I guess it will be an Act by the end of the day, but for now the short bill giving effect to a return to a single statutory objective for monetary policy is here. Yesterday’s parliamentary debate (first and second reading) is here, here, and here.
The heart of the bill is this clause
Note that this does not return things to as they were in 2018, keeping Labour’s addition of “over the medium term”. My own view is that references to time horizons are better kept for the Remit, which can be written in a more context-dependent way (sometimes it might be really important to get back to “price stability” – which isn’t 1-3% annual inflation anyway – really rather quickly. For example, after three years of inflation well above target?) With a bit more time, it might have been a good opportunity to simplify the 1989 bit of the wording as well. Simply “maintaining stability in the general level of prices” would be an improvement. But those are second and third order issues about this symbolic legislative change.
My bigger concern is that the legislation is not a complement to substance but a substitute for it. There is nothing wrong at all with symbolic steps, but if done in isolation they quickly come to seem like cosmetic distractions.
Take for example the Minister’s first reading speech
The bill is certainly a symbolic statement, but on its own it is nothing more than that. What is more, the Minister really should know that. There is nothing in the amendment that will, on its own, be “remedying one of the greatest stains of the outgoing Government and that is the stain of the cost of living crisis”. And there is nothing else even hinted at in the speeches from either the Minister or her associate (Seymour).
There has been a massive monetary policy failure in New Zealand in the last four years by the Reserve Bank of New Zealand (similar mistakes were made in many other advanced countries, but each operationally-independent central bank is responsible for its own country’s inflation rates). But, in part because there is a wide range of statutory legislative goals across countries and most of them ended up making much the same (really serious and costly) mistakes, it simply is not plausible to believe that things would have been materially different had that new “economic objective” been in place rather than the one that was actually on the statute books. There is no evidence at all to suggest that the monetary policy easing in 2020, the huge highly-risk LSAP punt, or the sluggish tightening in 2021 and early 2022 would have been any different at all, since the Reserve Bank’s own forecasts at the time (2020 and 2021) suggested to them that if anything what they were doing wasn’t really quite enough to keep inflation UP to the target midpoint.
This is all familiar ground but it is inconvenient ground (it appears) to the Minister who seems more interested in the rollicking political theatre of blaming her predecessor for his symbolic statutory amendment than in fixing our decayed and failing central bank. I read her speeches yesterday in both the first and second reading debates and there is no hint there that this statutory amendment is a first step in a process to fix the Bank or even to insist on some effective accountability for those whose decisions visited highly costly inflation and $12 billion of losses to the taxpayer on us. They used to talk of launching an independent review of Covid-era monetary policy. I was never entirely convinced of the case for such a review, and as I noted here recently if it is done the choice of reviewer will probably pre-determine the character of the final report, but it was a fairly consistent line from National. But there is no mention of it in yesterday’s speeches (the speech from the Associate Minister seemed more focused on the inflation of the Roman Empire than in actually fixing New Zealand’s central bank now).
The Minister (and her predecessor as Opposition finance spokesperson) has on several occasions been lied to by the Governor at FEC. The chair of the Board appears to have gotten away with lying to The Treasury, and getting Treasury to run spin for he and his Board have banned experts from serving as external members of the MPC. No external members have made even a single speech on monetary policy and inflation in their almost five years in office. The Board is stacked with underqualified mates of the previous government – a couple appointed despite, at the time, clear conflicts of interest, suggesting that not only the previous Minister but also the Governor and the board chair have at best a hazy sense of high standards in public life. Hardly anything is ever heard from the Governor on inflation – speeches from him on climate change are more common than those on the conduct of monetary policy. The Reserve Bank publishes little research, and is a bloated top-heavy regulation-fond expensive bureaucracy.
Not all of those failings could be fixed overnight even if the new government were so minded. The problem is that there is no sign at all that they are seriously interested in fixing any of them. This from a Minister and Associate Minister who did not support the reappointment of the Governor – a serious step for them to have taken then, but apparently meaning little now. There is no hint also that the Minister is going to reopen the selection process for the two external MPC roles falling vacant early next year. If she simply takes nominees who got through the Orr/Quigley/Board and Board recruitment agency process undertaken earlier this year, under the broad aegis of the previous government’s priorities/views, it is a recipe for things being no better in future. Either the nominees she is presented with will be amiable non-entities happy to be guided by the Governor, or (at best perhaps) people who were willing to keep their heads down and say not a discouraging word through the last four years of central bank failure.
Perhaps I’m being too critical too early? But if the Minister is at all serious about things being done differently in and by the Bank, yesterday’s speeches would have been a great (and easy) opportunity to have signalled something. It also hasn’t been too early for some other ministers to have written letters of expectation to agencies for which they are responsible, making clear the new government’s priorities around those agencies. But there seems to have been nothing from Willis.
Instead we get examples like this of her economic thinking
As economic thinking, the final sentence is a little embarrassing. There is little or no reason to suppose that there is any medium to long relationship (positive or negative) between the inflation rate and the unemployment rate (or “maximum sustainable employment”). One can have highish inflation and (sustainably) low unemployment or one can have low inflation – even price stability – and (sustainably) low unemployment. The record – across countries and across time – is pretty clear. But inflation – and especially unexpected bursts of inflation – is something the public dislikes, and for good reason. Getting and keeping sustainably low average rates of unemployment should be an important concern for governments, but Reserve Bank monetary policy has little or nothing to do with such outcomes.
Unfortunately there is quite a lot of muddled thinking around monetary policy and the expression of objectives. I could only agree with this line in the Minister’s first reading speech
Flexible inflation targeting, whereby the MPC has regard to the impact of monetary policy on the broader economy when determining how quickly to return inflation to target has been central to New Zealand’s successful inflation targeting regime for many years, and was the case prior to Robertson’s dual mandate hitting the books, regardless of whether there is a single or dual mandate, that remains the case.
and in fact giving expression to that generally shared understanding was one of the motivations for Labour’s legislative change in 2018. But, of course, the issue was never primarily about demand shocks and forecasting errors – like those of the last few years – that delivered us high inflation and unsustainably low inflation at the same time. Failures on the scale we’ve seen recently were simply never envisaged (and should never have happened). By contrast, supply shocks – that tend to drive headline inflation one way and unemployment the other way – aren’t infrequent at all and were always actively envisaged in the design and modification of Policy Targets Agreements over they years. In the face of such shocks it has always been the shared, usually expressed, understanding – and this dates all the way back to the oil shock in 1990 just a few months into the life of the 1990 Act – that faced with such shocks it would generally not be sensible or prudent to attempt to counter the direct price effects immediately, and that to do so would involve unnecessary and undesirable employment and output costs. There isn’t much of a sense of this in the Minister’s speeches – perhaps understandably as it veers to the geeky – but it is important nonetheless.
Finally, approaching the end of this post I wanted to offer a few thoughts on the Treasury’s Regulatory Impact Statement on the removal of the “dual mandate” from the Reserve Bank Act. At five pages long it is perhaps the best advert for the government’s decision not to require RISs for early pieces of legislation that are simply repeals. It leaves readers no better informed on the issues, offers no serious analysis, and actually muddies the ground in places. On the latter, for example, it correctly notes that Reserve Bank and Treasury view that the different mandate made no difference to policymaking over 2019 to 2023 (when the dominant shocks were understood to be demand shocks, likely to affect core inflation and unemployment in the same direction) but simply never engages on supply shocks (see previous paragraphs) or the flexibility long built into both central banking practice and the succession of Policy Targets Agreements. Since the political debate has further muddied this water – reinforced by half-baked media lines (of the sort I heard on RNZ this morning – it might be desirable for the new MPC Remit to make some of this stuff explicitly clear. There are short-term tradeoffs, but no long-term ones.
The RIS also repeats and endorses – and perhaps fed the Minister – the line that price stability is a “prerequisite” for achieving other objectives. It simply isn’t, and Treasury really should know better than to indulge what is not much more than misleading political rhetoric.
In RIS it is customary – perhaps even required – to look at three different ways of responding to the identified “policy problem”. The artificiality of this was never better displayed than in the Treasury RIS, in which they treat as a serious option using the reserve powers in the Act allowing the Minister of Finance to override temporarily the existing statutory economic objective, rather than amending the Act. Unsurprisingly, they recommend against using these never-used (dusted off for refreshing the memory every decade or so), which should never have been considered as an option in the first place – as not only would the market signalling have been terrible, but it would have gone quite against the direction the government was seeking (a permanent change).
Treasury ended up opposing the government’s legislative change, preferring to change just the MPC Remit (which the Minister can do pretty much any time he or she likes). Their only argument for this – eg they don’t seem to invoke any argument about reminding readers of statute of the wider context, or even that it is the Remit not the Act that is supposed to guide the MPC – seem to be a preference not to amend the Act (as if not amending the Act was a good in and of itself). They say “Treasury puts significant weight on the value of a stable and enduring legislative regime for the Reserve Bank” which (a) is weird coming immediately on the back of several years of extensive legislative overhaul around the Reserve Bank, (b) could be as easily seen as an argument for the government’s legislative amendment, which is closer to the “stable and enduring” legislative model that prevailed for almost 30 years, and (c) assumes recent reforms generally got things right, when there are clearly significant problems with the way the Reserve Bank Act reforms were done (including but not limited to making the underqualified board, which has no expertise in monetary policy, primarily responsible for holding the MPC to account and in appointing MPC members and the Governor).
Finally, Treasury seeks to invoke “international best practice” in defence of retaining Labour’s wording. In respect of legislative (or similar wording) they are simply misleading. All four of the most important advanced country central banks – Fed, ECB, Bank of Japan, and Bank of England – have a single statutory objective, even if often accompanied by wording designed to articulate something of why price stability matters. It is certainly true that some central banks have more explicit “dual mandate” wording and others talk openly about the interactions between inflation and employment, sometimes in “dual mandate” terms, but there is nothing out of step with the legislative amendment the government is putting through today. The Treasury explicitly tries to cite the US in its support, but while the Fed likes to talk “dual mandate” rhetoric, its actual statutory objective for monetary policy is (a) a single objective, and (b) one with very outdated – legacy of the 1970s wording.
“So as to” are the envisaged benefits of pursuing and achieving the specified single objective.
It was simply far from being Treasury at its finest, and if time was short there was no obstacle to writing a much better short paper.
As for the government it is early days, but the early signs are not great around the Reserve Bank. I’m quite prepared to believe the new government won’t accommodate more institutional bloat, and that their appointments will be no worse than those of their predecessors, but for now there are no signs leading a reasonable independent observer to expect anything much better about fixing the Reserve Bank (or our diminished Treasury for that matter).
UPDATE:
This is from a speech by the minister at the committee stage
The problem is that she contradicts herself. There are forms of inflation targeting where accountability might be really easy – any time CPI inflation is outside the target range, sack the Governor – but everyone has been agreed for 30+ years that that would not make sense and would generally produce inferior economic outcomes. In fact, the Minister herself agree because she is at pains to point out that the flexible form of inflation targeting (operated for the first 30 years) will be retained. In such a system it is not easy or mechanical to be able to exact accountability. These things -as so often in life – require judgement, and a willingness of ministers to exercise such judgement and, on rare occasions, act accordingly. Grant Robertson failure to do anything – and his decision to reappoint Orr and the 3 externals – is what made him party to their (central bank) failure.
