of February that things culminated, with significant foreign exchange outflows, reflecting at least in part a sense that a float was likely sooner rather than later, and that when it happened the exchange rate was likely to fall. As the Bank’s Bulletin article records, foreign exchange outflows had been particularly heavy on 28 February and 1 March, transactions due for settlement two working days later. By Friday 1 March, overnight cash rate were at 38 per cent and the 90 day bill rate was at 25 per cent. If you really thought the exchange rate was going to depreciate quite a bit in short order, paying interest rates of under 10bps a day to fund a position taken on the back of that view wasn’t too much of a problem.</p> <p>(Meanwhile in the Monetary Policy Section we were hard at work devising projections and policies designed to keep inflation in check, all based on a continuation of a fixed rate.)</p> <p>While the exchange rate was fixed, the Bank was committed to buying and selling whatever it took to maintain the rate, and each such transactions had counterpart domestic liquidity consequences (the Bank was not then doing routine daily open market operations to stabilise the level of settlement cash). Those fx outflows just prior to the float sharply lowered liquidity in the banking system. And once the float happened, the door was closed.</p> <p>On the first day of trading (4 March) the exchange rate did fall (down around 2 per cent against the USD, which itself was stable against the JPY and DEM) but the dynamic changed pretty quickly. Those liquidity pressures really started to bite, and anyone who wanted to bring funds back to New Zealand needed to find a market seller of NZD, rather than a fixed price central bank. Short-term interest rates skyrocketed</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/03/image-1.png"><img data-attachment-id="72644" data-permalink="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/image-362/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-1.png" data-orig-size="1063,427" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-1.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/03/image-1.png?w=700" loading="lazy" width="1024" height="411" src="https://croakingcassandra.com/wp-content/uploads/2025/03/image-1.png?w=1024" alt="" class="wp-image-72644" /></a></figure> <p>and although the official data has a peak cash rate of 265 per cent, my memory (and my contemporary diary records) suggests peaks in excess of 500 per cent (still only around 1 per cent day per day). Within a couple of days the NZD exchange rate was 4 per cent higher than it had been just prior to the float, and probably would have jumped even further had the Bank not eventually intervened. By 20 March, short-term rates were down to about 24 per cent. It had been a wild ride.</p> <p>Could the float have been avoided back on 2 March. Most likely it could have. The big problem in July 1984 had been a combination of a) perceptions that the exchange rate was fundamentally overvalued, b) perceptions that Roger Douglas, likely finance minister if Labour won, wanted to devalue, and c) the fact that interest rates were controlled, and so sales of foreign exchange by the Bank had no countervailing interest rate effect. But the broad direction of economic policy was to free up financial market prices, and so there would have been little good reason to delay further. </p> <p>It is interesting to ponder what might have happened had the government decided instead to a) liberalise interest rates, and b) remove exchange control but c) to keep on with a fixed exchange rate, at the post July 1984 level. The monetary policy trilemma says that in the world you lose control of domestic monetary conditions (and thus the ability to control your own inflation outcomes). By 1984/85, the inflation rates in most major western economies were already more or less in check (think UK, US, West Germany, Japan), and with a fixed exchange rate we might have been expected to have seen New Zealand converge in time to around the average of our trading partners. But I suspect it would have been a wild ride, and would not have ended well. For example, in March 1985 the effective Fed Funds rate was 8.5 per cent and three month rates in Germany were about 6 per cent. With those sorts of interest rates in New Zealand through that period – and that is what a credible exchange rate peg would have delivered – the credit boom, commercial property boom, sharemarket boom etc might well have been even larger, and ultimately messier to resolve, than what we were actually to experience a few years later (the Nordics, for example, went that sort of route, only to float some years later). (It also isn’t wildly different that what Ireland and Spain experienced in the 00s, except that – in adopting fit-for-Germany interest rates they may have been less badly prepared than New Zealand firms/banks might have been in the mid 80s.)</p> <p>This isn’t a post to review New Zealand’s experience with floating. Perhaps I will attempt something like that over the next few weeks. There have been persistent critics, even beyond the Day 1 ones cited above, perhaps most notably the economist Brian Easton. There were endless debates in the late 80s under the broad heading of “sequencing”: there were models under which things might have been less messy if the order of liberalisation had been different: external trade and labour markets before financial markets (and particularly the capital account and exchange rate). We’ll never know, although (as just one illustrative example) it was never plausible that even the 4th Labour government was ever going to lead with labour market reform, so perhaps there was never a real choice.</p> <p>Back in one of those early quotes, Rob Campbell commented critically about the increased room for “speculative moves” around the New Zealand dollar. I suspect that many of those who broadly supported the move to floating will still have been taken by surprise by the amplitude of the cyclical fluctuations in the exchange rate, and the incidence of large single day movements over the following few years. Then again, another mystery of the New Zealand experience is why an exchange rate that was so variable until about 15 years ago hasn’t been since. Perhaps that will be the topic for another exploratory (because I don’t think I know the answer) post</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/03/01/forty-years-of-floating/#comments">3 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72609" class="post-72609 post type-post status-publish format-standard hentry category-adrian-orr"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/" rel="bookmark">Why is such rank dishonesty tolerated?</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/" rel="bookmark"><time class="entry-date published" datetime="2025-02-27T09:37:57+13:00">February 27, 2025</time><time class="updated" datetime="2025-02-27T10:29:12+13:00">February 27, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a></span> </div> </header> <div class="entry-content"> <p>“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing”</p> <p>Those were Adrian Orr’s words last Thursday to Parliament’s Finance and Expenditure Committee at their hearing on the Bank’s latest<em> Monetary Policy Statement.</em> He’d been asked by National MP Dan Bidois what the Bank was doing to learn from too slow tightening a few years back and, perhaps, too slow easing last year. Orr’s words above are at about 23.50 <a href="https://vimeo.com/1058035440">here</a>.</p> <p>Orr has run the “we were one of the first to tighten” lines repeatedly in the last few years, but I hadn’t heard the (even more preposterous) claim about being one of the first to ease before. </p> <p>In various posts I’ve noted that his claim re tightening is simply false. But that point has often been buried in longer posts. So this post is devoted solely to those two factual claims.</p> <p>I’ve focused here mainly on the central banks of OECD countries. There are 37 (more or less) advanced economy countries belonging to the OECD. But a fair number of those use a single currency (the euro), and one other (Denmark) pegs its exchange rate to the euro, and thus has monetary policy in effect set by the ECB.</p> <p>That leaves 21 central banks responsible for setting monetary policy.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-32.png"><img data-attachment-id="72613" data-permalink="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/image-356/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-32.png" data-orig-size="161,613" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-32.png?w=79" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-32.png?w=161" loading="lazy" width="161" height="613" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-32.png?w=161" alt="" class="wp-image-72613" /></a></figure> <p>Of those central banks, two did not cut policy rates as Covid broke over the world in 2020 (Japan and Switzerland). So questions of reversing the Covid policy rate cuts didn’t arise there (and, for example, in Switzerland core inflation was to peak at just over 2 per cent).</p> <p>The Reserve Bank of New Zealand’s first OCR increase, beginning to reverse the Covid easing, was on 6 October 2021. On the same day (but 12 hours or so later, given time zones) the central bank of Poland also put in place its first post-Covid tightening.</p> <p>The following OECD countries had already increased policy rates by then</p> <div class="wp-block-syntaxhighlighter-code "><pre class="brush: plain; title: ; notranslate" title=""> </pre></div> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-34.png"><img data-attachment-id="72618" data-permalink="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/image-358/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-34.png" data-orig-size="221,290" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-34.png?w=221" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-34.png?w=221" loading="lazy" width="221" height="290" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-34.png?w=221" alt="" class="wp-image-72618" /></a></figure> <p>So that was nine OECD central banks moving before the Reserve Bank did, and quite a range of countries too: Latin Americans (in the case of Chile, a longstanding inflation targeter), both old and new OECD European countries, and Turkey. Countries richer and more productive than us and countries poorer and less productive than us. You might be inclined to discount Turkey, as having had some really crazy monetary management in the last few years (and I’d probably agree) but it still leaves eight of 20 moving in advance of the Reserve Bank. </p> <p>So that leaves 10 moving after the Reserve Bank (including the two central banks – Switzerland and Japan – that had never cut in the first place). </p> <p>The Governor’s claim that the Reserve Bank was “one of the first in the world to tighten” is simply false. And when I looked around a few other (non-OECD) countries with floating exchange rates, and thus their own monetary policies, it wasn’t hard to find several of them that had also begun to tighten before the Reserve Bank (eg Brazil in Feb 2021, Uruguay and Paraguay in Aug 2021, and my old stamping ground Zambia in Feb 2021).</p> <p>It is just made-up stuff. Said once it might have been pardonable – anyone can make mistakes, and a few Anglo-centric market commentators abroad had run similar lines (noting that the RBNZ had moved before peers in the UK, Canada, US, the euro-area, and Australia) – but when run repeatedly and shamelessly it is really inexcusable. </p> <p>What about “we were one of the first central banks in the world to be easing”? </p> <p>Well, that one doesn’t stack up either. The Reserve Bank’s first OCR cut was 14 August 2024.</p> <p>Among OECD central banks, the following had already cut by then (the first five of them in 2023)</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-35.png"><img data-attachment-id="72619" data-permalink="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/image-359/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-35.png" data-orig-size="165,380" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-35.png?w=130" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-35.png?w=165" loading="lazy" width="165" height="380" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-35.png?w=165" alt="" class="wp-image-72619" /></a></figure> <p>That’s 12 central banks (including the Bank of Canada, Bank of England, and the ECB)</p> <p>Turkey had also cut early but that was getting into their really crazy period, so I’ll simply leave them out.</p> <p>So of the 20 OECD central banks ex Turkey only 7 hadn’t cut by the time the Reserve Bank of New Zealand made its first cut in August. </p> <p>You can believe the Governor, or the hard data (and all this is really easy to check).</p> <p></p> <p>As I’ve pointed more than once, the whole thing is absurd anyway. It isn’t as if every country faces the same pressures or inflation risks, so it isn’t as if there is some unconditional cross-country race to tighten or cut first. </p> <p>But, as it happens, the Reserve Bank probably isn’t too keen on people digging even a little below the surface either. As I’ve noted previously, on IMF estimates New Zealand had the most overheated economy post-Covid of any advanced economy they do estimates for. That was on the Reserve Bank – monetary policy is supposed to be adjusted pre-emptively to minimise such overheats (and deep slumps) – and all else suggests they in fact should have one of the very first central banks to tighten. They weren’t. </p> <p>On the Bank’s own estimates, they let an output gap of almost 4 percentage points (at peak) of GDP build up, so that excess demand enabled by them was a big part of the New Zealand inflation failure.</p> <p>And, as just one illustration, consider the situation faced by the Bank of Canada and the Reserve Bank of New Zealand in late 2021 (I choose BoC mostly because they make their data readily accessible). </p> <p>This <a href="https://www.bankofcanada.ca/rates/indicators/capacity-and-inflation-pressures/product-market-definitions/">BoC chart</a> shows their estimates for the output gap at the end of 2021. At the time, they thought there was still a small negative output gap, and even now with the benefit of hindsight they think the output gap was about 1.2 per cent of GDP.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-36.png"><img data-attachment-id="72622" data-permalink="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/image-360/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-36.png" data-orig-size="1721,710" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-36.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-36.png?w=700" loading="lazy" width="1024" height="422" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-36.png?w=1024" alt="" class="wp-image-72622" /></a></figure> <p> What of the RBNZ? They thought at the time (November 2021 MPS) that the output gap was already slightly positive (having fallen back from mid-year estimates in excess of 2 per cent due to the fresh lockdowns) and they now estimate – again with the benefit of hindsight – that the output gap then was about 3 per cent of GDP. If the output gap was already positive there was no good justification for policy rates still being well below neutral. If the output gap was really highly positive, they had simply badly misread in real-time the inflation pressures in the economy (note also that the NZ unemployment rate by late 2021 was far below any estimates of NAIRU).</p> <p>Very few central banks handled the last five years particularly well. The Reserve Bank of New Zealand was not among them. Possibly, on substance, it was not that much worse than the median of its peers (time will still tell on emerging on the other side successfully).</p> <p>But what marks the Reserve Bank out is the repeated fabrications. The Governor just makes stuff up, running the same misleading or false stuff repeatedly, including to Parliament. And his (past and present) fellow MPC members – statutory officeholders all of them – let it pass (none of them speaks). As, it seems, do those charged with holding Orr to account, notably the Reserve Bank’s Board and the Minister of Finance (who last year reappointed the Board chair after the policy failures and outrageous attempts at misleading the public and Parliament of the Governor and MPC were already well known, and who has chosen not to fill vacancies on the Bank’s Board).</p> <p>It is, sadly, an age when a US President can simply lie about who was responsible for invading Ukraine. We shouldn’t have to put up with such Trumpian debauched behaviour from anyone in New Zealand public life. But that is what we get from the Governor. It reflects poorly on all those who accommodate him. It reflects poorly on New Zealand. But most of all it reflects poorly on the Governor himself, who repeatedly shows himself just not fit to hold the office.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/02/27/why-is-such-rank-dishonesty-tolerated/#comments">22 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72576" class="post-72576 post type-post status-publish format-standard hentry category-australia category-new-zealand-economic-performance category-productivity category-savings category-superannuation"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/" rel="bookmark">Is compulsory saving the answer?</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/" rel="bookmark"><time class="entry-date published" datetime="2025-02-26T11:44:16+13:00">February 26, 2025</time><time class="updated" datetime="2025-02-26T12:33:28+13:00">February 26, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/australia/" rel="category tag">Australia</a>, <a href="https://croakingcassandra.com/category/new-zealand-economic-performance/" rel="category tag">New Zealand economic performance</a>, <a href="https://croakingcassandra.com/category/productivity/" rel="category tag">Productivity</a>, <a href="https://croakingcassandra.com/category/savings/" rel="category tag">Savings</a>, <a href="https://croakingcassandra.com/category/superannuation/" rel="category tag">Superannuation</a></span> </div> </header> <div class="entry-content"> <p>Economic growth – and the lack of the sustained productivity growth that underpins it – is again briefly in focus. 70 years of relative economic decline still shows no sign of being durably reversed, but the last few years have been particularly tough and there is an election next year, and so the government’s rhetorical focus has turned to growth. Time will tell whether it is supported by any serious policy changes equal to the magnitude of the problem.</p> <p>Over the decades, whenever the conversation has (usually briefly) turned to growth and New Zealand’s fairly dismal longer-term economic performance, advocates of compulsory private savings emerge to some fresh prominence. The late Brian Gaynor used to argue that if only we’d kept on with the 1974 Roger Douglas scheme all would have been well. Other funds manager types refer us to the Australian compulsory savings system. And others champion Singapore (including former NZ Initiative and National Party adviser, <a href="https://leonardshong.com/2024/08/10/learning-about-new-policy-initiatives-from-singapore/">Leonard Hong</a> who recently devoted an entire dissertation to it [and whose Herald op-ed is <a href="https://www.nzherald.co.nz/business/personal-finance/tax/opinion-lessons-from-singapore-on-getting-the-governments-books-in-shape-without-paying-more-tax/RE5JSVUGXVEE3B7ZIBN4IGITTM/">here</a>]). Over the last decade, Roger Douglas and Auckland university economics professor Robert MacCulloch have been championing an overhaul of our entire system of health and welfare (including superannuation) provision, which would involve a lot more compulsory private saving. Just this week, MacCulloch is quoted in the Listener’s (flawed) feature article on New Zealand economic decline putting a big emphasis on lack of national saving, suggesting that the difference between New Zealand and Australian wealth/productivity is substantially explained by the differences in savings policies. On <a href="https://www.downtoearth.kiwi/post/does-the-feldstein-horioka-puzzle-mean-national-s-foreign-investment-strategy-won-t-raise-nz-product">his blog yesterday</a> MacCulloch reminds us of one of those empirical regularities of macroeconomics – the correlation between savings rates and investment rates – and claims that much of Singapore’s economic success is down to their compulsory private savings policy; that without something similar National’s growth aspirations aren’t likely to come to much. </p> <p>One can be a bit cynical about funds managers championing compulsory private savings – Kiwisaver, after all, has been good for funds managers – but I’m sure all these people believe their stories. I’ve become increasingly sceptical over the years,</p> <p>I don’t want to focus here on what is the best way to do retirement income policy (let alone the political feasibility of different models). One can mount arguments for a variety of different models. But my focus is on overall macroeconomic performance and outcomes, and my starting point is that the design of your country’s retirement income system is most unlikely to be a dominant factor in explaining your country’s overall economic performance. </p> <p>Let’s take <a href="https://en.wikipedia.org/wiki/Superannuation_in_Australia#:~:text=Currently%20set%20at%2011.5%25%2C%20from,a%20publicly%20funded%20pension%20system.">Australia</a> first. As a reminder, 30 years or so ago the Australian government introduced a compulsory private retirement savings scheme (employer contributions), starting at 3 per cent of income then rising to 9 per cent, and this year getting to 12 per cent. Sceptics note that, as yet, Australia still isn’t spending much less than New Zealand as a share of GDP on public pensions, but the focus here is macroeconomic outcomes. </p> <p>The first place one might look for evidence of the transformational macroeconomic possibilities is the national savings rate. </p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-23.png"><img data-attachment-id="72582" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-347/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-23.png" data-orig-size="1000,655" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-23.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-23.png?w=700" loading="lazy" width="1000" height="655" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-23.png?w=1000" alt="" class="wp-image-72582" /></a></figure> <p>Champions of the scheme have occasionally produced papers claiming a positive impact, and the counterfactual is – as almost always – impossible to know, but if there has been a positive effect it doesn’t exactly look transformational. </p> <p>Thoughtful Australian observers also worry about productivity growth over there (Australia is now richer and much more successful than New Zealand, but average productivity lags a long way behind the OECD leaders). There is always lots more going on in both countries but….there is no sign of Australia catching up with the US in the decades since large-scale compulsory private saving became a thing.</p> <figure class="wp-block-image size-large is-resized"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-24.png"><img data-attachment-id="72584" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-348/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-24.png" data-orig-size="959,740" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-24.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-24.png?w=700" loading="lazy" width="959" height="740" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-24.png?w=959" alt="" class="wp-image-72584" style="width:538px;height:auto" /></a></figure> <p>Australia is, by the way, the most culturally and behaviourally similar country to New Zealand in the world.</p> <p>But what about Singapore? It is a stellar economic success story that has seen real GDP per hour worked in Singapore reach levels not that far behind the most successful European economies and the US (although note that experts reckon that Singapore is one of those economies – like Ireland and the Netherlands – where international tax distortions (not just differences in company tax rates) are flattering the data more recently. No one serious uses headline GDP numbers in Ireland.)</p> <p>Singapore has also had a compulsory private savings system since colonial times (introduced in the mid 1950s).</p> <p>But it would be very hard indeed to argue that national savings played any very substantial part in Singapore’s economic emergence. </p> <p>I couldn’t find a very long-term series for Singapore’s national saving rate but the current account is just the difference between saving and investment.</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-25.png"><img data-attachment-id="72586" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-349/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-25.png" data-orig-size="1168,765" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-25.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-25.png?w=700" loading="lazy" width="1024" height="670" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-25.png?w=1024" alt="" class="wp-image-72586" /></a></figure> <p>Investment as a share of GDP took off in Singapore from about 1970, averaging about 40 per cent of GDP for 15 years or so, and translating into rapid growth in the aggregates that count (real GDP per capita, productivity growth etc). Throughout almost all that period, Singapore ran really large current account deficits (ie relied heavily on foreign savings). </p> <p>The IMF’s WEO database has a (directly observed) national savings series since 1980,</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-31.png"><img data-attachment-id="72604" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-355/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-31.png" data-orig-size="1032,709" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-31.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-31.png?w=700" loading="lazy" width="1024" height="703" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-31.png?w=1024" alt="" class="wp-image-72604" /></a></figure> <p>where the peak in the national savings rate (at times in excess of 50 per cent of GDP) came well after the peak in investment in a share of GDP. (As a curiosity, and if one takes the numbers in face value, investment as a share of GDP in Singapore and New Zealand have been roughly the same in the last half dozen years or so.) It looks as though, as one might expect, domestic investment tended to respond to opportunities rather than primarily, or to any great extent, to savings. </p> <p>And that shouldn’t be in the least surprising, since it was, after all, how countries like our own emerged to around the top of the world GDP per capita tables in the late 19th and early 20th centuries (eg there is an estimate for New Zealand for 1886 in which the net international investment position – net reliance on foreign capital – was almost 300 per cent of GDP). Not only New Zealand, but Australia, places like Argentina and Uruguay, and indeed the freshly settled parts of the US itself. Britain, by contrast, ran massive current account surpluses (national savings far exceeding domestic investment), and its lead in the world economic tables began to fade. There is a vast literature on this sort of stuff. More recently, you can see similar pictures for places like Ireland and South Korea (large account deficits in the early phase of emergence, as high investment rates start occurring, followed by later increases in savings rates).</p> <p>Robert MacCulloch’s post yesterday makes a lot of the Feldstein-Horiaka “puzzle”, first identified in a paper 45 years ago. Across countries, domestic investment rates (national accounts investment concept here as throughout) tend to be correlated with national savings rates. MacCulloch includes in his post this chart, covering (as I understand it) all countries</p> <figure class="wp-block-image size-large is-resized"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-27.png"><img data-attachment-id="72590" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-351/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-27.png" data-orig-size="770,966" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-27.png?w=239" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-27.png?w=700" loading="lazy" width="770" height="966" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-27.png?w=770" alt="" class="wp-image-72590" style="width:607px;height:auto" /></a></figure> <p>I did one just for the IMF’s group of advanced countries covering the last 30 years (the period for which the IMF has comprehensive data). Each dot represents a country</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-29.png"><img data-attachment-id="72594" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-353/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-29.png" data-orig-size="994,533" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-29.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-29.png?w=700" loading="lazy" width="994" height="533" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-29.png?w=994" alt="" class="wp-image-72594" /></a></figure> <p>It isn’t a tight correlation (check the range of savings rates for countries with investment rates averaging between 25 and 27 per cent, but it is definitely there. The question is what it means.</p> <p>The thrust of MacCulloch’s claim is that investment in New Zealand is (national) savings constrained. I’m sure he doesn’t mean it in a tight mechanical sense but the implication is that we couldn’t durably get from 23 per cent of GDP in investment to (say) 27 per cent – the sort of market-led change that would make a huge difference over time – on current policies around saving.</p> <p>I don’t see it. I’ve already illustrated how some current account balances have swung through enormous ranges over time – Singapore is one of the most glaring examples, now accumulating massive claims on the rest of the world, even as domestic investment rates are no longer anything out of the ordinary. Taking that IMF advanced economies grouping over the same 30 year period in the chart above, the median range within which current account deficits have fluctuated over that period has been 12 percentage points of GDP (over that 30 year period Spain, for example, has had both a 3 per cent of GDP current account surplus and a 9 per cent current account deficit). Several countries have had fluctuations within a range of 30 percentage points of GDP, and there are now multiple advanced countries (Europe and Asia) experiencing persistent and large current account surpluses – national savings well outstripping domestic investment.</p> <p>A fair amount of that correlation between domestic investment and national savings is likely to be because savings themselves are endogenous. When people think casually about saving rates they often have in mind household saving, or perhaps government saving (fiscal deficits and all that). But actually business saving matters a lot. Most of the series above are gross (ie including depreciation effects). Materially higher business investment is accompanied by higher depreciation provisions which firms need to fund. And economies in which the returns are high, where firms are finding plenty of opportunities, are also likely to be ones where firms find shareholders agreeing to higher rates of retained earnings. Much of the capital stock is either houses (always likely to be predominantly owned nationally, and where an increased stock also draws forth over time increased savings to pay for those houses) or government assets (and governments will tend to own physical assets almost exclusively in their own country), which also tend to be paid for domestically over time. </p> <p>There are some genuine and interesting puzzles as to why the ownership of firms displays more of a “home bias” than a simple model might suggest. But there isn’t much evidence -historical or contemporary – to suggest that if the opportunities were there a much higher sustained level of business investment could not occur in New Zealand without some step change (voluntary or coerced) in household saving rates. (And if that claim were true then given the Australian experience – see above – we might as well give up now.) One indicator of New Zealand’s ongoing ability to attract foreign capital is that with (a) some of the largest current account deficits (over many decades now, but including that 1995- 2014 period, and b) on average very low government deficits, the real exchange rate has remained very strong (puzzlingly so on some models, given the deterioration in our relative productivity performance).</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-30.png"><img data-attachment-id="72596" data-permalink="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/image-354/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-30.png" data-orig-size="925,675" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-30.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-30.png?w=700" loading="lazy" width="925" height="675" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-30.png?w=925" alt="" class="wp-image-72596" /></a></figure> <p>Opportunities? Some of the discussion around saving – and indeed mention of “capital intensity” from ministers and officials – seems to imply that private firms (ones actually operating here, or potential entrants) are leaving opportunities unexploited, leaving money on the table as it were. Frankly, that seems unlikely. They have strong incentives to produce good returns for their investors (& sharper incentives than those facing ministers and officials in this regard). I list among the reasons why there might be relatively few exploitable opportunities here things like high business tax rates, foreign investment restrictions, restrictions on exploiting natural resources (minerals etc), RMA-type obstacles, distance, and the persistently high real exchange rate. </p> <p>How might higher national savings help? Take a rather extreme example in which we all woke up tomorrow and decided that we were going to save another 5 percentage points of our income hereafter forever (well, for just the next two or three decades). You would then expect to see the real exchange rate move sustainably lower (still with cyclical fluctuations). That would be likely to make more outward-oriented business opportunities look attractive (although fewer domestically-oriented ones would, because we’d all be spending less, and most of our spending is local). That might well be a good and helpful thing, in response to a change in private preferences. (And if local opportunities really were even worse than I thought then New Zealanders would – like Singaporeans now – be accumulated assets abroad and our future incomes would rise, even if domestic productivity didn’t.)</p> <p>But changes in private preferences are one thing, while attempted state coercion is another (and these days the state might well first look to itself and close those operating deficits that we’ve been inflicted with all decade now). And if the real exchange rate was really the only macro thing that might be susceptible to changing savings behaviour, wouldn’t we want to first understand why it remains so persistently high before leaping to try (perhaps ineffectually) to attack symptoms? I’ve got a <a href="https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/events/Mar2013/5200823.pdf?la=en">story</a> for that, but ministers and officials hardly ever engage with the stylised fact. </p> <p>There might be a decent case for a different approach to retirement income – I’m sceptical, although I’d raise the NZS age quite a bit, and change the tax treatment of savings (as part of a better tax system all round, with less emphasis on taxing returns to capital) – but retirement income policy should be approached on its own terms, with a focus on individuals and their own ability to manage retirement (thus I was also very sceptical of Andrew Bayly’s desire to hijack Kiwisaver funds in pursuit some politicians’ growth stories). Perhaps a better retirement income model would have useful macroeconomic benefits, but for decades whenever politicians and officials – and economists – wanted to focus on savings it has so often had the feel of “lets force the great unwashed to do something different with their money, to suit our ends” rather than the hard graft of actually getting the obstacles the growth that governments themselves pose out of the way.</p> <p>If I have one final summary point it is that higher national savings rates have rarely, if ever, been a prelude to durably higher rates of domestic productivity or investment growth.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/02/26/is-compulsory-saving-the-answer/#comments">2 Comments</a></span> </footer> </article> </div> <div class="article-wrapper"> <article id="post-72548" class="post-72548 post type-post status-publish format-standard hentry category-adrian-orr category-cbdc category-monetary-policy"> <header class="entry-header"> <h1 class="entry-title"><a href="https://croakingcassandra.com/2025/02/21/orr-at-it-again/" rel="bookmark">Orr at it again</a></h1> <div class="entry-meta"> <span class="posted-on"><a href="https://croakingcassandra.com/2025/02/21/orr-at-it-again/" rel="bookmark"><time class="entry-date published" datetime="2025-02-21T16:24:25+13:00">February 21, 2025</time><time class="updated" datetime="2025-02-22T11:05:44+13:00">February 22, 2025</time></a></span> <span class="byline"><span class="author vcard"><a class="url fn n" href="https://croakingcassandra.com/author/mhreddell/">Michael Reddell</a></span></span> <span class="entry-categories"><a href="https://croakingcassandra.com/category/adrian-orr/" rel="category tag">Adrian Orr</a>, <a href="https://croakingcassandra.com/category/cbdc/" rel="category tag">CBDC</a>, <a href="https://croakingcassandra.com/category/monetary-policy/" rel="category tag">Monetary policy</a></span> </div> </header> <div class="entry-content"> <p>I decided not to bother listening to the <a href="https://vimeo.com/1058035440">Reserve Bank’s appearance at FEC yesterday morning</a>. After all, the OCR decision had been much as expected and foreshadowed, the forecast tracks etc hadn’t changed much, and – with all due respect to some new FEC members – how searching was any questioning really likely to be? </p> <p>But an old colleague listened in, and was rather <a href="https://www.linkedin.com/posts/john-young-1192a425_watch-public-meetings-of-the-finance-and-activity-7298206866889748480-SF0G/">concerned</a> to hear Orr’s deputy chief executive for macroeconomics and monetary (the one with no qualifications or background in either subject) Karen Silk making what appeared to be the claim that the Bank and MPC had got the trends in inflation about right. On listening to the relevant section myself I reckon she was trying to claim that the Bank had been broadly right last year that inflation would come down a lot last year. If so, I’d give her a pass, or perhaps half a one. After all, the questioning just prior to her comment had been about how much the Bank’s overall forecasts had changed in recent quarters, and as I illustrated in yesterday’s post there were really big changes</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-21.png"><img data-attachment-id="72553" data-permalink="https://croakingcassandra.com/2025/02/21/orr-at-it-again/image-345/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-21.png" data-orig-size="960,580" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-21.png?w=300" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-21.png?w=700" loading="lazy" width="960" height="580" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-21.png?w=960" alt="" class="wp-image-72553" /></a></figure> <p>when the underlying state of the economy and estimates of inflation pressure weren’t changing much at all. So, yes, they were right that inflation would at last come down, but quite at sea on what monetary policy it would take.</p> <p>The questioning was coming from National MP Dan Bidois who is, I think, the only economist in Parliament. He started by asking about the change from the August 2024 MPS. Orr, either getting things wrong or simply playing distraction knowing what he was saying simply wasn’t true, claimed that actually the August MPS projections for monetary policy had been pretty much bang on. In August the Bank projected that the OCR for the March quarter would be 4.62 per cent (4.36 per in the June quarter). In fact, the OCR will average about 4 per cent for the March quarter and no more than 3.75 per cent for the June quarter. </p> <p>Orr went on to suggest that Bidois probably really meant the May 2024 MPS – at which point the MPC was actually talking of possibly raising the OCR further. That, of course, looks even worse for the MPC. Back then – only 9 months ago – they reckoned the OCR for this quarter would be 5.62 per cent. </p> <p>Orr attempted to explain it away by data problems. And it is certainly true that historic GDP numbers have been quite materially revised by SNZ late last year. But changes to historic GDP numbers also change estimates of potential output. On the Bank’s own numbers – their published projections spreadsheets – their view of the size of the negative output gap as at early last year (say March quarter 2024) in the May 2024 MPS (-1.6% of potential GDP) was barely different from their current estimate of the output gap as at March quarter 2024 (-1.4 per cent of potential GDP). Back in May the chief economist was <a href="https://croakingcassandra.com/2024/05/25/underwhelming/">blaming his tools</a>, now he and his boss are blaming the data. What is pretty clear is that the Bank still has had an inadequate understanding of what is going on with inflation, and what it would take to keep it in check (back in 2020 to 2022) or to bring it back down.</p> <p>Bidois’s questioning had actually started with something more general, encompassing the whole of the last five years. He noted that people had observed that the Bank had been both too slow to tighten and, perhaps, more recently too slow to ease. What changes, he wanted to know, had the Bank made to be more accurate in its forecasts (and, presumably, appropriate in its policy calls). It was a pretty good question from a new member of the committee.</p> <p>Orr’s response? Handwaving, bluster, and what are little more than outright (repeated) lies. He really wanted to be able to “move on” from the last five years – I’m sure he would, so bad and expensive were the calls made by his MPC – but in any case, he claimed, it was all okay because the Bank had done its own review of experience and all the answers were in that report, and the lesson had been adopted he said. Orr was referring to their (required statutory) <a href="https://www.rbnz.govt.nz/hub/publications/monetary-policy-statement/rafimp">review of themselves</a>, covering the period 2017 to 2022. It had big problems and deficiencies, not least of which was that the Bank management was reviewing themselves (as it happens, 2+ years on I am still waiting for the Ombudsman to rule on a request for the input of external MPC members on this review – such is the Bank’s commitment to (anything but) openness).</p> <p>And it was published on 10 November 2022. By then – the November 2022 MPS – they’d decided that the OCR would need to go to 5.5 per cent, but they reckoned that by now (early 2025) it would still be over 5 per cent. Now, over a horizon of 2+ years that might not be thought to be a huge error, except that – see graph above – they were still well off the mark 18 months on in the middle of last year. </p> <p>To be clear, making sense of the last five years has been hard. Many private forecasters have probably, on average, been about as bad as the Bank. But the private forecasters a) aren’t paid to run monetary policy, b) tend not to boast about that period, and c) don’t just make things up, and actively seek to misrepresent things and thus mislead Parliament (in ways that now can only be considered knowing and intentional).</p> <p>Orr also claimed that the Reserve Bank had been among the first central banks to tighten and among the first central banks to ease. On the tightening point, I’ve previously documented that they were in fact about 7th of the OECD central banks to tighten (out of about 20 separate monetary authorities) but that – much more importantly – the positive output gap they had allowed to build up in New Zealand was materially larger than that of any other OECD country for which the IMF produces estimates. On the Bank’s own numbers it was huge (almost 4 per cent of GDP), and monetary policy isn’t a cross-country race, but is about dealing with your domestic circumstances, and the excess inflationary pressures they allowed to build up before slowly beginning to tighten was huge, and the seeds of many/most of our subsequent cyclical problems. As for easing again, and again what matters is not a cross-country race but domestic inflation (actuals and forecast), I found at least 11 OECD central banks had cut before the RBNZ Monetary Policy Committee did. Orr has to have known this. He simply made stuff up for the MPs, counting on the high likelihood that none of them would have enough data at their fingertips to contradict him there and then. Simply egregious behaviour. (But he has misled FEC so often in recent years – many episodes documented on this blog – with no apparent consequences that, if such is your approach to integrity and transparency (lack thereof), then I guess, why not.)</p> <p>And then it was just more of the cavalier dismissal of the last few years. It was, he claimed, a great achievement to get through with inflation peaking at “only” around 7 per cent (core inflation probably peaking around 6 per cent, the target the committee had agreed to take on when they accepted appointment was 2 per cent). No mention at all of the arbitrary income and wealth redistributions or of the massive dislocations in both inadvertently grossly overheating the economy and then having to squeeze the inflation out again (let alone the $11 billion of taxpayers’ money simply lost, to no useful macroeconomic end). Never mind, stuff happens, was the impression we got – just keep on paying me $800000 a year, reappointing me and my MPC members, and boosting my budget. </p> <p>An appropriate contrast, he suggested, was the Great Depression, in which he – weirdly – claimed that there had been <a href="https://en.wikipedia.org/wiki/Hyperinflation">hyperinflations</a> (where precisely?) Things hadn’t been that bad really.</p> <p>Then he had the gall to suggest that really the Bank was quite budget-constrained. They’d been doing what research they could on their “limited budgets”. Now, it is true that the resources they have chosen to devote to monetary policy in recent years haven’t increased – perhaps they should have – but this is the organisation whose staff numbers have more than doubled on Orr’s watch, still rising now, with an abundance of positions advancing management’s ideological causes rather than the Bank’s quite limited statutory objectives.</p> <p>Orr also mentioned the closed-door conference they are holding in a couple of weeks’ time, inviting in experts to help assure themselves that their research was at the cutting edge and up with the state of play in other central banks or academe. That should be a short conversation. This is their <a href="https://www.rbnz.govt.nz/research/our-research-and-analysis/discussion-papers#sort=%40computedsortdate%20descending">entire list of published Discussion Papers</a> (the peer-reviewed work) in the last five years</p> <figure class="wp-block-image size-large"><a href="https://croakingcassandra.com/wp-content/uploads/2025/02/image-22.png"><img data-attachment-id="72561" data-permalink="https://croakingcassandra.com/2025/02/21/orr-at-it-again/image-346/#main" data-orig-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-22.png" data-orig-size="961,1236" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="image" data-image-description="" data-image-caption="" data-medium-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-22.png?w=233" data-large-file="https://croakingcassandra.com/wp-content/uploads/2025/02/image-22.png?w=700" loading="lazy" width="796" height="1023" src="https://croakingcassandra.com/wp-content/uploads/2025/02/image-22.png?w=796" alt="" class="wp-image-72561" /></a></figure> <p>not one of which is directly relating to inflation or monetary policy, and one of which was primarily written by authors from other agencies. It is slim pickings indeed, compared (say) to the previous five years (33 such papers).</p> <p>It was all pretty extraordinary, at one level, but also all too ordinary for Orr. Orr and his offsiders blustered and made stuff up again, and laughed along with the committee members in a very chummy sort of engagement. When there were decent questions (and Bidois’s were good but rare for FEC)….well, they just made stuff up again and actively misled Parliament. That is supposed to be a very serious offence – as Parliament’s website tells us (and a year or so even an MP was reprimanded for misleading the House) – but such is the diminished state of things in New Zealand, I don’t suppose there will be any more consequences this time than all the previous times. In a well-functioning democracy you might hope that the Minister of Finance would take to task a Governor who so obviously and deliberately misled MPs (including one of her own) but……no one now expects anything of Willis when it comes to the disreputable central bank and its Governor. One might even hope that the external MPC members – who do not work for Orr – might distance themselves from this shabby and dishonest conduct. But they seem to prefer the quiet life, and just go along with Orr, by default associating themselves with his standards.</p> <p>At the end of the session the discussion moved to productivity. It isn’t really the Bank’s field, and Orr’s own contributions on the subject tend to veer between mechanistic growth accounting stuff and the “failures” of this, that, or the other group of people in the private sector (today’s villains appeared to be people who took dividends from companies rather than reinvesting). His chief economist, who knows more about productivity, has already <a href="https://croakingcassandra.com/2024/08/28/wholly-inappropriate/">shown his hand as a bigger-government statist</a>, advancing personal political agendas under his Reserve Bank title.</p> <p>But today Orr was claiming that the Reserve Bank has a lot to offer on productivity (policy). Not, you understand, anything to do with the risk-weighted bank capital requirements (where he was blustery and dismissive without even being asked any direct question), sectoral risk weights etc (and where I suspect he is probably about half right in substance). No, what he had to offer was a central bank digital currency (CBDC). It was in development, could be in place by 2030, and would – he claimed – make a great deal of difference. It wasn’t at all clear how, despite his mutterings about how it would enable the state to deal directly with people – unlike, say, the way it pays welfare benefits now, and isn’t a CBDC a liability of an independent Reserve Bank, not something governments have access to? It would, we were told, “fundamentally change this society” – which is sort of what scares many of the more conspiratorially-minded sceptics, even though there is little reason to think such a product would meet with any material demand, or be at all widely used. It remains, in the <a href="https://croakingcassandra.com/wp-content/uploads/2024/07/submission-on-the-reserve-bank-of-new-zealand-cbdc-consultation-july-2024.pdf">words of successive submissions</a> I’ve made on the issue, a solution in search of a problem, and a bigger-government one at that.</p> <p>Orr’s words clearly excited one National backbencher who wanted to know when it would be in place, and what it would take. Orr’s response (in addition to the 2030 date) was “significant government support”. One can only imagine how much money (scarce taxpayer money, adding to the deficit) they are spending on this work (of course no one asked that) and wonder why it is that Nicola Willis has not closed it down already. </p> <p>Quite sad what officialdom has been coming to in New Zealand, and the apparent indifference of those whom we elect to hold officials to account.</p> <p></p> </div> <footer class="entry-meta"> <span class="comments-link"><a href="https://croakingcassandra.com/2025/02/21/orr-at-it-again/#comments">4 Comments</a></span> </footer> </article> </div> <nav role="navigation" id="nav-below" class="paging-navigation"> <h1 class="screen-reader-text">Post navigation</h1> <div class="nav-previous"><a href="https://croakingcassandra.com/page/2/" ><span class="meta-nav">←</span> Older posts</a></div> </nav> </main> </div> <div class="secondary widget-area" role="complementary"> <aside id="block-2" class="widget widget_block"> <div 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