Despite urgent need for economic expertise, the Productivity Commission is at a low ebb. Photo / AP
COMMENT:
Early in the pandemic many of the economists at the Productivity Commission were called away (virtually) to help Treasury officials urgently try to understand the broad financial implications of the emergency. After that initial rush of analysis, some turned their attention to bite-sized investigations of Covid-related subjects like digital track and trace options. But the early scramble of work now appears to have been replaced by a surprising measure of slack at the independent, little Crown agency.
The work helping the Treasury has finished and the small Covid-related projects seem to be petering out. Some of the commission's team of roughly 20, mainly economists, are on leave, while others are pushing ahead with research assigned by the Government in January: an extensive investigation into how New Zealand can better foster big, exporting companies, known as frontier firms. A second Government-assigned topic of inquiry, due to be finalised in the first half of the year, has not materialised.
One piece of analysis the commission produced in May, following the five-day extension of level 4 lockdown, is especially illustrative of the hurdles it has faced to providing useful economic thinking in the midst of what is a colossal health and economic crisis.
The work, born of discussions with Treasury officials, found the costs of that April extension of hard lockdown were $740 million greater than the benefits; it was designed to show a technique for weighing health benefits against economic costs that could be used in future decision-making.
But far from being asked for anything more in the vein, or to refine the model, author Dave Heatley, principal analyst at the commission and seemingly the only public servant to undertake an actual cost-benefit analysis of any aspect of New Zealand Covid-19 policy was essentially ignored.
With no interest in follow-up work from the Treasury, Heatley was left to potter off to do some skiing in the Southern Alps followed by a spot of volunteer rat-catching in Fiordland. He recently returned.
It's hard to think of a better metaphor for the Government's studied lack of interest in formal analysis that seeks to understand the tradeoffs it's currently making between the economy and public health. And it helps to explain why, despite the urgent need for economic expertise, productivity at its namesake commission is at a low ebb.
The Commission is a Crown entity. It is independent in that the work it produces is not subject to political involvement, but it ordinarily works on two big research topics assigned by the Finance Minister, with the approval of the Cabinet.
In recent years it's tackled subjects like technological change and the future of work, and how New Zealand can transition to a low emissions economy. The work is a "deep dive" and typically takes a year or more to complete.
A second inquiry topic was due to be assigned when the pandemic hit. That's been delayed and is now expected some time after the October election.
The procedure by which topics are assigned usually takes months. It involves input from a range of government departments as well as outside researchers and the commission itself. Several parties familiar with the process emphasised that it would be unweildy to undertake in a time of emergency response such as this (the sources asked not to be named because they have no authority to speak on either the commission's or the Government's behalf).
Other observers, however, insist that now more than ever, the specialised economic expertise that exists within the commission needs to be better deployed.
Oliver Hartwich, executive director of the think tank the New Zealand Initiative, described it as, "an extraordinary time to leave the Productivty Commission out in the cold."
"They still have some of New Zealand's brightest economists... and especially in this situation, you would think the Government would make use of that brain power."
A good commission, Hartwich said, "would occasionally be a thorn in the Government's side no matter which party is in power."
There is scope for the commission to assign its own work, but practical considerations like budget mean the extent of proactively generated work is quite limited.
There is also a tension, heighted by the upcoming election. On one hand, the commission's purpose is to advise the Government on improving productivity. On the other hand, once it has produced a piece of work like the cost-benefit analysis of the lockdown extension it would be very difficult to proactively take it any further without creating an awkward rift.
Much of the Government's policy response to Covid has relied on modelling of the virus' spread by a team led by professor Shaun Hendy of the University of Auckland, a physicist and specialist in complex systems. Hendy has not welcomed the alternative perspective.
He and his team contest Heatley's analysis, arguing it fails to take proper account of aspects of the virus' spread and therefore the risk that leaving lockdown posed. Hendy said his team hopes to produce its own cost-benefit work, but to date it has been too consumed with epidemiological modelling.
The economists, however, have stood their ground. The work was peer reviewed both internally and externally. Reviewers included the commission's chairman Murray Sherwin and the Treasury's former cost-benefit expert and principal adviser Dieter Katz. Sherwin, who is due to leave the commission's helm in January, said he stands by the work.
The analysis sits on the commission's website, having been publicly released under the OIA, suggesting quietly but clearly that New Zealand has at least once paid an astronomical price for insurance (the price of extra lockdown) to mitigate a very small public health risk.
Even if there is room for disagreement in calibrating the model, as Hendy suggests, it's the kind of analysis that could be brought to bear every time the Government weighs prolonging an alert level. It could be used now as the country sits, with very little disease, at restriction level 2, and Auckland continues under heightened restrictions dubbed level 2.5.
Finance Minister Grant Robertson said he is aware of the commission's cost-benefit work and "I also note Shaun Hendy's detailed criticism of the report."
Robertson insisted that the Treasury has "analysed costs and benefits [of Covid-related policy] and provided advice based on that analysis directly to me."
The minister's assertion however appears to hinge on semantics. While Treasury has tallied costs like lost jobs and GDP for Covid-related policy settings, and has considered public health benefits like the speed and effectiveness of virus elimination, it has not undertaken what the department itself refers to as cost-benefit analysis, where monetary values are weighed against one another. Spokesman Bryan McDaniel is clear: "they have not been produced."
Productivity Commissioner Andrew Sweet also confirmed that the commission will pursue no further cost-benefit work: "We are not currently contemplating further cost-benefit analysis. To usefully inform decision making such analysis needs to be carried out as a core part of the policy development process. It is therefore best undertaken by agencies such as the Treasury who are more closely involved in that process."
The commission now finds itself at a difficult crossroads. It was set-up a decade ago to tackle the puzzle of New Zealand's longstanding, low productivity, a measure of how poor we are, relative to our OECD peers, at turning resources, especially our labour, into goods and services and ultimately into higher living standards.
And though the commission was created at the behest of the Act Party, it enjoyed what many describe as a strong relationship with National Finance Ministers, Sir Bill English in particular. But its appeal to the current Labour coalition is less certain.
Sweet insisted that the commission is continuing to undertake "self-initiated research in a number of areas, including in relation to New Zealand's response to Covid. We have also shifted some staff to bolster the team working on our existing Inquiry on Frontier Firms, and have some staff on secondment and long-term leave."
The coming months will be important. Sherwin's replacement will be selected by the Minister of Finance, a process that's expected after the election. Someone who can provide both "thought leadership" and navigate Wellington's politics will be crucial, according to economist and blogger Michael Reddell.
'[This is]...an incredibly difficult decision, felt deeply across our small organisation.'