More people means more emissions. So how about fewer people?

I’ve never had that much interest in climate change.  Perhaps it comes from living in Wellington.   If average local temperatures were a couple of degrees warmer here most people would be quite happy.    And as successive earthquakes seem to have the South Island pushing under the North Island, raising the land levels around here –  you can see the dry land that just wasn’t there before 1855 –  it is a bit hard to get too bothered about rising local sea levels.  Perhaps it is a deep moral failing, a failure of imagination, or just an aversion to substitute religions.  Whatever the reason, I just haven’t had much interest.

But a story I saw yesterday reminded me of a post I’d been meaning to write for a few weeks.  According to Newshub,

In documents released under the Official Information Act, a briefing to Judith Collins on her first day as Energy Minister says the cost to the economy of buying international carbon units to offset our own emissions will be $14.2 billion over 10 years.

In the documents, officials say “this represents a significant transfer of wealth overseas”, and also warn “an over-reliance on overseas purchasing at the expense of domestic reductions could also leave New Zealand exposed in the face of increasing global carbon prices beyond 2030”.

The cost amounts to $1.4 billion annually.

The Green Party says the bill will only get bigger if no action is taken by the Government to reverse climate pollution, and it continues to open new coal mines and irrigation schemes.

Roughly speaking, this suggests we’ll be giving roughly 0.5 per cent of GDP each year to people in other countries, just because of an (inevitably) somewhat arbitrary emissions target.   Many useful economic reforms might struggle to generate a gain of 0.5 per cent of GDP.  These are large amounts of money, inevitably raised at a still larger real economic cost.   And this is on top of the economic costs of domestic abatement policies.

Of course, whatever New Zealand does in this area makes no difference to the global climate.  We are simply too small.  Most people recognise that we sign up to arbitrary targets through some (not unrelated) mix of wanting to be a good international citizen and (perhaps as importantly) being seen as a good international citizen.  If we were regarded as not “doing our bit” there might be a risk of trade restrictions or other adverse repercussions a little way further down the track.

If one is an emissions and climate change zealot, the New Zealand data looks like it could give you grounds for zealotry.   For example, here are total emissions (in CO2 equivalent terms) per unit of GDP (using PPP exchange rates), from the OECD databases.  Why per unit of GDP?  Well, generating GDP takes various inputs, and emissions of greenhouse gases are often one of them.

emissions per GDP

But emissions levels are, at least in part, about geography and industry structure.  They aren’t just a matter of “wasteful” choices.   Thus, steps to reduce emissions might also reduce the number of units of GDP.   (In emissions per capita terms, we don’t rank as far to the right –  being quite a lot poorer than (say) Australia, Canada and the United States).

The self-imposed emissions reductions targets are, I gather, expressed in terms of total emissions.    Again using OECD data, here is how the various countries have done on that score since 1990 (the typical reference date –  and a somewhat convenient one for the former eastern bloc countries, which often had very inefficient heavy industries).

emissions total

But one of the things that marks us out relative to most of the OECD (and certainly relative to those former eastern bloc countries on the left of the chart) is the rapid growth in population we’ve experienced since then.   In fact, New Zealand’s population has increased by more than 40 per cent since 1990.  By contrast, all the world’s high income countries’ population has increased by only around 15 per cent over the same period.   And all else equal, more people tend to mean more emissions  (although no doubt it isn’t a simple one-to-one relationship).

In per capita terms, our greenhouse gas emissions have actually fallen since 1990.  Of course, so have those of most OECD countries.  Here are the data.

emissions pc

Our average per capita emissions have been falling less rapidly than many other OECD countries, but not that much less rapidly than the OECD total.   And all this in a country where I gather –  from listening to the occasional Warwick McKibbin presentation –  that the marginal cost of abatement is higher than almost anywhere in the world.  Why?  Well, all those animals for a start.  And the fact that we already generate a huge proportion of our energy from renewable sources (all that hydro).  And, of course, distance doesn’t help –  aircraft engines use a lot of fuel, and neither a return to sailing ships nor the prospect of, say, solar-powered planes at present seem an adequate substitute.

So you have to wonder how our government proposes to meet its self-imposed targets, without doing so at great cost to the living standards of New Zealanders.

In fact, it seems the government is wondering just that.   A few weeks ago,

The Minister for Climate Change Issues, Hon Paula Bennett, and the Minister of Finance, Hon Steven Joyce, today announced a new inquiry for the Productivity Commission into the opportunities and challenges of a transition to a lower net emissions economy for New Zealand.

The terms of reference are here.    As they note

New Zealand has recently formalised its first Nationally Determined Contribution under the Paris Agreement to reduce its emissions by 30 percent below 2005 levels by 2030. The Paris Agreement envisages all countries taking progressively ambitious emissions reduction targets beyond 2030. Countries are invited to formulate and communicate long-term low emission development strategies before 2020. The Government has previously notified a target for a 50 per cent reduction in New Zealand greenhouse gas emissions from 1990 levels by 2050.

Which does look a little challenging (in 2014 total emissions were about 3 per cent lower than 2005 levels –  30 per cent looks a long way away).  That isn’t too surprising.  After all,

  • the marginal cost of abatement is particularly high in New Zealand
  • the rate of population growth in New Zealand has been rapid, and
  • the rate of population growth is projected, on current policies, to continue to be quite rapid.

In fact, SNZ project another 25 per cent population growth by 2050 –  quite a slowing from here, but still materially faster than the populations of most other advanced economies will be growing.  And, recall, more people typically means, all else equal, more emissions.    The 2050 target, in particular, requires quite staggering reductions in per capita emissions –  actual emissions now are a quarter higher than in 1990 –  if anything like these population increases actually occur.

The terms of reference for the Productivity Commission inquiry go on at  length about all manner of things, including noting (but only in passing) that there may be “future demographic change”.

Recall that New Zealanders are actually doing their bit to lower total emissions. Our total fertility rate has been below replacement for forty years.  And (net) New Zealanders have been leaving New Zealand each and every year since 1962/63.    If New Zealanders’ personal choices had been left to determine the population –  the natural way you might think –  total emissions in New Zealand would almost certainly be far lower than they are now.   Check out the low population growth countries’ experiences in the second chart above.

Instead, we’ve had the second largest (per capita) non-citizen immigration programme anywhere in the OECD (behind only Israel),  a programme that (as it happens) got underway just about the time (1990) people benchmark these emissions reductions targets to.

As I’ve noted repeatedly, neither the government (or its predecessors), nor the officials, nor the business and think tank enthusiaists for large scale immigration, can offer any compelling evidence for the economic benefits to New Zealanders (income and productivity) from this modern large scale immigration.    And when they do make the case for large scale immigration, they hardly ever mention things like emissions reductions targets (I’m pretty sure, for example, there was no reference to this issue in the New Zealand Initiative’s big immigration advocacy paper earlier in the year).    Even if, to go further than I think the evidence warrants, one concluded that the large scale immigration had made no difference at all to productivity levels here (and remember that, for whatever reason, we have actually been falling slowly further behind other countries over this period despite all the immigration), once one takes account of the substantial abatement costs the country is likely to face if it takes the emissions reduction target seriously, the balance would quite readily turn negative.    We would need to have managed quite a bit of spillover productivity growth from our not-overly-skilled immigration programme (and recall that no gains have actually been demonstrated)  just to offset the economic costs, direct and indirect, of meeting emissions reduction targets which are made more onerous by the rapid increase in population numbers.

So I do hope that as the Productivity Commission starts to think about how to conduct their emissions inquiry, they will be thinking seriously about the role that changes in immigration policy could play in costlessly (or perhaps even with a net benefit) allowing New Zealand to meet the emissions reductions targets it has set for itself.  On various assumptions about the economic costs or benefits of immigration, how would the marginal costs of abatement compare as between lowering the immigration (residence approvals) target, and other policy mechanisms that are more often advocated in this area?   It would be interesting to see the modelling work on these issues.  If the Productivity Commission doesn’t take seriously the reduced immigration option, it would be hard not to conclude that ideology was simply trumping analysis.

Of course, reduced population growth through lower immigration isn’t a solution for every country.  On the one hand, people who don’t come here, stay somewhere else.  And on the other, most advanced countries have much smaller immigration programmes than we do.  But if it isn’t a solution for every country,  it looks like a pretty sensible and serious option for New Zealand specifically.  And the interests of New Zealanders should be the primary focus of our policymakers, and their advisers.

It is also brings to mind the old question as to why the Green Party in particular seems to remain so committed to large scale immigration, and the “big New Zealand” mentality, that has driven politicians here (of all stripes) for more than a century.  Not only would a lower population be consistent with New Zealanders’ personal revealed preferences (birth rates and emigration) and actions, it would assist in meeting emissions targets.  Perhaps to idealistic Greens that seems like “cheating” –  it doesn’t reduce global emissions, although it may put the people in places where the costs of reducing global emissions is cheaper than it is here.

But even if so, then what about one of those other pressing Green concerns –  water quality and the pressure on the environment from the increased intensity of agriculture?  There is increasing recognition across the political spectrum that there is a major issue here, and it is an area where New Zealand actions and choices make all the difference.   Cut back the immigration target and, over time, we would see lower real interest rates and a lower real exchange rate.   Against that backdrop it becomes much easier to envisage governments being able to impose much stiffer, and more expensive, standards on farmers (the offset being the lower exchange rate).      With a less rapidly-growing population, the (probable) reduced growth in agricultural output would be less of a concern (economically) and real progress could be induced on the environmental fronts (emissions and water pollution etc), without dramatically eroding the competitiveness of New Zealand’s largest tradables sector.

(Much the same sort of argument can be advanced in respect of congestion and pollution costs associated with growth in tourism: less rapid immigration would result in a lower real exchange rate, making it more feasible (economically and politically) to levy the sorts of charges that might effectively deal with pressures that the sheer number of tourists is imposing in some parts of the country –  in a country where the natural environment is really what draws people.)

It is past time for a serious debate on just what economic gains (if any) New Zealanders as a whole are getting from continued large scale non-citizen immigration.  The emissions reduction target might be seen by some as an arbitrary, even unnecessary, intervention, and is no doubt seen by others as a moral imperative, perhaps the very least we could do. I don’t have a dog in that fight.  But the targets are a fact –  a domestic political reality, and probably an international constraint we have to live with even if we didn’t really want to.  Against that background, and given the high marginal cost of abating greenhouse gas emissions in New Zealand, and with little or no evidence of other systematic gains to New Zealanders from the unusually large scale immigration programme we run, we really should be taking more account of our immigration policy in thinking about how best (most cheaply) to reduce effectively greenhouse gas emissions, as well as the water pollution that increasingly worries many New Zealanders.

New immigration data from Statistics New Zealand

One can, and does, grizzle about the range and quality of New Zealand’s official statistics.  But last Friday saw a small but welcome step forward.

On various occasions I’ve written about the limitations of the permanent and long-term migration data.  Those data are based on the self-reported intentions of travellers at the time they cross the New Zealand border, and people can and do change their minds.  That is as true of New Zealand citizens coming and going as it is non-citizens.

Prompted by the Reserve Bank, in late 2014 Statistics New Zealand published a paper containing some experimental work they had done trying to estimate the actual permanent and long-term movements (ie allowing for the ability of travellers to change their minds and their plans).    That work confirmed that, while the broad patterns were similar, on occasions the differences between the published PLT figures and the results using the follow-up methods could be large.   In the 2002/03 episode, the published PLT numbers materially understated the extent of the actual permanent and long-term inflow.

Graph, Comparison between net recorded PLT and alternative net PLT migration methods, year ended June 2000 to 2013.

At the time Statistics New Zealand published that paper they indicated that they had no budgetary resources to update this work regularly, or make it part of the suite of official statistics.  And so when I wrote a post a few weeks ago on which migration data to use for which purposes I noted

Use the overall PLT numbers by all means for some short-term purposes (is the rate of population growth right now accelerating, slowing or holding roughly steady), but it is crucial to recognise the limitations of those data.

Perhaps the new Minister of Statistics could look at securing some budgetary funding for Statistics New Zealand, to enable them to move those alternative methods into becoming a regularly-published and updated part of the suite of official statistics?

Little did I know that Statistics New Zealand  had already found some funding.  Because last Friday, they put out a press release (together with some background material) indicating that they have settled on a particular methodology, providing updated estimates using that methodology, and indicating that they will shortly commence regular updates of this data.    That is good news.    Anyone who wants details on the new “12/16 month rule”…

Any traveller with at least one border movement in a given month has their resident status reviewed. The combined information on the assumed resident status at the start of the month, the direction of the last movement in the month, and the 16-month follow-up travel history, determines the traveller’s final migrant status.

…can consult the SNZ background paper.   As SNZ notes, the 12/16 method is also the one used by the Australian Bureau of Statistics.

There are several things to remember:

  • anyone interested in analysing immigration policy (ie how many non-citizens we let on and on what bases) should still focus on the MBIE approvals data.  It is hard data from the agency actually granting the approvals,  Sadly, the user-friendly data is only available once a year, with quite a lag, but the patterns of approvals don’t change that much from one year to the next.  But perhaps the SNZ lead might prompt MBIE to improve the accessibility of their own monthly data?
  • the new SNZ series will be only be available with a lag of at least 18 months  (in this release they’ve provided data to March 2015 –  16 months after that was July last year).  It is going to be useful for making sense of history, rather than for high-frequency timely analysis.  That is true of plenty of official data (and isn’t a criticism).
  • in terms of getting a sense of how many people need a roof over their head, neither the PLT data nor these new 12/16 data quite fit the bill.   Short-term visitors need accommodation just as much as long-term settlers do  (although they might want different types of accommodation).  (Volatile) total migration data remains of some use for that purpose.
  • sometimes intentions matters, not just outcomes.    If, for example, lots of young New Zealanders head off to Australia, intending to never come back, only to find a few months later that Australia is hit by a very severe labour market downturn, many of those same New Zealanders might come back again quite quickly.  Analysts will want to know both that they went intending to stay away, and that having got to Australia they were caught by a change of circumstances and didn’t in fact stay away (for more than the 12 months PLT threshold).   In other words, when there are material differences between the aggregate PLT numbers and the aggregate new 12/16 numbers, both are likely to offer some useful insights as to quite what is going on.  That is particularly so as regards the movements of New Zealand citizens.
  • But what do the new statistics actually show?  Here is SNZ’s summary chart

    plt and 12 16 rule

    The orange line is the previously-published PLT numbers and the purple line is the new 12/16 series.

    As highlighted previous, there is a very big difference between the two series in the 2002/03 period.    But the pictures are also quite different around the 2008/09 recession.  On the PLT numbers there was a big increase in net inflows in 2009, which then more than reversed over the following couple of years.  But on the new 12/16 numbers, net permanent and long-term actual inflows had been pretty steady for several years (from 2004 to 2009), and then fell away very sharply over 2010 and 2011.   Fortunately, in the last couple of years of the new data, the two lines are very similar but –  since plans can change –  there is no guarantee that will be consistently the case in the future.   This is a genuine improvement in the provision of data on an ongoing basis, not just something to deal with a one-off anomaly in 2008/09.

    Over this particular period, the net inflow over the full 14 years was a bit higher than the PLT numbers had suggested.  That wasn’t a surprise –  we already knew it from the experimental numbers a couple of years ago.  But it is also important to stresss that the changes of plans can run either way; there is no a priori reason to suppose that one method will typically understate or overstate the actual net inflows.

    Before showing you a few of my own charts, I wanted to reproduce one more of the SNZ charts

    As I’ve noted repeatedly in recent months, the PLT data showing the visa type people held when they arrived in the country isn’t very enlightening for anything much at at all.  The immigration system is set up in a way that encourages many people to change their visa type once they are here (eg most people who get residence visas do so while already living here, many people move from a student visa to a work visa while here).  That is why I urge people to focus on the MBIE approvals data if you want to understand immigration policy decisions etc.  And this chart from the new SNZ paper really just reinforces the point.

    Graph, Migrant arrivals and departures by selected border entry visa type, by 12/16-month rule and PLT measures, December 2001 to 2014 years.

    There are huge differences in all four categories between what the PLT numbers showed, and the new 12/16 method numbers.  For most purposes, both are less useful than the MBIE approvals data.

    One area where the new 12/16 data are a real boon is around the permanent and long-term movements of New Zealanders.  New Zealanders don’t need permission to come or go, so (at least between censuses) we are totally reliant on the migration statistics for an accurate sense of the net flow of New Zealanders.   The PLT data have recorded a huge net outflow of New Zealanders (and actual outflows every year since 1962/63).   My hunch has been that the PLT numbers overstated the outflow (and that, net, some people who went intending to stay away long-term came back quite quickly).     The new 12/16 data are available by citizenship (although not yet in a terribly user-friendly format).  Here is the chart showing the two methods, on a March year basis.

    outflow of nZers plt and 12 16

    In no individual year have the differences been very large.  That is reassuring for short-term analysis, but over the full 14 years for which SNZ have provided the new data, those moderate annual differences add up.    On the PLT data, a net 341000 New Zealand citizens left between January 2001 and March 2015.  On the 12/16 rule data, 300000 left.   Both are large numbers, but the actual outflow of New Zealanders appears to have been around 10 per cent less than the PLT numbers had suggested.   That is a big part of the reason why the overall net inflows to New Zealand have been a bit larger than the PLT numbers had suggested.

    For other citizenships, SNZ has only provided the data at an aggregated level.  But here is the chart showing the net inflows, on the 12/16 method, for various groups of citizenships for the full period the new data are available for.

    plt by citizen 12 16 method

    As I’ve stressed previously, if you want to look at immigration policy choices, look at the MBIE approvals data. But these data, even if not very timely, do have the advantage of capturing not just those who got approval and came, but also those who left again.

    Australian citizens don’t need advance approval to come.  The numbers who do come are pretty small, but out of interest here is the net flow of Australian citizens, both on a PLT basis and on the new 12/16 method.

    aus citizens

    The divergence between the two series over 2008/09 looks like a possible example of a case where both lines tell us something interesting.  Although the net inflow of Australian citizens had been falling, it was still positive (on the PLT numbers).  But in 2008/09, the New Zealand economy went into an unexpected recession and the unemployment rate rose quite sharply.  Presumably, a large proportion than usual of the Australians who came here changed their minds fairly quickly and went home again.

    And one last chart from the new data.   One of the stories around the divergence between the PLT numbers and the other methods in 2002/03 had been that much of it reflected Chinese (in particular) language students, who ended up staying for longer than they had indicated on their initial arrival card.     This chart, of net arrivals from north-east Asian countries (the SNZ grouping) seems consistent with that.

    north asia PLT.png

    There was a huge surge, on this better method, in 2002/03, significantly balanced out by net outflows of north-east Asian citizens several years later.   Actual residence approvals granted to people from these countries were much steadier throughout the period (for Chinese, the number of residence approvals fluctuated between 4800 and 8000 per annum).

    To be boringly repetitive, if you want to talk about immigration policy, it really is best to look at the MBIE approvals data.  If only they would make them readily available, in user-friendly form, every month it would be lot easier to encourage people to consistently do so.

    Well done to Statistics New Zealand for publishing this new data.   It will help shed more light on the activities of New Zealanders (and the typically small flow of Australians), and enable us to see better –  albeit with a bit of a lag –  how the overall movement of people in and out of New Zealand has been contributing to the population change.  For some purposes, the PLT data themselves remain useful, but it is always important to remember that they are only an estimate of what is really going on.

    New Zealanders’ population choices

    The other day Statistics New Zealand released the annual data on New Zealand birth rates.  There was some coverage of the continuing drop in teen birth rates (it was what SNZ highlighted), but the chart that caught my eye was this one.

    TFR NZ SNZ

    I’d been under the impression that New Zealand’s birth rate was at, or just above, replacement (roughly 2.1 births per woman, thus allowing for early deaths).   And, according to this summary indicator, it was for a few years not that long ago.    But that is no longer the case.

    But what most interested me –  and it isn’t data I’ve ever paid that much attention to –  was the longer-term averages.  It turns out that for forty years now, New Zealand’s birth rate has averaged below the replacement rate (1977 was the last year the TFR had been persistently above 2.1).

    This is how we compare with other OECD countries.

    tfr OECD

    New Zealand is still towards the right of the chart.  But note that only two OECD countries now have total fertility rates in excess of replacement –  one (Mexico) just barely.  The country that really stands out is Israel, with a TFR of 3.1.   New Zealand hasn’t been that high for 45 years.

    (Diverting off topic for a moment) the gap between Israeli and New Zealand birth rates has been there for a long time.

    TFR is and NZ

    At one stage, the high Israeli birth rates were all about the Arab population, but apparently the Jewish and Arab-Israeli birth rates are now equal (Arab rates falling and Jewish rates –  especially among the orthodox –  rising.   (Israel also has a lot of immigration –  together they explain the very rapid population growth I highlighted yesterday – but that is a topic for another day.)

    For forty years, New Zealanders in aggregate have been choosing to have slightly fewer children than would, all else equal, maintain the population.  But over that same period, there has also been a very large outflow of New Zealanders moving permanently to other countries (especially Australia).   In the forty years to March 2017, the estimated net outflow (as recorded in the PLT data, with all their limitations) of New Zealand citizens was 845,520.

    plt since 78

    There is a lot of cyclical volatility, but in not a single year in that period has the flow of New Zealand citizens been back to New Zealand.  In fact, the last time the data record a net inflow of New Zealand citizens was the year I was born.  By international standards, it is a staggering loss of our own people (more than 20 per cent of the average total population over that period).  I can’t think of any other functioning democracy in the last 100 years that has had such a large percentage outflow of its own people.

    These New Zealanders have presumably been making their own choices and assessments about the opportunites for themselves and their (actual or potential) children.  Not only have they chosen to have not quite enough children to maintain the population, but many of them (us) have also decided that the opportunities abroad are simply better than those here.  Not all of them will necessarily have made the right choice, but average we should presume that it was a rational choice.  These aren’t simply patterns based on a single year’s whim, a single year’s bad news.

    So New Zealanders’ own choices, about their own lives, would have set in train a process that would see a gradually falling population in New Zealand.   Immigration policy, regarding the access of non-citizens, dramatically reversed that, and has in fact given us one of the fastest population growth rates in the advanced world over recent decades.  You have to wonder what insights, and wisdom, our politicians and officials are blessed with that leads them to run a policy operating directly to undermine the effect of the choices of individual New Zealanders.  Perhaps they might share that wisdom, that research, with us one day, before they further worsen the prospects of the New Zealanders who chose to stay living here.

    Declining populations do create some issues, as fast-growing ones do.  Over history –  even modern New Zealand’s short history –  many places have grown, and then faded away.  On the whole, it might be better to live in place that had so many opportunities, it could maintain strong productivity growth and offer those gains to more people (at least if transport and housing messes could be sorted out).  But one doesn’t fix the fundamental economic challenges –  that lead people individually to take actions that mean New Zealand’s population wouldm’t be growing –  just by going to a bunch of poorer countries and telling their people they can come here, in large numbers, if they want.   But, as I say, perhaps our political leaders could share with us their apparently superior insights and research results, which back their decisions to place their own preferences above the considered choices of New Zealand individuals.

     

    Two improbable outposts

    Monday afternoon’s post was prompted by news of the New Zealand Initiative’s business leaders’ study tour to Switzerland.  Switzerland is materially better off than New Zealand, but as I illustrated over the last 45 years it is the only advanced country to have managed lower productivity growth than New Zealand.

    The news of the Swiss trip reminded me of a story I’d seen a while ago, and had meant to write about, about another business study tour (involving at least some of the same people), to another laggard OECD economy, Israel.  Even the Prime Minister’s chief science adviser went along.  That trip was promoted by the Trans-Tasman Business Circle.   You can read about it here in a story written by a journalist who was invited along on the trip (or there is an Israeli perspective here).

    Most people have heard of Israel’s high-tech sector, which was the focus of this New Zealand mission.   Somehow, there is an impression around in many circles –  I recall first encountering it at The Treasury –  that Israel is an economic success story.   Here are a couple of snippets from the Herald story

    The mission will visit leading Israeli companies and institutions.

    This includes Start-Up Nation Central, which connects companies and countries to the people and technologies in Israel that can solve their most pressing challenges.

    Start-Up Nation Central was inspired by the 2009 best-selling book Start-Up Nation: The Story of Israel’s Economic Miracle, which explores the roots of Israeli innovation. The book continues to generate enormous demand from around the world for access to the people and technologies of Israel’s innovation ecosystem.

    and

    Why Israel? Moutter reckons while there are obvious differences, New Zealand shares many things with Israel. “We are both relatively young countries, with a culture and heritage of innovation, as well as some similarities in terms of market scale – from our perspective Israel is a more comparable point of reference for New Zealand than larger innovation ecosystems such as Silicon Valley or Shanghai. How has this small nation, less than 70 years old, with less natural resources than New Zealand, in one of the most volatile regions in the world, become widely known as the Start-Up Nation? I believe it will be invaluable for New Zealand to have greater insight into this journey.”

    Sounds good. It is a shame about the hard data.

    In the modern sense, both Israel and New Zealand are young countries.   And they are both somewhat improbable outposts.    New Zealand was the last major land mass settled by humans, and was so remote that until the 19th century all economic activity had to occur within these islands. Foreign trade wasn’t possible, or economic.   Technology changed that and for a time –  after the land was taken more or less by force and the indigenous culture displaced – an economy grew here that supported some of the highest material living standards in the world, for a pretty small number of people.  We remain physically remote, and that still seems to matter rather a lot.

    As for Israel, the land itself has been close to where major civilisations grew and prospered long ago. Ancient Israel itself was, for a time, a rich kingdom.   But in the 19th century there wasn’t much high value economic activity there.   Through some mix of ideology, religious convictions, the horrors of Nazi Germany, and other later push and pull factors, a mass relocation of Jewish people has occurred.  In a land taken more or less by force, in the process something fairly remarkable has been built –  a relatively rich democratic society, in a region with little or no tradition of democracy and where modern prosperity has otherwise been achieved only in some of the countries with oil windfalls.  Physical distance isn’t such an issue for Israel.  It is surrounded by countries with hundreds of millions of people.    Unfortunately for Israel, many of the regimes of those countries (or popular movements those regimes suppress) would like nothing more than the destruction of the state of Israel.   Sixteen countries, apparently, ban altogether people on Israeli passports, and most of those countries are quite physically close.  So, mostly, economic and social ties aren’t close.  In an age when distance seems to matter rather a lot.

    As I did with my Swiss post the other day, I’m going to start my comparisons from around 1970 where possible.  For us, it was just before Britain entered the EU and before the dislocations of the collapse in the terms of trade in the 1970s.  For Israel, it was 20 years after independence, when the country had achieved reasonable size (the population then was very similar to New Zealand’s, at just under three million), and it was few years after Israel’s greatest military success.

    Unfortunately, not all of the Israeli data goes back that far (especially in the OECD databases).  As I showed the other day, in 1970 New Zealand’s labour productivity (real GDP per hour worked) was just a touch below that of the median OECD country (in company with the larger European countries).     I couldn’t find good comparable data for Israel for 1970 (whether for GDP per hour worked or real GDP per capita) but it looks as though Israel had outcomes pretty similar to New Zealand, perhaps just a little below.   On the earliest OECD data I could find, Israel’s real GDP per capita was around 5 per cent less than New Zealand’s in 1977, and the few years leading up to 1977 were bad ones for New Zealand.

    The OECD has real GDP per hour worked data for Israel from 1981.   This chart shows how New Zealand and Israel have done relative to the median of the OECD countries for which there was 1970 data (ie mostly those who were really prosperous and democratic back then).

    israel real gdp phw

    Israel’s outcomes, at least on this score, look a lot like New Zealand’s.      New Zealand’s have been pretty poor.    The median real GDP per hour worked for that group of country (mostly the rich countries in 1970) is 42 per cent above New Zealand’s 2015 number.

    From 1981 to 2015. the median OECD country achieved growth in real GDP per hour worked of 72.7 per cent.  That was around the sort of increase the US and the UK experienced.    But here are bottom five growth rate countries over that period

    Growth (%) in real GDP phw 1981-2015 Level in 2015 (USD, converted at 2010 PPPs)
    New Zealand 56.5 37.5
    Netherlands 54.0 61.5
    Israel 52.3 35.1
    Italy 39.9 47.7
    Switzerland  37.5 56.5

    New Zealand wasn’t the worst, and neither was Israel.    But both New Zealand and Israel started out materially less productive than the Netherlands, Italy and Switzerland, and we still languish well down the field.   For all its problems, even Italy manages much higher average labour productivity than either Israel or New Zealand.

    The picture doesn’t change much if, say, one starts the comparison from 1990 (after many of our reforms had been done).    We and Israel still managed labour productivity growth in the bottom quartile of OECD countries.

    What about foreign trade?  It is now better realised that New Zealand’s export (and import) share of GDP has been going nowhere for quite some time.  By contrast, world trade as a share of GDP has been trending strongly upwards over the decades.  And while exports aren’t some panacea –  governments can always subsidise them and get more of them –  in successful highly productive economies, an increasing share of foreign trade (again imports as well as exports) is usually part of the mix.  In fact, I’m not aware of any country that has successfully closed the economic gaps to the leading economies, without export success playing a material part.

    So here is a chart of exports as a share of GDP, for Israel, New Zealand and for the OECD as a whole, since 1971.

    israel exports

    Being small countries, you would expect both Israel and New Zealand to do more foreign trade than larger countries.  As the chart shows, both countries used to export a lot more (share of GDP) than did the OECD countries as a whole (in which, of course, the US is a large share).   That is no longer so, despite (in Israel’s case) that vaunted high-tech sector.  Firms in both countries  –  remote in their own ways –  find it more difficult to be a part of global value chains than, say, contiguous European countries (in something approaching a single market) do.  But whatever the full set of reasons, it isn’t an encouraging picture.

    One factor, so I hypothesise, might be relatively rapid population growth.  As I noted, in 1970 Israel and New Zealand had similar populations.  Now Israel is getting on for double New Zealand’s population.

    Using the United Nations population data, here is a chart of population growth since 1990.

    israel popn

    High-income countries in total have had population growth or around 16.5 per cent over that period.  New Zealand’s population has increased much faster than that (at around 35 per cent), and Israel’s population has increased much more rapidly still, up by around 79 per cent.

    If there are lots of great new opportunities in a country, population growth needn’t impede productivity growth. In some cases, it might even help it.  Australia, for example, has also had rapid population growth, but seems to have had enough new opportunities (all those minerals) that its overall productivity and per capita income performance hasn’t been bad (although far from top tier).

    What of New Zealand and Israel?  There don’t seem to have been many new high value opportunities in New Zealand –  in fact, in the article on the mission to Israel one thing that struck me was how many of the listed participants were from domestic-focused firms.   For Israel, one might have supposed it was different (all those high tech firms).

    I’ve argued for some years, that rapid population growth can crowd out other business activities.  The basic logic is pretty simple.   New people –  whether born or migrant –  need new capital stock.  A modern economy requires rather a lot of (physical) capital per person (houses, roads, offices, schools, shops, machines etc) and real resources that have to be devoted to meeting the needs and demand of the new people, can’t be used for other purposes.  It is often those “other purposes” that seem to get squeezed out –  in particular, investment in the tradables sector.  People have to live somewhere, so that demand is often more inelastic (insensitive to changes in price) than is potential investment in support of new business opportunities

    It needn’t happen.  A country with a fast-growing population could also have a higher than usual savings rate.   That would free up resources to meet both potential needs.  Over time, one might expect that.  And a country with a fast-growing population might also meet some of its needs by running a current account deficit (drawing on resources from the rest of the world).  But while you import a car, you can’t import non-tradables.  So current account deficits can help, but they don’t relieve all the pressure.

    What do the summary data suggest? The IMF publishes data on the savings and investment rates for each advanced country back to 1980.  Over that period, both Israel (in particular) and New Zealand have had materially faster population growth than the median advanced country.   All else equal, that should have been reflected in a higher share of GDP having to be devoted to investment in both New Zealand and Israel than in the typical advanced economy.

    But here are the data

    israel I There is plenty of cyclical variation, but in both countries on average over this period, the share of investment spending in GDP has been a bit lower than advanced country median.     Given all the resources that needed to go to meeting the needs of the fast-growing populations (simply maintaining capital per person), there will have been materially less “left over” for capital deepening, or for new businesses and ideas.  It isn’t a mechanical rationing process, but just a response to the opportunities and the relative prices.

    And here is the same comparison for national savings rates.

    Israel savings

    Again, despite the much more rapid population growth rates, both countries have had lower national savings rates than the median advanced country over this period.

    I don’t know enough detail about Israel to be highly confident about quite what mix of factors is important in explaining its sustained underperformance (relative to other advanced, and key emerging, economies).  But the underperformance is pretty clear.  Israel’s productivity, like New Zealand’s, languishes towards the lower end of the OECD (and certainly of those OECD countries that were market economies a few decades ago).  Perhaps there are some specifics in the Israeli high-tech sector from which visitors can learn.   But if, to some extent, Israel’s sheer survival (so far) might be loosely termed a “miracle”, it isn’t clear that its economic performance is anything of the sort.   Very rapid population growth looks like it might have been part of the story (whatever it has done in terms of boosting the number of future IDF soldiers).

    Has the Reserve Bank shrunk the country and not told us?

    In the press release (and in the full text) for Reserve Bank Assistant Governor, John McDermott’s speech the other day we were told that

    the economy is populated with thousands of households and businesses responding to their own particular circumstances and opportunities,

    In fact, there are well over 1.5 million households, and many hundreds of thousands of businesses.  There are plenty of uncertainties the Reserve Bank has to grapple with, but that shouldn’t be one of them.

    It is often not entirely clear why the Reserve Bank chooses to make some of the on-the-record speeches it does.    Sometimes there is a specific and important message they want to get across.  But often, at least when I was still there, it seemed that the Governor was keen to give his senior managers a bit more public profile, and so they gave speeches (and published them) even when there wasn’t very much to say.

    McDermott’s speech on forecasting seems to be in that category.   There seem to be a couple of substantive points: a brief attempt to defend how well the current monetary policy decisionmaking process works (even as both major parties are considering the possibility of change), and an even briefer bid for a monthly CPI.  I happen to agree with them that a monthly CPI would be welcome (so would monthly unemployment data, a gap that also stands out in cross-country comparisons).  It is, thus, a shame that 15 years ago the Bank pushed back against Lars Svensson’s recommendation, in his inquiry conducted for the then Minister of Finance, that New Zealand should have a monthly CPI.     Having said that, I think the Bank’s chief economist is fooling himself if he really believes, as he claims in his speech, that “this is likely to be a fruitful avenue for future improvement that would greatly improve the Bank’s forecasting ability”.      Incrementally useful is probably a more accurate summary.

    As for the rest of the speech, it would have been better not delivered at all.   It is a curious mix of bits and pieces from a couple of popular recent books on forecasting, and a convoluted attempt to defend what the Reserve Bank does as, it would seem, the very best it can do, and just the right approach to adopt.

    When speaking abstractly, McDermott is happy to talk about the importance of acknowledging mistakes.  Thus, and for example

    To learn from our errors, we need to recognise that they are errors.

    Hard to disagree with that.  But in the entire course of the speech, McDermott never once describes any stance the Bank has taken, or forecast it has made, simply as an “error”.   He devotes almost two pages of the speech to 2014 increases in the OCR which had subsequently to be more than fully reversed.  But the only evaluative word used in the entire two pages is “correct” –  that to describe the point where they realised that it didn’t make sense to keep on increasing the OCR as much as they had previously been suggesting they would.    But human beings make mistakes.  We all do.   It doesn’t speak well of the Bank’s senior management that they are still so reluctant to even use the words, applied to themselves.

    As McDermott notes, to some extent, forecasting is an inevitable part of much of what we do in life.   There are the mundane things.  If I put a tin full of cake mixture in the oven at 180 degrees, I do so implicitly forecasting that in an hour or so it will be cooked.  Those sort of examples could be multiplied endlessly.

    But monetary policy is today’s topic.   Forecasting isn’t an inevitable part of monetary policy.  One could, for example, simply peg the exchange rate (as we did for many years) or fix the money base.  I don’t recommend either approach, but neither requires much in the way of forecasting.

    Much more conventional approaches also needn’t require much forecasting.    Decades ago, US economist John Taylor illustrated that a simple rule, in which monetary policy responds to changes in the current inflation rate (deviation from target) and to changes in the output gap (or, similarly, to changes in an unemployment gap) pretty well described how the Federal Reserve had actually run monetary policy.   Estimating a Taylor rule might take quite a lot of ongoing analysis (you need estimates of the neutral interest rate and of the output gap) but it needn’t involve any active forecasting at all.   Because monetary policy works with lags, there is an implicit forecast involved in using a Taylor rule, but it is very different from the sort of forecasting McDermott is talking about.

    Our Reserve Bank goes beyond that in two ways:

    • it publishes numerical forecasts for a range of key macroeconomic variables (including inflation) for about three years ahead, and
    • it publishes forecasts of what it itself will do with monetary policy over that same period ahead.

    The first leg of that is quite common.  Most advanced country central banks now publish economic forecasts in some form or another.

    The second leg is quite uncommon.  The Reserve Bank of New Zealand was the first central bank to do so 20 years ago (without a great deal of debate at the time) and not many have followed us.    The OCR forecasts are, of course, subject to change (and we often preferred to call them “projections”) but at the time they were published they were really close to the best unconditional forecast by the Bank (or more specifically the Governor) of its own future actions.

    And when you read, as we do in the Bank’s press release for McDermott’s speech, that forecasting  is “helping the Bank plan for the future” and that “forecasts also help people form expectations of the future and therefore guide current actions” you might suppose that the Bank thinks it knows something about the future.     If so, silly you.   Because we are also told that

    Forecasting is not supposed to be prophecy

    Setting aside the quasi-religous connotations of the word “prophecy”, the OED suggests I should take it as meaning a prediction of the future.

    If you can’t predict the future, your predictions can’t help you plan, and they can’t help anyone else plan either.   The Reserve Bank really can’t have it both ways.  Of course, forecasts don’t have to be 100 per cent accurate to help you or others plan, but if they have no information at all about the future they are also no use at all.  Indeed, if your forecasts end up biased one way or another, and you actually think they are telling you something about the future, they can lead you (and anyone else who took them seriously) quite badly astray.

    (As it happens, it is less than a year since the Reserve Bank was out touting evidence of the accuracy of its forecasts. I wrote about that work here.)

    There is none of this is McDermott’s speech.  And while he claims that through the Reserve Bank’s particular approach

    the predictability of monetary policy decisions is enhanced and policy uncertainty is reduced.

    he offers no evidence of this.  Is there, for example, evidence of less monetary policy uncertainty in New Zealand than in other countries?  I’d have thought not, but the Bank doesn’t even try to back its claims.   As we are the only advanced country to have initiated two tightening cycles since the 2008/09 recessions, only to have to reverse them both, a detached observer might reasonably be sceptical.

    There isn’t even an attempt to distinguish between the various possible forecast horizons.  As I understand it, for example, the Reserve Bank isn’t bad at forecasting inflation and GDP one quarter ahead (although even these claims are relative –  on the eve of the GDP release we were often reminded that the actual number could easily be +/- 0.5 percentage points different than our forecast).

    At the other extreme, when (as they did last  week) they forecast the OCR itself for the June 2020 quarter, there is no information value at all about the future.  The right OCR for June 2020 will, in their way of thinking and allowing for the lags, depend on inflation pressures in 2021 and 2022.  No one has the foggiest idea what those pressures will look like.   The Reserve Bank’s forecast accuracy work (linked to earlier) highlighted both the huge errors and the biased nature of those errors, for periods even two years ahead, let alone four to five years ahead.

    And then there are the in-between periods.  Perhaps very good forecasters might be able to add a little value in forecasting inflation and GDP a year ahead,    But even then, that value might be quite small, and subject to huge error bounds.

    But there is none of that sort of differentiation in McDermott’s speech either.

    To be clear, my criticism is not (mostly) that the Reserve Bank is bad at forecasting.  Everyone is.   My concern is that they show little sign of even recognising the limitations of what they are doing (and not much ability to even maintain a consistent story about the role of forecasts from one year to the next).

    The fallback line is that even if forecasts tell one nothing about the future, they help guide people (presumably especially financial markets) on how the Bank might change policy if the data come out differently than the Bank expected.   By publishing forecasts, one could better understand the mental “model” the Bank had in mind, and one could get a sense of the “reaction function” (ie how the Bank responds to a particular inflation outlook, and changes in that outlook).     But even this point is vastly overstated, for a variety of reasons:

    • it doesn’t apply at all to, say, the Bank’s current forecasts of the OCR in 2020.  By then, there will have been another dozen or so sets of forecasts out.
    • it doesn’t even really apply to forecasts of inflation or GDP a year hence.  By the time we discover whether those forecasts are correct, there will have been another three or four sets of forecasts published.

    There is a case that published forecasts of the very next round of quarterly data might be helpful.  If the Bank thinks the next quarter’s GDP data will show an increase of 0.4 per cent, and the actual outcome is 0.9 per cent, then (all else equal) markets are likely to think the Bank is a bit more likely than previously to tighten a bit sooner than previously.     But even then, it is never that simple.   After all, there is noise in the actual data.    But that is where McDermott’s case is strongest, which has nothing to do with the medium-term forecasts.

    The line, which pervades the speech, that it really doesn’t matter if forecasts are right, because they still have useful information, would probably be true in one very specific set of circumstances.

    If the Reserve Bank had, through hard work, divine insight or whatever, uniquely acquired the perfect “model” of how the economy works, but simply didn’t know what new shocks might hit the economy, then the model –  and the associated forecasts –  would have some use.  If a shock hits out of the blue, everyone can be clear how much that shock will affect the forecasts and, hence, how the Reserve Bank will optimally react.

    But to write that down is to expose just how unlike the real world that is.  Typically forecasters have only at best only a vague approximation to the correct “model”, and when data come out that surprise them, it often isn’t a genuine shock – a new event arising outside the system – but rather something that challenges the “model” of the economy the forecasters (or central bank) have been using.    To a considerable extent, that has been the story of the last decade –  not just for the Reserve Bank of New Zealand, but for all of us here and abroad.    It also isn’t a criticism (of the Bank or anyone else), just a description of the limitations of our knowledge.    What is worth criticising is the pretence that the forecasts are offering more.

    A common benchmark is whether a forecast (whether by judgement or a formal model, or some combination) can beat a random walk –  a simple model in which the best prediction of the next period is the actual outcome for the last period.   If not, there really is no point in doing forecasts, since the forecasts are just adding noise.   Over the last eight years, the Reserve Bank’s medium-term OCR forecasts have clearly been worse than a random walk forecast, and they’ve been biased too.  It is harder to do on the other variables (since, for example, they don’t publish core inflation forecasts), but there is little in the evidence to suggest that the medium-term forecasts in particular are adding any value at all.  And yet, as McDermott notes, they take a lot of resources to produce.

    To be clear, I’m not denying that markets and commentators pay some attention to the Reserve Bank’s OCR track all the way out to 2020.  But they do so not because that track has any substantive information about what the OCR will actually be in 2020 –  their guess is probably as good as the RB’s, and both are typically terrible –  but simply because it has become a communications device.  If the Reserve Bank wants to communicate a more hawkish stance, it will typically choose to revise up that forward OCR track (and I’ve sat in many meetings where Governors didn’t want to communicate a hawkish stance and forecasters were told to go away and flatten out the track).   But from a substantive perspective, it is unlikely that there is any more useful information than was contained in this simple sentence from the front page of last week’s MPS.

    Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

    Agree with them or not, there really wasn’t much more to the document –  for all its pages – than that.

    There is a great deal in McDermott’s speech about how helpful the Bank finds its forecasting –  indeed, it must surely be a first for the word “precise” to appear twice in a Reserve Bank press release.  But if (a) you know almost nothing about the future, and (b) you can reasonably confident you don’t even have the right model, it is really all sound and fury, signifying nothing, akin to the ritual incantations of some ancient tribe.

    Almost all the value in the economic analysis the Bank does is in understanding the past and the present.  That is no small challenge in itself.  Making sense of what the output gap (or unemployment gap) is right now, making sense of what explains current inflation or unemployment, is plenty enough to keep lots of smart analysts occupied (after all, look at the revisions to the historical estimates).  There may well be a useful role for some short-term forecasting –  the next quarter’s GDP or CPI outcomes –  and even perhaps for scenario analysis, but anything else should be of almost no value to policymakers –  who will mostly update their OCR decision on the next set of actual outcomes –  or to anyone else.   When we say that we can meaningful forecast medium-term economic developments, we deceive ourselves, and the truth is not in us.

    Finally, McDermott is at pains to try to stress how open to scrutiny and challenge the Bank is –  and repeats the claim that the Reserve Bank is one of the most transparent central banks in the world.    Again, you can’t really have it both ways.  If the forecasts don’t tell the future (as the Bank today wants to claim), there isn’t really any information in them.    It is akin to being transparent about a set of random numbers.   As I’ve noted before, the Bank ranks well on transparency about things it knows almost nothing about –  the future –  while being highly secretive about the stuff it does know about.    We don’t see the background papers the Governor considers in coming to his published forecasts, we don’t see even summaries of the advice the Governor receives on the OCR, we see nothing of the minutes of the Monetary Policy Committee or the Governing Committee and so on.  And it is not as if the Bank could really justify secrecy on the basis of the old line “trust us, we know what we are doing”.   Demonstrably, they haven’t convincingly passed that test for some time.  Instead, they hide behind all this talk of “precise” thinking, detailed processes, alleged openness to new ideas, encapsulated in ongoing updates to the forecasts.  The unnerving thing is that McDermott at least appears to believe it.

    I popped into the Wellington Public Library’s annual book sale yesterday and came away with an interesting little book by a Princeton academic, The Road to Delphi: The Life and Afterlife of Oracles.  Flicking through it, I couldn’t find a good quote that was both apt and fair to apply to the Bank, but it isn’t hard to think that the Bank’s forecasts may play more of quasi-oracular role, with all the actual forecasting capability of the oracles of Delphi or modern astrologers (for which there is clearly a revealed demand), than a substantive economic one.

    And since readers often respond with “so what would you do?”,  I would

    • stop publishing OCR forecasts at all,
    • restrict published economic forecasts to the year ahead, and
    • re-orient the analytical (and particularly) the communications effort much more squarely on making sense of where we are now.  That is quite hard enough, and without a good fix on that, everything else is largely sailing blind.

     

     

     

     

    One of the more idiotic headlines I’ve ever seen

    Of course, there is plenty of competition.  But this isn’t the latest on Kim Kardashian or Prince Harry, or whatever.  It is about house prices.   And this time one can even, sort of, excuse the media outlet concerned

    According to the Herald,  New Zealand housing market 40% chance of going bust, says Goldman Sachs.  

    Sounds bad.  Or perhaps promising if you care about the prospects of your kids being able to buy a house.

    But quite what does “bust” mean here?  Well, not quite what you or I might think of us as a bust.

    Goldman, Bloomberg said, defines bust as house prices falling five percent or more after adjustment for inflation.

    A five per cent fall in real house prices is a “bust”???  In what sort of alternative universe?   If the Reserve Bank does its job and keep annual CPI inflation around 2 per cent, unchanged nominal house prices for 2.5 years is a real fall of around 5 per cent.

    As recently as 2008/09 –  no one’s definition of a house price “bust” in New Zealand –  nominal house prices fell by 9.1 per cent in year to March 2009.  The total nominal fall was a bit larger than that, and the real fall was a bit larger again.   In serious ‘busts” abroad, real house prices have fallen by 50 per cent (most of that nominal). In the late 1970s in New Zealand, real house prices fell by 40 per cent.

    But, of course, the worst of it isn’t Goldman Sachs fishing for headlines with ill-chosen labels for modest corrections, but politicians who fall over themselves to suggest that, no matter how awful and unaffordable current house prices are, we can’t possible have house prices falling.

    Last month it was Andrew Little

    But asked if he welcomed signs Auckland house prices were falling, Little said no.

    Today, Phil Twyford seems to be running the same line

    Labour housing spokesman Phil Twyford said a housing bust could be just as bad as skyrocketing prices.

    (In fairness, even though this quote appears in the “bust” article, it is possible Twyford has something more in mind than a 5 per cent real fall when he talks of a “bust”).

    Flat nominal house prices might be an improvement on what we’ve had, but as I illustrated in a post last month

    Depending on how optimistic you are, [with flat nominal house prices] it could take 40 to 50 years to get house price to income ratios back to around three – the sort of level sustained over long periods in well-functioning US cities (and in many other places before land use regulation became the fashion). Perhaps you are sceptical New Zealand could get back to three. It would take 20 years or more just to get back to five.

    Of course, it isn’t as if other political parties are really any better.

    If Amy Adams had been asked, at today’s launch of the plan for the government to build lots of houses, if she was hoping to see house prices fall, I wonder what she would have said?

    The Green Party co-leader,  Metiria Turei, did once call for a slashing in Auckland house prices.  But that was a year ago, and nothing more has been heard of that call.

    Last year, Arthur Grimes called for a 40 per cent fall in house prices.  That was greeted by the then Prime Minister with the label of “crazy”.  As I noted at the time

    It betrayed a fundamental lack of seriousness on the part of the Prime Minister and the government about making housing affordable, and in fixing the dysfunctional market that they –  and their Labour predecessors –  have presided over.

    Arthur noted that no politician has been willing to give a a straight answer on how much they wish house prices to fall and suggested

    I suggest that this simple question should be asked every time a politician (of any stripe) talks on the subject. One can then see if they are really serious about making house prices in Auckland affordable for ordinary people.

    Indeed.

    Big changes in relative prices can be disruptive.  They already have been, on the way up.  But as I noted last year

    if some people will suffer in house prices fall, that is only the quid pro quo for relieving the pressures (“suffering”) on whole classes of people who find it desperately difficult to afford a house at all, especially in Auckland –  the younger, the less well-established, the newer arrivals, those without wealthy parents to fall back on.

    It amused me last year when someone passed on a report of a talkback caller who had insisted that I couldn’t be a real economist because I favoured a fall in house prices.   I think what caller had had in mind was the sort of fall in house prices that results from massive overbuilding, and reckless lending.   Severe recessions are often associated with those sorts of gross mis-allocations of resources.

    But we’ve had no sign of overbuilding (if only…) and not much sign of reckless lending either (if banks had been inclined to, successive waves of LVR controls have made it that much harder).  Instead, we could fix up the housing market by freeing up land supply (because the biggest underlying issues –  for all the talk of building houses –  are land, not the house on the land).   And we could help by taking off some of the population pressure, even if only temporarily.    People who had bought in the last few years, might well find themselves in a difficult position.  People who haven’t been able to buy or build would be much much better off.  And for most of us, it wouldn’t make a lot of direct difference at all –  the mortgage you were planning to pay off over 30 years, would still be being paid off over 30 years.   There wouldn’t be an economic recession in consequence, rather than would be a new wave of optimism and opportunity as land –  not exactly naturally scarce in New Zealand –  was once more affordable.

     

    The IMF’s paper on New Zealand immigration

    The International Monetary Fund (IMF), like their counterparts at the OECD, tend to be big fans of immigration.  And if some is good, more is generally better.  If immigration in some times or places make a lot of sense, it probably should do so in all times and places.  Or at least that is the sort of tone that often pervades their documents.   There is, no doubt, a variety of reasons for these stances –  some good, some less so – but it can’t hurt that these organisations are made up largely of highly-paid economists who have themselves left their own countries to ply their trade in some of the richer and more comfortable capitals of the world.   Theirs is, typically, a migrant’s perspective, rather than that of a citizen of a recipient country.  And no one doubts that migration typically, or an average, benefits the migrant.  If it didn’t, then mostly they wouldn’t move.

    Last year, the IMF was out championing the potential gains from immigration in one of their flagship publications, the World Economic Outlook.    I wrote here about the work they were highlighting –  some empirical estimates suggesting some rather implausible things.

    If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

    Come to think of it, the model also implies that if 20 per cent of New Zealanders moved to Australia (oh, they already have) and an equivalent number of Australians moved to New Zealand, we could soon be as wealthy as Australia is now, simply by exchanging populations.   Believe that, as they say, and you’ll believe anything.   (Since the New Zealand Initiative also drew on this IMF work in their advocacy piece on New Zealand’s immigration policy, I also touched on the Fund research here.)

    Last week, the IMF released their Article IV report on New Zealand.  In the main text, there is a pretty typical, but not very specific, tone around the generally beneficial effects of high rates of immigration to New Zealand.    The Fund’s Board happily went along, noting among other things.

    Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

    As I noted last week, there was no hint of what these benefits might be, or how they might be “leveraged”.

    But buried deep in the package of papers released with the Article IV report was an annex with some interesting empirical research on the economic effects of immigration. It can be found starting on page 39 of the report document.     These annexes, or what used to be called “selected issues” papers, involve someone on the Fund staff team doing some more in-depth work on a topic of relevance to the specific member country.  Topics are usually agreed with, and may be suggested by, the national authorities (in practice, the Reserve Bank and Treasury).   I commend those agencies for asking for, or agreeing to, this work.

    In opening, the paper notes

    Over 1990-2014, net migration measured as annual net flow of foreign born
    population averaged about 0.9 percent of previous-year population, which is around twice the OECD average

    and

    In New Zealand both inflows and outflows fluctuate markedly over time, which has a resulted in more volatile net migration compared to most other OECD countries.

    The IMF’s own starting presumptions are clear.

    The educational attainments of New Zealand’s migrant population suggest that
    migration policy has contributed to raising human capital

    They include a chart showing that, relative to other OECD countries, a larger proportion of New Zealand’s migrant have a university degree, but appear unaware of the OECD skills data that shows that, even so, the average skill level of immigrants has still been lower than the average skill level of natives.

    But the focus of the paper is on two quite separate pieces of empirical analysis, one focused specifically on cyclical effects in New Zealand, and the other focused on longer-term growth and productivity effects, but not specific to New Zealand at all.

    The modelling of the cyclical effects appears to be very similar to some research work published by the Reserve Bank a year or so ago (the paper is here, and my discussion of it is included in this post), which distinguished between net migration flows between New Zealand and Australia, which are heavily influenced by what is going on in the Australian labour market, and other net migration flows.

    For the “other” migration they find exactly the sorts of results one would expect, and which researchers in New Zealand have pretty much always found (going back many decades).   For these migration shocks, the demand effects tend to outweigh the supply effects in the short to medium term,   This is a point that seems to be repeatedly lost in the current popular debate on immigration.  Migrants aren’t just workers, they are consumers (and need new capital stock).  So in the short to medium term immigration shocks tend to lower unemployment (and increase the “output gap”).  All else equal, in the short to medium term, they increase inflation pressures.

    Both the IMF and the Reserve Bank’s researchers find something a bit different for migration between New Zealand and Australia that is associated with Australian labour market shocks (proxied by changes in Australian unemployment).    Reduced net flows to Australia are associated with slightly higher unemployment (and lower employment) in the short-term –  and, thus, presumably weaker inflation pressures.

    Unfortunately (and perhaps they were pressed for space), the IMF left out the critical point that the Reserve Bank’s researchers had acknowledged

    the Australian unemployment shock could capture other indirect demand effects. There are common drivers of labour market movements in Australia and New Zealand, and these common drivers mean that the Australian and New Zealand unemployment rates typically co-move. A high Australian unemployment rate is reflected in higher unemployment in New Zealand, but also high net immigration.

    In other words:

    • similar international shocks often hit both New Zealand and Australia.  When they do, Australian unemployment rises, and (net) fewer New Zealanders go to Australia, but New Zealand unemployment also rises, not because of the change in the immigration numbers but because of the international adverse shock itself.
    • Australia is also the largest trade and investment partner for the New Zealand economy.  Thus, any downturn in Australia (whether home-sourced or global) will reduce demand for New Zealand goods and services, and perhaps investment in New Zealand by the many Australian companies operating here.  All else equal, those effects will weaken demand and employment, and raise unemployment, in New Zealand.  At the same time, (net) fewer New Zealanders will be moving to Australia.  The estimates in the Reserve Bank and IMF models capture the combined effects of all this, not just the effects of a change in immigration flows between New Zealand and Australia.

    On my reading, the safest conclusion remains –  as it always has –  that increased net migration inflows (especially if they arise from things exogenous to the New Zealand market –  whether global events or New Zealand policy changes) increase pressure on local resources in the short to medium term. But if, at the same time, demand in one of our major markets is also weak, the overall effect (of the weak international demand and the increased immigration) will not necessarily be to require higher interest rates.  If we could have one without the other, there would be a cleaner test.  With the Australian flows, no one has yet done the research to enable us to do so.

    The second half of the IMF paper looks at “how migration affects growth, factor accumulation, and productivity in a sample of OECD countries”.      This is similar to what the IMF did in the paper they published last October (see above), and relative to that paper it has some pros and cons.

    The downside is that it uses a smaller sample of OECD countries (this time only 14, whereas the earlier paper used 19).  And whereas in the earlier paper, all the countries were already advanced market economies in 1990 (when the data start), this one includes Hungary.   Unlike the earlier paper, this paper also includes Luxembourg, which complicates things because a large proportion of Luxembourg’s workforce doesn’t actually live in Luxembourg, so making sense of their data is harder than usual (there is, for example, a very large gap between GDP –  stuff produced in the country –  and GNI – income accruing to residents of the country).

    On the other hand, the earlier paper only looked at GDP per capita, and simply hand-waved about where the large suggested gains from migration might be coming from, suggesting that we might expect to find a boost to total factor productivity (TFP) growth.  By contrast, in this exercise for the New Zealand Article IV the Fund’s researchers look specifically at productivity measures, both labour productivity and estimates of TFP.

    The modelling exercise does not produce results for any individual country; rather they are average results across this pool of very different countries.   Here is the summary table from the IMF’s paper

    imf migration results

    Tables like that can be a bit hard to read.   On GDP per capita, the results suggest that over this period and for these countries on average

    “a net migration flow of 1 per cent of total population is associated with an increase in output of nearly 1.5 – 2 per cent, driven by an increase in both employment and the capital stock”

    That sounds good (and, if still implausibly large, not inconsistent with the results in the earlier IMF paper).   But note that there was no mention of productivity gains in that quote.   We’ve seen these sorts of results, in different types of models, in Australasia before.   Since migrants tend to be relatively young they, for example, tend to have a higher average labour force participation rate than natives (not too many 80 year migrants).   One can get a boost to GDP per capita, at least for a time, even if there are no gains in productivity, and if there are no gains in productivity there are no long-term gains to natives.  This was the sort of result the Australian Productivity Commission suggested in its recent report on immigration.

    So what did this particular IMF cross-country empirical exercise suggest about productivity effects?

    For labour productivity, you can compare the two lines ‘output” and “hours”.  On one specification, output and hours increased almost identically (so no labour productivity effects at all, and in the second specification of the model, output increases less than hours (1.54 vs 1.72).   We don’t know if that difference is statistically significant, but lets assume not.  At best, immigration produced no gains to labour productivity, across these particular 14 countries, in the last 25 years.

    And what of TFP?  The authors report those results directly.  In both specifications, the coefficients are negative, but not statistically significant.  Again, at best, no TFP gains from immigration across this pool of countries over the last 25 years.

    I’ve previously showed simple scatter plots suggesting that the correlation coefficient between immigration –  using the immigration data in the previous IMF study – and TFP growth, cross-country, is negative –  the outlier in the top right is Ireland, and as this post illustrated, Irish immigration growth came several years after its TFP surge.

    imf-mfp

    As I said, this new IMF work isn’t a New Zealand specific result.  But it might have been nice if the IMF authors, in a New Zealand focused paper, had included a chart or table highlighting how New Zealand’s experience compares to the average finding.  For example, of the countries in the study, only Luxembourg had higher net immigration (as a share of population) over the same period, and over the period we’ve had moderate per capita income growth, very weak labour productivity growth (third lowest of these countries over this period) and pretty disappointing TFP growth by international standards.  You would have to suppose that we look like an outlier (relative to this model, over this period).      Of course, there may be others things at work –  a relatively simple model like this can’t capture everything –  but if you are an international agency wanting to use international research findings to buttress a policy choice of a New Zealand government, surely you owe it to readers –  whether interested citizens, or officials and politicians –  to provide some detail on how New Zealand’s experience looks to compare to the general results of your model.

    As I’ve said repeatedly, I’m quite comfortable with the idea that migration at some times and in some places will benefit natives of the receving country/region.  These particular results aren’t that encouraging on the score (no productivity gains on average), even for the larger group of advanced countries as a whole in modern times.  But if migration benefits natives economically in some times and places –  as it no doubt did in 19th century New Zealand –  there is no reason why that automatically translates to a conclusion that all cross-border migration anywhere and at any time is beneficial.  In fact, even in this study, a finding of no productivity gains (labour or TFP) across the whole sample must mean that, even if the model is robust, some countries will have had positive experiences and others negative.  My suggestion is that New Zealand’s has been negative.  Nothing in the IMF results challenges that.

    Having said that, it was good to have the work done.  I hope the authors considered extending or refining it, and if they are still working on New Zealand issues to drawing out more explicitly how New Zealand’s experience is best explained.