This letter is discussed in   What Happened in July 1984: and the Aftermath: (OCR of Original)
                                   
Keywords: Political Economy & History;
 

DAVID SHEPPARD’S LETTER OF JULY 13, 1984.
 

                                  DEPARTMENT OF ECONOMICS
                                  13 June, 1984
The Rt. Hon. Sir Robert Muldoon
Minister of Finance,
Parliament Buildings,
Wellington
Dear Sir Robert,
     Thank you for the acknowledgment of my last letter.
     I understand that you pay attention to comments that critics of the Government’s economic policy make on the media. Reluctantly – as I find my own academic work far more interesting – as a public exposure economist and as a critic, it is fitting that I elaborate on one of the comments I made on TV on Sunday night as it is important that you and your advisers understand It. Regrettably, Ian Fraser did not ask me why I saw no reason why Hew Zealand should adopt a ‘financial policy’ which directly conflicts with the conventional accepted orthodoxy of letting interest rates rise to crowd out inflationary trends. I understand why: he did not think, rightly, that most viewers would understand my explanation, and therefore did not wish to solicit my response that conventional orthodox economics is simply designed to explain how a ‘free market’ mechanism works in a world which does not exist. It – neoclassical macro economic theory –  is certainly beautiful; it has a well-ordered determinate structure. Regrettably, however, it is based on premises and postulates which are simply completely at variance w the world in which we live; their treatment of the concept of time is ridiculous; they assume there is some ‘God’, called a Walrasian auctioneer, who makes sure that prices are set so that markets clear, and they seem to have a fixation that we Jive in a one-commodity world, rather than in a multi-commodity world in which many prices are set by the hand of man, the corporate marketing division, and that the adjustment of them is a protracted and expensive business.
     This means that the concept of ‘price’ as expressed by a price index is, as you have recently pointed out in criticising P. Harris’s contentions, often not much better than a vacuous concept. As such, its movements have far more to do with a charge in the distribution of income, that is a change in the rewards paid to various producers of output and services (income relativities) than with serving to eliminate excess demand or excess supply in the marketplace. The only exception to this case is when the price index is relatively stable (not much more than say 2 to 3 percent per annum change. Only then does the national unit of account, the measure of value in exchange, proxy a useful measure of an invariant standard of value in the marketplace. Out of this context, when the so-called indices are bouncing along at rates of increase of say 10 percent or more per annum, our measuring rod of value is distorted, and opportunities exist which are taken up to make price changes rather then output charges a n of appropriating extra profits or extra wages, over and above the amount due for increases in our shares of the annual flow of goods and services produced.
     These contentions, mine, have distinct and different implications for successful economic management .In essence, in circumstances when the price indices are rising at an unacceptable rate, the State simply cannot afford to reject the consideration that incomes, prices, interest rates and exchange rates need to be managed in the collective interest. I point out that there is a new line In economic theory which supports these conjectures. It is called post-Keynesian economics and is advocated by sundry professional economists such as A. Okun, Paul Davidson, A. Eichner, A. Lerner, H. Kalecki, all of whom your neoclassical advisers would be hard-pressed to dismiss as nut cases, in as much as they take the time to consider the argument presented.
     Obviously, however, while these post-Keynesians do produce robust justifications to State-imposed, that is determined, price, income, exchange rate and interest rate settinq, they ado two important qualifications: a) the consequences of the setting must be made on a consistent basis – – arbitrary decisions, that is those which have been made without such an assessment, may well make matters worse; b) such State setting may be used malevolently, and in any event inevitably does create an expense in the form of the State’s appropriation of the right of the seller or buyer to determine the price which he is prepared to take or offer for goods/services available in the marketplace. Liberty, that is the freedom to choose, is also an item of value.
     I will not write more now except this. The key to your advisers’ difficulty in failing to understand why the State must have and at times exercise the right to determine prices in the marketplace is that they have overlooked the importance that Ricardo ascribed to trying to always make sure the national unit of account, the $NZ, is a vital element in the conduct of economic management. If they can be brought to considering this critical concept, then they too will gain some appreciation as to why there is a case to be answered as to why New Zealand should adopt, in certain circumstances, market imperfections to condition their laissez-faire fixation.
                             Yours sincerely,
                             D.K. Sheppard,
                             Professor  of Money and Finance

A memoir as explained below.

Keywords: Political Economy & History;

The 2006 biography, Roderick Deane: His Life and Times by Michael and Judith Bassett twice mentioned me. On both occasions the statements were wrong on matters of fact. Had anyone believed the claims they would have thought ill of me. While the facts related to events that occurred in 1984, they remained of contemporary relevance, since at least two of the reviewers of the book explicitly referred to the first mention, especially associating me with it.

I asked the publisher (Pearson Ltd/Penguin) for a correction and apology. Because I thought this a scholarly matter I did not ask for damages, despite the defamation involved in the errors.

<a href=article943.html>Eventually there was settlement involving an apology and some actions to reduce the likelihood that future scholars would repeat the errors.</a>

For reasons that are unclear, it took an extraordinary time to settle the matter – over two years – even though it soon became apparent that there was no physical evidence to support the book’s allegation.. In the course of the negotiations, it seemed that it would be necessary to go to court (although why the other side would want to take this course remains a mystery). So I prepared for my lawyers an account of the events as I understood them. The coverage was wide, in part to set a context for the case, but also to demonstrate how inaccurate the book’s claims were.

As further evidence was accumulated and added, the report morphed into the following account. I guess too, because I am interesting in writing it has also become more ‘literary’ in style.

It should be emphasised that it is the account of events in the period after June 1984, as it affects me. There will be others with a different perspective who will tell the story with a different balance. Comments would be welcome.

I have done my best to be as accurate and comprehensive as possible. However some conjectures are necessary, (especially as the original intention was to give counsel as coherent a story as possible). I regret any mistakes and am happy to correct them in future versions.

Finally I am grateful for all those people who have assisted with the development of this paper, especially those who have patiently responded to my insistent questioning. I am also grateful to my lawyers John Tizard and Sandra Moran.

Monday morning, 16 July, 1984 was bright if brisk. The sun was shining, and I was happy, an ecstatic moment which has stayed with me through all these years. I recall the sentiment forming as I walked to work through the then Ron Jarden Memorial Garden in front of the Anglican Cathedral, having just walked through parliament grounds. ‘It’s all over, thank God, it’s all over.’

I was referring to the election of the fourth Labour Government on the previous Saturday night. For the past decade I had been among those who had opposed Muldoon’s policies, and found myself in public saying so. It was not a matter of choice. I could have said ‘no’ when journalists asked me to talk on economic issues or when other opportunities arose. But I have never been one to flinch (although tactical decisions are not unknown). In any case, from the age of twelve I have wanted to be a teacher, so when the opportunity arises to explain to the public the little I know, I am happy to take it, even if it means criticising the government’s policies.

Why I was so grateful was that the uncomfortable situation I have just described had, I thought, ended. Sure, I would still be called on to talk to the media, and sometimes I would criticise government policy. But at least there would be, I expected, a regime of moderate economic orthodoxy in which honest debate could take place. I supposed too – I dont recall articulating this at the time, but I am sure I expected it – that the pall of the repression of dissent which hovered over the country would be lifted. After all, the new Government had talked about the need for reconciliation and consultation instead of conflict and oppression.

I am not particularly policy focussed. That may surprise many, but my attitude to policy is a bit like when I did applied mathematics. We would be required to solve the substantive problem (say a theorem) and then as an aside – supplementary marks to separate out the top scholars – to prove an associated lemma. For me policies are like the lemmas. Resolving them shows you have understood the underlying problem.

I guess my reputation for being deep into policies is because the public wants to debate the policies, not the underlying analysis, so I am usually asked to share my expertise in that context – to comment on the lemma. In addition policy is yet another empirical phenomenon which has greatly intrigued me, so it is not surprising I have written at least four books on the policy process. It is also true that occasionally I have created policy – sometimes because a client has asked that of me. I am often astonished when my policy conclusion is (even partially) implemented – perhaps I have understood the problem and its analysis. There is nothing wrong with contributing to policy formation. It is just that it is not my passion.

The New Zealand Institute of Economic Research

In July 1984 I was the director of the New Zealand Institute of Economic Research, where I led a team of a dozen economists. My first salaried job had been as a research assistant at the NZIER between 1963 and 1966, before I went overseas. I learned much of my craft as an economist there. When I came back from Britain to a job in Christchurch I kept in touch with the NZIER and visited it whenever I was in Wellington. A friend said I had a special affection for the NZIER. True: I felt privileged to be appointed director in 1981.

While I found the management involved in the Director’s job stressful, I loved the research – especially as we were building up a research program around a team of quality researchers. The ecstatic feeling outside the Cathedral was because now I would at last be able to focus entirely on that task, in what I expected to be a more benign environment.

I loved the job. It was really the only job that I have really cared about (as distinct from my profession which is an independent scholar – an intellectual – doing economic and social research and which I even more greatly care about). I went to the NZIER planning to break the pattern of five year turnover of directors, because it needed greater stability to develop research programs. It still grieves me I had to leave after five years. This memoir is an expression of the grief.

There is much I could write about the NZIER, but for the purposes of this memoir the reader needs to know that it was governed by a board of trustees, to which the Director reported. On that Board in 1984 were Rod Deane, Deputy Governor of the Reserve Bank, and Jas McKenzie, Deputy Secretary of the Treasury, each representative of their institutions. The other trustees were businessmen, but the influence of the two officials was weighty, given the political power and the reputation of their departments, and each’s great talents. Moreover, directly and indirectly, their departments were influential in the funding of the NZIER, with the Reserve Bank making an annual grant, and the Treasury providing soft contracts (whose purpose was to promote research without an immediate payoff for the client).

Since he appears often in the following story I need to say a little about Deane. He has recently been the subject of a Penguin published biography , Roderick Deane: His Life and Times, written by Michael and Judith Bassett, a book which comes into this memoir.

A number of reviewers described the book as ‘hagiographic’. Deane deserved better than that, or at least his work as an economist does, for I am not so well placed to judge his subsequent career as Chairman of the State Service Commission from 1986, and then in the corporate sector.

A graduate of Victoria University of Wellington, Deane worked primarily in the Reserve Bank of New Zealand (with overseas stints) until he went to chair the SSC. In the 1970s as chief economist he built up an impressive research team, perhaps only surpassed in New Zealand applied economics by the (somewhat more poorly funded) one I ran at the NZIER. (Its achievements are reported in my valedictory speech as director in June 1986, The Exchange Rate Since 1981, Performance and Policy, and form the basis of my 1997 book In Stormy Seas: The Post-War New Zealand Economy. Incidentally, my inaugural speech as director, External Impact and Internal Response: The New Zealand Economy in the 1970s and 1980s, sets out the program.) My admiration of this achievement was such that when in 2007 I was asked who one of the seminar rooms at the RBNZ should be named after, my first nomination was Deane. (It was rejected because those named had to be dead.)

Subsequently, as Assistant Governor, Deane supervised monetary policy, especially the liberalisation of the monetary system. Although there were critics – we meet David Sheppard below – and although some of their criticisms may well be correct, the program of monetary liberalisation was his major achievement as an economist. Deane was made a Distinguished Fellow of the New Zealand Association of Economists, one of only two out of the first ten who did not have mainly a university career.

Devaluation

The other piece of background the reader needs to know is about the devaluation debate of those times.

I had spent a lot of time researching the exchange rate, probably more than any other New Zealand economist. To me it is one of the key prices in the economy (I would say the real exchange rate – the relativity between external and domestic prices – is the key price in a small open multi-sectoral economy like New Zealand, but we dont need to go into that detail.) You can get a sense of how important it is from my book In Stormy Seas: The Postwar New Zealand Economy. By the early 1980s there was strong research evidence that the exchange rate was over-valued. In my judgement the best way to deal with this was a reduction in the nominal exchange rate – a devaluation.

One alternative was the use of subsidies to the tradeable sector. The government before July 1984, under Rob Muldoon, had had such a strategy but the interventions were so widespread and complex that no one knew whether they were working (although they contributed to a loose fiscal stance). Another alternative was a process of disinflation, reducing the domestic price (and wage) levels relative to the rest of the world (which was sort of what Muldoon’s price freeze was about).

I wont go into all the intricacies, but there are two points to be made. First, I was aware of various alternatives, but had chosen what I judged the most practical. Second, observe that I had a predilection for using market mechanisms. I wont develop that here. I have written pages and pages in many other venues.

About the time I began as director of the NZIER New Zealand economists Len Bayliss and Frank Holmes had advocated devaluation and had been publicly criticised by Muldoon for being so presumptuous. Given my research program, I concluded that a director of an economic research institute not allowed to talk about exchange rate policy was in an impossible situation. It would be like a biologist not being allowed to talk about evolution. Accepting such a limitation would be to flinch.

However, I found that Muldoon would tolerate public discussion about the exchange rate, providing one did not advocate an immediate devaluation. Which was very comfortable for me, since my interest was getting across the analysis to the public rather than propounding a policy. When a journalist asked when New Zealand should devalue – typically following a long discussion – I would say ‘yesterday’, which was hardly reportable.

But to be clear, I thought the New Zealand exchange rate should be devalued at an opportune moment. I also recognised that for a devaluation to succeed other policies were necessary. The content of my public contributions could easily be read to get this conclusion.

The July 1984 Devaluation

I have written on the July 1984 devaluation so I need to make only a few pertinent remarks here. A post-election devaluation was always likely, particularly as that is exactly what happened when the Australian Labor Government had been elected a year earlier. The business sector concurred. The day after the election was announced (on June 14) there was a ‘run’ on the New Zealand dollar, as business became increasingly reluctant to hold New Zealand dollars, preferring to hold foreign currencies (such as the US dollar). This meant that the Reserve Bank had to buy New Zealand dollars in exchange for the foreign currency. Since it held only a limited supply of foreign currency, it was soon running out. You could say its foreign reserves had the runs.

The officials’ advice on June 17 was to devalue by 15 percent. I have since seen the official papers, but I was told on the Monday or Tuesday after (18 or 19 June) by Deane that the financial markets knew that the officials had given advice to devalue. I did not ask how they found out. (Incidentally, it was perfectly appropriate in those days for the Director of the NZIER to ring a senior official for guidance as to the government’s – or maybe the officials’ – position on public questions. This backgrounding would inform my commentary, but I was always discreet about it. There were journalists who worked with officials on the same basis.)

Muldoon rejected the advice. He was strongly against devaluations anyway, but to have devalued a short time before an election would have been a political calamity. He also rejected advice to tighten the exchange restrictions. This is not unimportant, because there was a view – not mine – that the Reserve Bank’s failure to do so worsened (or even caused) the subsequent devaluation. Whether tightening would have had much effect is beside the point here. The officials were directed not to tighten by the minister to whom they were accountable. It would have been constitutionally quite improper for them to ignore that direction.

The option Muldoon chose was to sell the foreign currency forward. This meant the Reserve Bank would not have to supply the currency immediately, but in, say. a month’s time. Perhaps by then the Reserve Bank (and Treasury) would have liquidated (converted into currency) sufficient of the foreign assets they had and been able to use the currency from those sales to cover the forward contracts. After the election, and perhaps before, Muldoon took the view that once businesses realised there would be no devaluation they would ‘unwind’ their foreign exchange positions, converting them back to New Zealand dollars. It is necessary to go through these murky mechanics because Muldoon was not alone in this belief. Some of the non-officials who appear later in this memoir seem to have held a similar view. I did not.

Once the decision had been made for the Reserve Bank to supply the forward exchange, the financial markets quietened down, especially as they knew that they did not need to purchase forward exchange until closer to the election. (Purchases were costly because they involved an interest rate penalty.) They made an unnervingly large set of purchases in the week before the election.

So the financial sector understood what was going on, as did Labour’s economic advisors to whom I spoke. They were very proper, and gave me no hint as to what they expected the incoming government to do. But one was left with the clear impression that they understood the problem, and were favourably disposed to a devaluation (in ‘appropriate circumstances’, of course).

However, many journalists do not seem to have picked up what was going on. I recall talking to a business journalist on 13 July, the Friday before election day. We were standing next to Broadcasting House on Bowen Street. I said something like ‘I hear there is a bank in trouble’. He said, ‘you mean one of the trust banks?’ I did not say the Reserve Bank across the road was the one which I in mind.

To the journalist’s credit, he rang me on the Sunday night after the election and said ‘Is this country in meltdown?’, a colourful enough expression for the currency crisis underway. I did not ask how he found out. I have since heard a senior journalist was rung by an official the previous Sunday pointing out that the lights on the top storey of the Reserve Bank were burning – a standard term for suggesting that officials were working late into the night on a crisis.

There was a constitutional crisis over the next few days with the outgoing government led by Muldoon unwilling to devalue, and the incoming government led by David Lange not having the legal power to do so. It was resolved on Wednesday 19 July, by Muldoon, under instructions from Lange, directing the officials to devalue by 20 percent (more than the June 17 recommendation in part because it was necessary to show increased credibility).

(Allow a deviation. Because of the 1983 Australian parallel I had realised there could be a constitutional problem, and had consulted some lawyers during the course of the election campaign as to the options. But it was a very different constitutional crisis.)

The Letter

Thus far I have relied upon my personal recollections (which could be more detailed if necessary) and the documentary evidence (which could be elaborated). However there were some other activities in which I was not involved and unaware of at the time.

Early on Monday 16 July, the same day I was transported into the paradise of the possibility of getting on with my research, a group of economists – Geoff Bertram, Merv Pope and David Sheppard, all of whom appear again in this memoir – talked to Jim Anderton (president of the Labour Party) and Anne Hercus (who chaired the party’s policy council) about the exchange rate crisis. They were encouraged to get in contact with Lange. They were turned back by officials – the constitutional justification for this is unclear, since the new government was not sworn in.

It may be that, unable to gain physical access to Lange, some of them wrote a letter to him in that week – most likely on the 17th. At least Deane claims that Lange told him there was such a letter.

According to the biography, a ‘clutch of left-wing economists, including Brian Easton, David Sheppard, Mervyn Pope and Suzanne Snively, wrote to Lange blaming Deane for the foreign exchange crisis and suggesting he be sacked’. (p.115) [It is footnoted that ‘Deane told the authors in February 2005 that Lange showed him the letter a few days later. Snively later apologised to Deane.’]

The Bassetts had not seen the letter when they wrote this, and have not been able to find it when subsequently challenged. Instead the Bassetts state the existence of the letter with no caveats, relying entirely upon his memory of Deane’s claim.

In the course of the dispute which precipitated this memoir, I looked for the letter. Bertram (a senior lecturer at Victoria University of Wellington) and Snively (who, at the time, was working for a sharebroker) insist they did not know of any such letter until it was mentioned in the Deane biography. Unfortunately Pope (who also at the time was a senior lecturer at the university) and Sheppard (who was the university’s Professor of Money and Banking), are dead, although there are contemporaries who surely would have known about it and had no recollection.

The closest the search got to finding any letter which could conceivably be that to which the Bassetts were referring proved to be <a href=article945.html>written by Sheppard to Muldoon</a> (with copies to various officials) on 13 June 1984 (the day before the election was called) commenting on various monetary policy issues. Graham Scott, Assistant Secretary of the Treasury, responded on 24 July (after the election), and Sheppard replied on 30 July. The file sequence (held by Bertram) ends with a six page ‘Over-view of the Exchange Rate Crisis’, including a three page appendix‘History of Devaluation of the New Zealand Dollar with Respect to the SDR 1973 IV to 1984 July’, signed by Sheppard on 31 October, 1984.

This last paper’s tone is academic but defensive. It argues that the official advice was of high quality from June 16, when the run on the currency began, but it is critical of the advice before then. One wonders whether Sheppard had concluded he had overstepped the mark in some other (not necessarily written) communication and needed to withdraw a little. It could be that he is the implicitly referring is to a letter he wrote in the first week after the election week (commencing 16 July), but there is no letter from that period by Sheppard (or anyone else) among the Bertram papers.

I have contemplated whether the letter the Bassetts were referring to could have possibly been the letter to Muldoon just preceding the election. It seems unlikely, but I have tried to make the strongest possible case that it was, for Sheppard’s letter of June 13 is the closest we get to anything like the letter the Bassetts mention.

Suppose Sheppard had sent a copy of his June 13 letter to David Lange shortly after the July 14 election, perhaps with a hand-written comment. (In 1984 VUW economists did not have personal computers, so it would not have been a simple matter to rewrite an earlier letter.) However, it could not have mentioned the foreign exchange crisis which began after the election was called (on June 14) and happened a month later. In any case it would involved Lange reading through two pages of quite dense economic argument and interpreting with considerable subtlety the final paragraph with its implications that the officials were wrong.

But the only reason I make such a tenuous argument for this letter is that this is the only possible one we have. The lack of Exhibit A – the letter – raises severe difficulties for the Bassetts’ account of the events. What did it say? Who signed it?

It is possible that Sheppard wrote a letter of which there is no record. Suppose he sent it to Lange on, say, 17 July (the day after the group were turned back by the officials). It probably argued against the need for a devaluation.

How might it claim that Deane caused the foreign exchange crisis? The Reserve Bank had delegated the administration of the foreign exchange system to the private foreign exchange dealers. Deane was the responsible Reserve Bank manager. Perhaps a means of resisting the run on the New Zealand dollar was for the Reserve Bank to withdraw the delegation and go back to administrating the system itself, using the opportunity to slow down individual transactions. (Apparently Bertram and Pope believed this at the time, and pursued the matter with the Reserve Bank in August 1984.)

The point here is not that this policy would have worked, but that Sheppard, say, believed it could have worked. In which case he might have written so to Lange, commenting that because the officials had not tightened exchange controls they caused (or worsened) the crisis. It is possible that Sheppard went as far as recommending that Deane be dismissed from his job because of this failure, although that is not necessary. Perhaps Lange concluded that was the implication of the letter.

This is all conjectural. I do not know whether Sheppard expressed all these beliefs to anyone at the time. (His closest colleague, Jan Whitwell – who being in Palmerston North at that time was almost certainly not directly involved – is also dead.) However if there was such a letter, it would explain the defensive nature of Sheppard’s October memorandum. Perhaps he had been earlier confronted with the sentiments of the letter by an official. He then obtained the official record under the Official Information Act (as I was to also do) and discovered that officials had recommended the tightening of the exchange controls, but had been turned down by Muldoon. Rather than a full backdown, he shifted his position to argue that while their advice was sound from June 16 when the run began, it was not satisfactory before.

Of course this is conjecture about events which happened more than two decades ago. We have no such letter. But I have used approaches which historians investigating events two centuries ago and more ago might use. It is, I submit, currently the best account which fits all the known facts. It is possible that new facts could turn up and we may have to modify – or radically revise – this account. So be it. Setting this down allows us to get on with the story. It will not depend on this conjecture.

(I add that I am somewhat embarrassed to have a theory about contemporary events which depends on implicating a dead man with so little direct evidence for his involvement. Perhaps I should say that the conjecture involves no impropriety on Sheppard’s part. )

Could anyone else have signed the letter? Snively insists she did not write or sign it, and has no recollection of the apology mentioned the footnote. The best explanation of that event may be that Deane thought she wrote (or signed) the letter, raised it with her perhaps a little crypticly, and Snively, not understanding his point (since she had no inkling that such a letter existed), apologised for the intrusion into the officials’ domain on 16 July.

Noting that Bassett says there were other economists, I have asked Bertram, Bob Buckle and John Zannetti – each of them a possible candidate because they were colleagues of Pope and Sheppard. Each denied knowledge of the letter. Bryan Philpott, who is also dead, never mentioned such a letter to me.

In seems unlikely that Pope would have written a letter. Both Buckle and I think it would have been out of character, not so much because he may not have held some or all of the views in the letter (we dont know what they were), but Merv did not function like that. He was so deliberate, so careful, so scrupulous in coming to a conclusion. In January 1985 I asked him and Buckle to write a article for the NZIER Quarterly Predictions on exchange rate policy, and got an interesting enough contribution, but without any policy conclusion. As editor I needed one to offset a companion article that vigorously advocated floating the exchange rate. I had to insist they include one. It was slowly and reluctantly provided. Even then the recommendation was cautious

I did not write or sign (or even see) any such letter. I am absolutely sure of that.

In any case the circumstantial evidence is overwhelming. First, I was not in contact with Sheppard or Snively in that period. I may have talked to Pope, since he was an associate of the NZIER but I have no recollection of doing so in the post-election week. If we did meet we did not discuss any approach to Lange – that is the sort of thing I remember. After all, my inclination was to butt out.

Second, the letter does not express my beliefs. I favoured a devaluation, I thought the devaluation was forced on the government by the events from June 14 and not the consequence of a single person (perhaps excluding Muldoon). I certainly did not think that Deane should have been sacked for the actions he took during the exchange rate crisis. That remains my view today having seen more of the evidence.

Third, it is not in my character to sign joint letters. And even more certainly not ones attacking someone else in the manner reported (assuming it did).

Finally, it would have been utterly irresponsible for a chief executive of the NZIER to have written such a letter, especially given that it appears to have recommended that a member of the board to which he reported should be sacked.

So how did I get mentioned by Lange? Suppose that such a letter was written by someone or other. Deane obviously did not read it. Perhaps Lange waved it in front of Deane (so Deane saw the letter but not its contents – this justifying the Bassetts’ ‘showed’). However if he had, Deane would have quite properly asked to see it. He would have immediately seen that the signatories did not include Easton and Snively (of that we are certain). So the reasonable assumption is that if there was a letter, Lange told him about it but did not show him the letter, and that the Bassetts’ ‘showed’ is not precise.

Given Lange’s speaking style, it is possible that he was confusing, and Deane did not quite understand what Lange had said. But that does not explain the introduction of the names of two economists who definitely did not sign the letter.

The most plausible account I can think of, is that Lange was being witty and/or mischievous. A possibility – remember we can only guess at the contents of the letter and Lange’s exact words – was that Lange was warning that while Deane was his adviser, he could obtain advice from others if Deane did not perform well. Perhaps then Lange may have mentioned some names such as Easton and Snively who had nothing to do with the letter, as well as Sheppard and, perhaps, Pope, assuming they were its writers.

Why did Lange mention me and Snively? He knew Snively socially. I hardly had interacted – or would interact – with him. Perhaps he mentioned me because I was a prominent economist. I think it unlikely that Lange knew of the Talavera Group, the non-official group of economists which Douglas reports in Towards Prosperity, had been set up before the election to give Douglas advice. It included Bertram and Snively, and met at her house in Talavera Terrace. I lived in Talavera Terrace too, but was not a member of the group, and did not know of its existence until the Douglas book. Pope and Sheppard were not members either.

There is another possibility. Recall that Bertram, Pope and Sheppard had arranged to see Lange on the Monday morning. Presumably Lange knew. Perhaps he was referring to them, knowing that they were available for alternative advice and a slip of the tongue replaced Bertram’s name with mine. But why, then, did he include Snively?

As every writer knows, a poorly articulated statement can easily conflate two independent ideas. Consider the sentence ‘I can get advice from Easton (or Bertram), Pope, Snively, and Sheppard who wrote a letter.’ Does the ‘who’ refer only to Sheppard or to all four? Would Deane necessarily interpret the spoken sentence the way that Lange intended?

If this conjecture is near correct, there is a further twist. Lange was reminding Deane, his very recently acquired adviser, that there was the possibility of alternative advice if Deane’s was not satisfactory. However Deane may have perceived the remark as a threat to his position. Especially in this early stage of the adviser-advised relationship, the threat that officials most fear: to be replaced by other advisers. If that was the drift of Lange’s remarks, it added to the concerns that Deane would have had. In fact he became a trusted adviser of the Labour government. (There is an irony in all this. Deane was being criticised because he followed out the instructions of the politician to whom he was accountable. As a result Lange was warning Deane that if he did not follow out such instructions in the future he could be sacked.)

This is all conjecture. I have made it, in order to suggest how Deane could have in good faith been misled by Lange as to my involvement in the episode. There are other possible conjectures. Sorting out between them requires more evidence.

Of course the above has presupposed there was such a letter, possibly sent by Sheppard. Apparently since the publication of the book, the Bassetts have looked through Lange’s files, and could not find it. (Did they observe the Sheppard letter of June 17, if it were among them?)

Moreover, and perhaps decisively, journalist Dick Griffin knew of the rumour of such a letter (apparently it was well known among one Wellington group, which did not include me). About five years ago, so he told me in late 2006, he raised it with Lange who absolutely denied the existence of such a letter.

Even so as a letter from Penguin stated ‘[T]he fact remains that since 1984 Roderick Deane has thought that you did call for his removal as deputy governor of the Reserve Bank.’ (1 September 2006)

Belief is not a proof of its veracity.

The Devaluation Enquiry: October 1984

Snively was appointed to the board of the Reserve Bank in 1985, which would hardly have been appropriate, had she written the alleged letter, unless the Government wanted to sack Deane from the Deputy Governorship. However we know he retained its full confidence, as indicated by his appointment to chair the State Services Commission in 1986.

At some point, as already mentioned, Deane probably confronted Snively with her supposed contribution to the alleged letter, to obtain some sort of satisfaction. But despite for almost two years remaining a Trustee on the NZIER Board to which I reported, until he went to the SSC, Deane never raised the matter with me. I did not learn of his belief until I saw the statement in his biography written by the Bassetts some 22 years later. It has changed my view of various things which occurred since.

In September 1984, a parliamentary select committee had begun an enquiry on the devaluation. It was chaired by Anderton and included Muldoon. In my view, at the time, it was quite inappropriate because Muldoon was an inquisitor rather than being a subject of the inquiry. The Bassetts’ biography of Deane contains the following:

“Between them, Muldoon and Anderton tried to make Roderick Deane the principal scapegoat for devaluation. Deane had always been direct with Muldoon, and knew how to apply pressure to him. Muldoon hadn’t liked his advice, and always thought he knew better than professional economists. In left-wing circles, several people, including Brian Easton of the Institute of Economic Research, had identified Deane as a proponent of deregulation and a threat to the old-style economic orthodoxy. On the extreme left, rumours abounded of plots to use the devaluation crisis as an excuse to undermine the welfare state. Anderton clearly believed that some officials – he didn’t name them – had leaked information to the press in such a manner that they created a run on the dollar that ended in devaluation, which in turn provided an excuse for the policies that ensued.” (p.122). [The footnote is NZPD vol 457, 3 October 1984, p.781.]

Why I am included in this paragraph is unclear, for the reference appears gratuitous. The fact is that I did not ‘identify’ Deane this way, in October 1984 or at any other time. The Bassetts have been unable to provide any evidence that I did. The expressions ‘deregulation’ and ‘old-style economic orthodoxy’ are not even terms I would use. (I eschew ‘deregulation’ because markets are a regulating mechanism. I use the term ‘(market) liberalisation’.) The Bassetts may mean Muldoon’s economics were the ‘old-style economic orthodoxy’ but I did not think they were ‘orthodox’. Arguably these otherwise unnamed economists could say I too was a ‘proponent of deregulation and a threat to the old-style economic orthodoxy’, as my writings (in say The Listener, would testify). So why would I need to identify Deane in this way?

Although the following sentence probably is intended to exclude me, I mention that I did not believe ‘the devaluation crisis [was] an excuse to undermine the welfare state’. I did not even know of these rumours. It is unfortunate that the allegations are so vague we have no idea who might be involved.

In any case, my (marginal) involvement in the devaluation enquiry contradicts the sentiment. The parliamentary enquiry lasted one day, before it was aborted by the government. In that day Deane was interviewed by the select committee. (Perhaps it would be more accurate to say that he was ‘vigorously cross-examined by Muldoon’.)

A short while after, I was rung by a journalist from Truth, who said he had the transcript of the select committee’s discussion. He did not understand some bits of it, so he asked whether he could come and talk to me. I said ‘yes’, but I had a problem. Being involved in the leaking of a select committee report would be a contempt of parliament, and could – I well recall contemplating this – lead to my ending up in Mt Crawford. Muldoon might be vindictive enough to see this happened. On the other hand it was important that the public was given an accurate account of the proceedings, and apparently some expertise was necessary. So I set these things out to myself in a memorandum, which I would, if necessary, table to the Privileges Committee of Parliament.

My memorandum shows I was largely unaware of various issues that the above paragraph by the Bassetts covers. Had I known, I would have expected the Privileges Committee to ask me about them – recall I had no idea what was in the transcripts – and I would have covered myself in the memorandum. The reader may be surprised that I did not know what was going on. The truth is that while I try to keep up with the rumour mill – I am not a gossip groupie, but I need to know about such things – I was retreating into running a research program and was not greatly interested in the politics.

It turned out the Truth reporter understood very little about the economic issues covered by the transcript. So we went through it, literally line by line, with my patiently explaining (sometimes repeatedly) what each meant. Despite my explanations the reporter was obsessed with the view that Deane had done some wrong (as I recall, causing the devaluation, but I am not sure it was exactly that). Eventually, after we had been through the transcript perhaps three times, I said ‘just where in the transcript does Deane say that?’ He looked at me in amazement and said ‘He tricked me’, and the ‘he’ was expressed in a way that I knew immediately who had leaked the transcript and a wave of relief swept over me. There was no danger of me going to jail. Muldoon would have been very disappointed when Truth report focussed solely on the fact that some of the financial institutions were illiquid during the month before the election, and some depositors’ savings were, perhaps, threatened.

Some time later, I wrote Deane a note about this event. Had I shut up, the reporter would have defamed him. He would have won the case, but no doubt his reputation would have been besmirched. He kept my letter, and the Bassetts book refers to it: ‘early in 1985 Brian Easton had told Deane he’d been shown the leaked minutes by a journalist and concluded they had come from Muldoon’ (p.262). A closer reading by the Bassetts of my note would have suggested that it was unlikely to have come from a person who wrote the alleged letter to Lange.

Opening the Books

‘Opening the Books’ refers to the publication of the post-election briefings. It had occurred in Australia in 1983, and was probably unavoidable here given the 1982 Official Information Act. Even so, the Treasury and Reserve Bank reports were published in August 1984 with some flourish. The media asked me to comment, and I said that while I had some reservations, the approach represented standard economic analysis. Later Bernie Galvin, Secretary of the Treasury, thanked me for this contribution.

Seven economists at the Victoria University of Wellington decided to review the ‘books’ – that is the Treasury and Reserve Bank post-election briefings – and wrote a report of seven chapters under the chairmanship of their colleague John Zannetti. One supposes the chapters were individually written and perhaps lightly reviewed by the other six. Their quality varies. (The authors were Bertram, Peter Brosnan, Buckle, Pope, Bob Stephens, Graeme Wells, and Zannetti. Later Bryan Philpott and Sheppard said they wished to be associated with their colleagues’ report.)

I first learned of the exercise from Bryce Wilkinson, the head of the Treasury macroeconomic section. He asked whether had I seen it. I said ‘no’. He sent me a copy. (Again an indication that I was so involved with the NZIER that I was not in touch with the university. We were about a 30 minute walk apart.)

It is a perfectly appropriate academic exercise to try to distill the underlying analysis of a report. Indeed later I tried to do that for the Victoria School (the seven or nine, although having recently having seen some of more of Sheppard’s writings, I probably did not capture enough of his post-Keynesianism). In my judgement the Victoria School report was a reasonable attempt at this, but it was a bit naive about some aspects of officialdom, and perhaps to some degree – and inevitably – did not get some of the officials’ intentions correctly. The big mistake, however, was a political one. They did not show a draft to the officials before publishing it.

The officials reacted like – well like – good students who had proudly shown their work to the teacher, and been only awarded a B+. They were highly offended. Actually we are all over-sensitive to criticisms of our research (babies) but most academics try not to show how hurt they are.

It was partly the officials’ own fault. For various reasons they had not interacted much with outsiders before the 1984 election, and like any inward looking group had made assumptions which had not been rigorously tested by open critical debate. There is the famous example of a paper presented to an New Zealand Association of Economists’ Conference in early 1984, in which the Treasury presenters took the entire time so there was no discussion, and which everybody who attended told me they did not understand. I was not there, but having read it I can confirm the paper was long, turgid, and obscure. Later we were told it was the foundation document for the justification for privatisation.

Treasury and the Reserve Bank could write superb reports for ministers, but frequently their think-pieces were ill-disciplined and not to an academic standard. Their Post Election Briefings are to ministers and therefore were much clearer and more easily accessible, although sometimes the text collapses into the incomprehensible or ludicrous. (The briefs were written in a rush. Sometimes a paragraph looks as though it may have at first been coherent, but other officials came along – my image is of them standing over a secretary on a word-processor – making additions (typically involving caveats) to the point that the sentence structure got totally out of control, at which point someone cut the sentence into a number, with a loss of meaning.)

There was a standoff between the officials and the academics, in which each side asked for my support. I stayed out. It was not a fight I was keen to get into, nor was it quite as gripping to outsiders as to those involved, although I suppose my Victoria School paper (in the NZIER working papers series) is a kind of response, and indicative of the way that I approach such things – trying to go deeper to get an understanding.

The fracas ended up at the February 1985 NZEA meeting. I could not attend because I had consultancy work in Auckland that day. It was in February 1985, that Deane told the Bassetts of the purported letter to Lange. One wonders if the conference session prompted this remark.

What may not have been evident to the academics was that was a struggle going on within the Treasury and the Reserve Bank (together with their fears of outside criticism of impropriety, most evidently over the devaluation enquiry). A simple representation of the struggle is that it was a conflict between the moderates and the extremists. Both were committed to ‘more market’, but there was – and is – a dispute about how rigorously the approach should be applied. There was also – to put it crudely – a Keynesian versus Monetarist element to the debate about macroeconomic policy.

It seems likely that the Victoria School intervention was interpreted as supporting the Keynesians. The Monetarists interpreted the report as an attack on the Treasury as a whole, thus using it as a part of their internal struggle for power. (I know less about the Reserve Bank debate, but responses to the academics’ paper were bly dominated by concern at the claims – not in the paper – of the Bank mismanaging the devaluation crisis.)

My impression is that the officials’ debate was resolved with a balance in favour of the extremists/Monetarists shortly after the floating of the exchange rate in March 1985. But such an outcome was not obvious in late 1984.

I have argued that my relations with the Victoria Seven/Nine were proper but circumspect. This is nicely illustrated by Bertram’s chapter ‘Keynesianism, Neoclassicism and the State’ in State and Economy in New Zealand. It is written from the academics’ perspective reflecting on their dispute with the officials. The article does not make a single reference to my work, indicating I was not involved. (In contrast, the book in total cites more references to my publications than anyone else showing that I was not irrelevant to the general topic.)

The NZIER in 1985 and 1986.

Despite my hopes for a longer appointment, it became evident by about May 1985 that there was to be a reduction in funding available for independent research rather than the increase I had hoped for. It did not happen only to the NZIER. Philpott lost his modelling grant from Treasury, and my understanding is that Sheppard’s external funding also came under pressure. Insofar as any funding was to be available to the NZIER, it would be on a contract basis in which the terms of reference (and ultimately the outcome) would be carefully defined by the client – namely the Treasury or Reserve Bank. There would be little opportunity for independent research or free enquiry. We were replacing Muldoon dissent by official control.

I was told that we should make sufficient profit on the consultancy work to conduct independent research. It was a strange lapse for those who purported to be persuaded by economic analysis. Consultancy is a highly competitive business. One expects its super-normal profits to be driven down to zero, creamed off in high salaries for top consultants. That was already my experience and more than twenty years of consultancy since confirms it. I have only been able to do so much independent research without separate funding at the severe cost of forgoing remuneration.

Moreover. some of my most talented staff at the NZIER could not be held because they were not doing what they wanted to do, and went off to greener pastures. Their replacements were good quality consultants, not researchers. The nature of the team I was leading changed.

In those days there was no alternative funding for genuine research, as we have today from Foundation for Research Science and Technology and the Royal Society of New Zealand (and even today it is not ideal for economic research of the sort I do).

Thus I was faced with running a research institute which would not be able to do useful research but instead would have to operate as a consultancy. That is what subsequently happened. (Happily, my successor but one, Alan Bollard, ran a commendable research program in industrial economics from the bits and pieces of consultancy he was able to gather together.)

Additionally I got the impression that I was not acceptable to key elements in the Reserve Bank and Treasury. At the time I put it down to two factors.

First, now that the advisers had the full ear of the Ministers (one could say the latter were ‘captured’) they saw no need for outsiders. Later the Commission for the Future and the Planning Council were abolished. In the Muldoon era they had been able to articulate publicly views which officials could not, even though they were sympathetic to the views expressed (and on occasions influenced them).

Second, my sort of economics was clearly out of favour with the extremists who triumphed earlier in the power struggle. I have written in detail elsewhere about this, but in summary they believed that their theory was ‘the truth’, and research – insofar as it was needed – was to buttress this truth. My approach, of Popperian scepticism continually using evidence to test theories, was in sharp conflict. These led to very different modes of research. Some would say their extremist approach did not generate any research at all – only applause.

It now seems likely there was a third reason. If Deane thought I had recommended that he be sacked, he was hardly likely to view any of my efforts favourably.

The ending of the Reserve Bank grant is instructive. Towards the end of 1985 I took a couple of months of stress leave, which were largely caused by the pressures I have just described. (In that period I earned my salary for the NZIER in a big court case involving the Maui field and I wrote a book Wages and the Poor.) While I was away, the Reserve Bank announced it would end the annual grant, but it would be receptive to consultancy contracts. It was a unilateral statement without an opportunity for response, all the more unilateral because the director was on leave. (People generally do not do those sort of things.) The announcement could have been held over until I got back. However, bureaucracies are often more callous, and that is the way I interpreted it.

After Deane left the Reserve Bank for the SSC, the Governor of the Reserve Bank, Spencer Russell told us that while the Bank did not want to back down from the decision, now that Deane had left, if a way around the ending of soft funding could be found they were very willing to consider it. According to my successor, David Mayes, there was some such funding after I left.

Some years later, the then Deputy Governor of the Bank and also a trustee on the board of the NZIER, Peter Nichol, told me he had gone through the Bank’s papers to brief himself and he was appalled at what had happened to the NZIER. He would not say more, and I have never asked for those papers. (The whole thing has just been too painful, and I had let matters in this memoir lapse until the Bassetts’ book raised them again.) While I do not know exactly what Nichol meant, I have always assumed, perhaps from something in the conversation, his concern was about the ending of the Reserve Bank grant.

Slowly and reluctantly I decided I had to move on. The NZIER trustees offered me a renewal at the end of my five year term. But it seemed to me that the first responsibility of a director was to act in the best interests of the institution with whose care he (or she) was charged. I judged the best chance the NZIER had for its survival as a research institute was a new director, who was less publicly prominent and perhaps more conservative, and who would have a chance to rebuild relations with the two key government agencies and receive soft funding.

I felt forced out or, as we might say today, ‘constructively dismissed’,. The terms of the job I had been appointed to had changed and I had little option but to leave with as much dignity as I could muster.

The Aftermath

Alas for my hopes, my successor was to last only six months, in part he said because of the inadequacy of the grant funding.

His successor, Bollard, stayed for seven years, maintaining a significant industrial economics research program. But my great loves – growth economics, macroeconomics, and applied welfare – lapsed into disrepair. (Industrial economics was my fourth great interest. I had appointed Bollard to lead that activity, and I am delighted about how well he did.) As far as I can judge, the macroeconomic forecasting became very mechanistic rather than analytic because there was no underlying research program. (The introduction of spreadsheets was another factor in this development.) Today the NZIER is a consultancy agency. It has been unable to command regular significant grant funding from the Foundation and the Royal Society which became available from the mid 1990s, and is now not well known for any area of research expertise.

Today’s moral successor of the NZIER is Motu Associates, which mainly depends on research grant income. By a strange irony Deane was appointed to its board.

But Motu does not address the growth and macroeconomic issues either. Such economic research which is done on them – typically in government agencies – is usually mechanistic, simplistic and of low quality. The universities have retreated. There is little incentive to study the New Zealand economy, for they reward the display of technical excellence, often on poor quality data and/or low priority questions, which interest overseas journals. The consequence is that the graduates they send to government agencies are poorly prepared: hence the low quality of the bureaucracy’s research work (with sometimes happy exceptions).

Indeed much of the economic research and debate in New Zealand, such as it is, ignores the elephant in the room, standing behind and looking the other way, wondering what is actually going on. The work may not be fundamentally wrong – much is interesting – but it lacks the context of a small open multi-sectoral model changing through time.

I have pondered on what might have happened to economic policy had there been a continuing commitment to open research after 1985. Undoubtedly the failures of the policies and the flaws in the policy framework would have become evident earlier. Perhaps the longest post-war recession – from 1986 to 1993, when per capita GDP fell every year – would have been avoided, even though some recession was probably inevitable. But in 1985, those who won the internal policy debate could not contemplate they might be wrong, or that research should find anything other than a confirmation of how right they were.

I left the NZIER in June 1986 to became a consultant. I had expected that I would get a job in an academic institution, but, despite some honorary, visiting, and short-term positions, that has never happened.

In 1987, I applied for the McCarthy Chair of Economics at Victoria University of Wellington, when Philpott retired. I was told by the dean of commerce, Athol Mann, and the head of the department, Pru Hyman, that I was not put on the shortlist of six, because I was ‘too controversial’ and I ‘published too much’.

I am proud of my publication record. It is true I publish a lot. In some years I published more than the entire Victoria University economics department of twenty or so economists (although perhaps my average quality was lower). When the research performance of economics departments was assessed in the Performance Based Research Funding assessment of 2004, Victoria University’s came second to bottom equal – bottom if AUT, transforming itself from polytechnic to university, is excluded. I am not saying I would have made any great difference but there was not a research culture in the department which, no doubt, is one reason why I was not of interest. (Philpott’s research work did not get the support it deserved after he retired, the department missing the opportunity to be world significant.)

Being ‘controversial’ puzzled me more. Being publicly prominent is not the same thing, while disagreeing with the conventional wisdom should not be a handicap for a university position. (Mind you, I did not really become as outspoken against the Rogernomic extremists until later – not until I was absolutely convinced that their theories did not stack up. Right from the beginning I thought they were wrong, or perhaps they knew something I did not. I spent a long time reading their papers and thinking about what they were doing, before I was confident that I had not overlooked something, that they did not have any insight I had not, and they were just plain wrong.)

Moreover, the McCarthy Professor had traditionally had a role of speaking in public, although that has not been true for Philpott’s successors. Perhaps the university had been badly burnt by the Opening of the Books episode and was fearful of my adding to the fire. That would be ironic, because I kept out. (I do not think I was punished for not supporting them.)

That is the way I saw my rejection then. I now wonder additionally, that I was seen as ‘controversial’ was a code for a belief I had improperly criticised Deane. However it is not clear who knew that or how they might have been that found out. Deane was not on the selection panel.

To add to the oddity of the story, over the next few weeks after my rejection I bumped into various Victoria University economists. More than half of the department said they regretted my not being short listed. Someone (or some minority) on the panel may have had a veto, for at issue was only whether I would go into the last six for final consideration. (I had worked out what I would say to university economists. ‘New Zealand was in an almost unique experiment of market liberalisation. Let’s build a research program around it, just as built a research team at the NZIER. One’s views of the liberalisation would not matter. Any controversy would have sharpened our understanding. The research program would be of interest to the world and raise the status of the department in world terms.’ Alas the wonderful opportunity was ignored, the research never happened – Alan Bollard’s work being an exception – and no New Zealand economics department has a really international standing on the basis of a distinctive research program on what is arguably an internationally unique experience.)

The story of my struggle to survive as a researcher does not really belong here. Sufficient to say I am proud of my publications list, my contribution to research, including the provision of a critically constructive perspective on others’ economics. Some of it has led to better policy and, even more importantly, to a better policy framework, as future intellectual historians may judge.

And of course I have maintained my contribution to public education and discourse especially through the fortnightly Listener columns which in part, have been a vehicle for the transmission of my research (and the research of others – foreign and New Zealand) into the public arena. I am included in Lawrence Simmon’s book on public intellectuals in New Zealand, Speaking Truth to Power.

Twenty years after Deane thought he heard what proved to be a false claim, I was made a Distinguished Fellow of the New Zealand Association of Economists, the only independent scholar to be thus far honoured.

Footnote: An earlier version of this report was shown to Deane in January 2009 and he was invited to comment. He chose to turn down the opportunity.