Month: November 2015

On reading “Migration Trends and Outlook”

Michael Reddell Immigration

It is a glorious day in Wellington, suggesting that summer might really be with us soon.  Tempting as it is to just get outside, I had been reading MBIE’s flagship annual report Migration Trends and Outlook 2014/15 and wanted to note (again) a few concerns about the apparent quality of the immigration policy analysis being undertaken by the government’s chief advisory agency in this area.

Recall that, in New Zealand, immigration policy is no minor matter –  it is one of the largest discretionary structural economic policy interventions undertaken by governments.  Each year, on average, we drift a little further behind Australia and the rest of the advanced world.  And yet each year we target bringing (permanently) another pool of people equivalent to 1 per cent of the existing population.

Migration Trends and Outlook is not a heavily analytical piece.   But it tells the story MBIE wants us to hear about New Zealand’s immigration.  And it simply isn’t very convincing.

The report saying that it is aimed at “policy-makers concerned with migration flows and their impacts”  and “the wider public with an interest in immigration policy and outcomes”.

So we should take seriously what it says.  It begins with this statement:

1.2 Why immigration is important

Immigration helps grow a stronger economy, creates jobs and builds diverse communities. Skilled workers address skill shortages and bring skills and talent that help a wide variety of local firms. Business migrants bring their networks, experience and capital to boost the economy. Visitors and international students bring in significant revenue, with international education and tourism being two of New Zealand’s biggest export-earning sectors.

Internationally, migrants are increasingly mobile, and competition for skilled people in the global labour market is strong. In 2014/15, as in other recent years, the focus of immigration policies continued to be on attracting skilled temporary and permanent migrants to help resolve New Zealand’s labour and skill shortages and to contribute to New Zealand economically.

The “skill shortages” line pervades the entire 66 page document, in a way redolent of a manpower planning exercise from the 1960s.  In fact, it reaches a peak in the Conclusion to the entire report where it is asserted that

Like many countries with declining birth rates, an aging population and high emigration of local-born people, New Zealand relies on migrants to fill labour shortages.

I’ve been trying to work out which countries MBIE has in mind here.  For a start, there aren’t that many relatively advanced countries that have an average annual net outflow of their own citizens in excess of 0.5 per cent of the population.  And of the countries with large average outflows of their own citizens (various eastern European countries for example), few have large scale inward migration programmes at all.  And of countries with large scale inward migration programmes  – Canada or Australia for example – I’m not aware of any others that also have large net outflows of their own people.

So the statement seems to be factually false.  But perhaps more concerning is the apparent sense that somehow the number of jobs in an economy is independent of the number of people, or the price of the services of those people, and that if it weren’t for the wise actions of a prescient government, the economy really couldn’t cope with (a) New Zealanders pursuing better opportunities abroad, and (b) New Zealanders choosing to have only modest numbers of children.

What I find remarkable in this document, as in other MBIE immigration work I’ve seen, is the absence of any sense of market processes, and how the market might sort these things out.  For example, if there are excellent opportunities here which New Zealanders are simply ignoring in their rush to get to Australia, surely we’d expect real wages to increase here?    If that happened, some of the opportunities might disappear.  Some New Zealanders might change their minds about going to Australia.  Some people might regard more training as worthwhile, to better equip themselves for those higher-paying opportunities.  Some will switch jobs from less rewarding ones, to the ones where the returns are now higher.  Some people might work harder or stay in the workforce longer.  But not one of these market mechanisms is even discussed.  And this from a key economic agency, implementing the policy of a vaguely centre-right government?  Does it not occur to them that “shortages” don’t happen in most markets, and when they do they are usually just a sign that the price has not adjusted.  Why does MBIE think that labour is different?

Although MBIE and the government seem to see immigration largely as a labour market phenomenon (“a critical economic enabler”), the price of labour  “wages”  appears only once in the entire document (purely descriptively).  “Price” does not appear at all.  In fact, “productivity” and “competition” each appear only once, in neither case in the context of an analytical sentence.  “Labour market” does appear repeatedly, but almost always only descriptively.  There is simply no sense, anywhere in the document, of a competitive market process at work.  If one were being unkind, one might think MBIE saw the role of government as being to ensure that the right pegs were in the right holes.

The “skill shortages” argument has been with us for many decades.  I was wryly amused to dip into a book over the weekend which reported the claims of New Zealand employers’ bodies in the 1920s urging high rates of immigration on exactly the same sort of “skill shortage” arguments.  You really wonder how countries without large scale immigration programmes managed to survive –  let alone to consistently economically outperform New Zealand over many decades.

Immigration advocates have sometimes argued that if only we can attract the cream of the global crop –  talent, initiative, ideas – we can lift the productivity of New Zealand as a whole, and that of the pre-existing population as well.  It was never very plausible –  short of some of global catastrophe, it was never obvious why the cream would now want to come to New Zealand –  a pleasant spot to be sure, but small and very remote, and not at the leading edge of very much.  There is periodic talk of the transformative powers of immigrants in Silicon Valley, but even if it were true there, why would it be likely (on the balance of probabilities) to work here?   We are small and distant.  San Francisco is neither.  And we have universities that, in most fields, are mediocre at best.  We are fooling ourselves –  or rather our governments seem to keep trying to fool us – if we believe that plausible immigration (volume, type of people, or whatever) is the answer to New Zealand’s economic challenges.  There is no sign it has been in the last 100 years, and the boosters –  MBIE chief among them –  offer no reason to think that is about to change.  We have to make our own future –  as most successful countries in the past have done.  If we do, perhaps able people will be clamouring to join us and we can (or not) take the pick of the crop.  For the present, it still seems more likely that rational New Zealanders will choose to leave for Australia whenever they can, although it is harder to do so than it was previously.

I’ve written previously about the relatively low-skilled nature of even most of those being granted residence as Skilled Migrants over recent years.  The table below (from the MBIE report) updates that for 2014/15. And recall that these are the principal applicants in the Skilled Migrant category –  ie the most skilled of our migrants.  They make up only around a quarter of our annual residence approvals.  Not all of the others will be less skilled, but on average they will be.  I don’t know about you, but this list does not suggest that our immigration programme is functioning as any sort of medium-term “critical economic enabler” (to use one of MBIE’s own phrases).

 

Main occupations for Skilled Migrant Category principal applicants, 2014/15  
   
Occupation 2014/15
Number %
Chef 699 7.2%
Registered Nurse (Aged Care) 607 6.2%
Retail Manager (General) 462 4.7%
Cafe or Restaurant Manager 389 4.0%
ICT Customer Support Officer 282 2.9%
Developer Programmer 209 2.1%
ICT Support Technicians nec 205 2.1%
Software Engineer 147 1.5%
Accountant (General) 138 1.4%
Early Childhood (Pre-primary School) Teacher 127 1.3%
Marketing Specialist 124 1.3%
Dairy Cattle Farmer 123 1.3%
Carpenter 122 1.3%
Electrician (General) 111 1.1%
Office Manager 106 1.1%
Baker 105 1.1%
Program or Project Administrator 97 1.0%
Software Tester 95 1.0%
Sales and Marketing Manager 94 1.0%

I noted the other day, that the residence approvals target has not been met for the last five years (the target is 45000 to 50000 per annum, and approvals have lagged a bit below 45000 each year).  That raises some questions about even the design of our immigration programme.  I’ve always tended to work on the assumption that since most of the world is much poorer than we are, it should never be a problem finding enough immigrants if we wanted them –  even notionally “skilled” ones.  Returns to labour in New Zealand are higher than anywhere in Africa, Latin America, the Pacific, or most of Asia.  There are plenty of English speakers who could pass health and security tests.  So how come we can’t fill our targets with suitably “skilled” people –  especially as the skills threshold seems depressingly low?

I wonder if it is partly because most residence approvals are now granted to people already living in New Zealand (around 70 per cent) –  that is typically people here on a work visa, or a study visa.   The logic is apparently that people adjust more easily if they are already familiar with New Zealand.   So in applying under the skilled migrant category you get points for having a job or confirmed job offer.  92 per cent of successful applicants got points that way.  You also get points for a job outside Auckland, even though Auckland is the fastest-growing part of our economy –  just over half of all those with jobs/offers claimed points for jobs out of Auckland.

But it is expensive to come to New Zealand –  particularly for people relocating a family here.  And it is hard to effectively job-search from abroad.    And we impose an additional cost by rewarding people who get job offers in the less productive parts of the country (with fewer alternative future opportunities).   Personally, I think our immigration policy is pretty deeply flawed, but if our governments are serious about wanting lots of skilled migrants shouldn’t we think about putting fewer roadblocks in the path of any able person who wants to come?  There seems to be something wrong with the fact that a country with still relatively high returns to labour can’t manage to fill its immigration target (despite alleged “skill shortages”), even by taking such a pool of rather dubiously “skilled”people.    10000 a year (the number of skilled migrant principal applicant granted approval) simply isn’t that many in world terms –  we really should be able to do better than having the four most common occupations of our skilled migrants being chefs, aged care nurses, retail managers and café and restaurant managers.

Perhaps the continued emphasis on skill shortages is a sign that MBIE has largely given up on the other channels by which immigration might boost “the prosperity and wellbeing of New Zealanders” [the phrase from MBIE’s own mission statement]?  But even if so, the “skill shortages” argument –  for the sorts of people New Zealand is mostly importing –  is pretty intellectually slipshod.  In addition to the points I noted earlier, the MBIE document is also devoid of any macroeconomics.  It has long been pretty common ground among New Zealand macroeconomists that, whatever the possible long-term effect of immigration, in the short-term immigrants add more to demand than they do to supply.  The Reserve Bank’s own research shows it.  But what that means is that even though an individual immigrant might relieve an individual employer’s “skill shortage”, in aggregate an increase in immigration increases the pressure on the labour market as a whole. Resource pressures are intensified and not eased.  If the knowledge transfer and productivity stories carried much weight now for New Zealand –  as perhaps they may have in the 19th century – that might be fine.  But there is no evidence of that channel having worked, and no real sign of that changing soon.  And yet if our immigration policy is supposed to ease skill shortages it is almost doomed to fail by construction.

We deserve rather a better quality of analysis from a large public agency paid to provide high quality economic advice on immigration and economic performance issues.  I hope that when the Cabinet has been reviewing the residence approvals target recently they have been more willing to ask some hard questions about just what is being achieved by our immigration programme than has been evident to date.

Founding the Fed

Michael Reddell Central banks

It has been at least a week since I mentioned central banks on this blog  – probably a first.   There are many areas of economics and public policy that interest me more, and which matter more.  But I have just finished reading Roger Lowenstein’s new book, America’s Bank: The Epic Struggle to Create the Federal Reserve.  The Federal Reserve opened for business on 16 November 1914, amidst  the global liquidity crisis, affecting the United States as much as the combatants, created by the outbreak of World War One.   There was, of course, little hint of what was to come when Woodrow Wilson had signed into law the new Federal Reserve Act into law on 23 December the previous year, one of the landmark pieces of legislation in Wilson’s first year in office.

(For anyone wanting to know more about the 1914 crisis, there are two worthwhile modern books; Saving the City  is a British-focused global story and When Washington Shut Down Wall Street is the American story.)

Lowenstein is a financial journalist (rather than an economic historian), with a number of books to his credit.  He is perhaps best-known for When Genius Failed: The Rise and Fall of LTCM.  His tale of the political and banking background to the passage of the Federal Reserve Act is a very readable account for anyone interested in the topic.   In places, it felt like an account of 1912 presidential election campaign – a particularly torrid affair as the Republican incumbent, Taft, was challenged at the general election both by the Democrat Wilson, and by Theodore Roosevelt, Taft’s predecessor and former friend and mentor.  I hadn’t realised how important William Jennings Bryan –  1896 Democratic nominee, and author of the famous Cross of Gold speech –  still was in the Democratic party’s own debates on a central bank.

By the early 20th century, the United States was relatively unusual , but hardly unique, in not having a central bank.  Britain, France, Japan, Germany and Italy all did, but then Canada, Australia, South Africa and New Zealand did not.  The US had had central banks previously –  the most recent had lost its position when Andrew Jackson vetoed the renewal of its charter in the 1830s.   But what marked out the United States in the 1900s was not the absence of a central bank but the presence of repeated severe financial crises –  the most recent in 1907, the effects of which –  while relatively short-lived-  were felt around the world.  As I’ve noted here previously, it is not as if the repeated financial crises seemed in any way to be derailing the longer-term  progress of the United States or the sustained lift in living standards.  At the time, the United States competed with places like New Zealand and Australia for having the highest material living standards in the world.

But in the short-run, the crises were enormously disruptive,  and even the seasonal pressures  – in an economy where farming still played a large role –  were large.  There were plenty of signs that something was broken, and some fix was needed.

The fix chosen turned out to be a central bank –  or rather, a system of regional central banks, loosely overseen and bound together by the Federal Reserve Board in Washington.

It needn’t have been.  Lowenstein tells the story as if the only sensible outcome was the founding of a central bank –  an outcome towards which all history was tending.  He tells his story vividly, and draws on a wide range of primary and secondary sources –  and the cover includes plaudits from former central bankers Ben Bernanke, Alan Blinder, and Paul Volcker.  But the book is weakened because the author shows no sign of having engaged with the alternative hypotheses about what had left the American system so prone to crises.    Many –  most recently Calomiris and Haber – have noted the contrast between the US system and that of Canada, which has been largely free of serious financial stresses before and after the founding of the central bank in 1935.  On a much smaller scale, but also in a heavily agricultural economy, one could include among the relative stable systems that of New Zealand.

If what rendered the US prone to crisis was the absence of a lender of last resort –  or even of external seasonal finance –  then the case for a central bank was much stronger. But a plausible case can be made that what left the US system prone to crises was the regulatory structure put in place over the previous few decades.  The United States system pre 1914 is often loosely characterised as “free banking”.  In fact, it was a highly regulated system.  The two most important regulations were the restrictions on branch banking and interstate banking, which made it very difficult for banks to effectively diversify risks, including liquidity risks, and the restrictions on the issuance of notes.  Physical currency was still a hugely important medium, and demand was highly seasonal.  State banks could not issues notes, and national banks were able to issue their own notes only to the extent that they held US government bonds to back them.  Bonds were relatively scarce, and expensive and, as noted, the demand for notes was highly seasonal.  The conversion of a deposit into a note did not change the nature of the credit risk the holder of the claim faced, but the ability of banks to do that readily, when customers wanted it, was constrained by law.  Perhaps the political economy would have made dealing with the restrictions on the geographic scope of banks impossible  at the time (it took many decades), but Lowenstein does not even deal with the question of whether, for example, amending the restrictions on the note issue might have largely dealt with the pressures –  for an ‘elastic currency’ – that, at the time, gave rise to the creation of the Fed.

Not doing so perhaps make the construction of his narrative easier, and more powerful.   But by not treating seriously those opposed to the creation of a central bank it does limit the insights he can offer.  Some perspectives from, say, the archives of the Bank of England of the Banque de France on what they made of the whole long process might also have been interesting.   Of course, the beauty of being a big country is that there are many other books and papers that deal with some of these issues.

I notice that George Selgin, from whom I’ve learned a great deal over the years, expresses similar views in his own comments on Lowenstein’s book and offers some richer comments on the weaknesses of the pre-1914 regulatory structures.  To repeat, Lowenstein’s book  is a good read, especially for anyone interested in the politics of it all, but just bear in mind the limitations

Our own central bank was not founded for another 20 years, opening for business on 1 August 1934.  There is a line commonly heard these days that central banks were largely created to deal with financial system stresses.  That was true in the United States –  although the most severe crises in US history have come since 1914 –  but it certainly wasn’t true here (or in Australia or Canada).  The Reserve Bank of New Zealand was created to allow independent macroeconomic management for New Zealand, especially to be distinct from Australia.    No one envisaged anything quite like modern discretionary central banking, with data reviews and potential policy adjustments ever six or eight weeks.  But it was about ensuring that New Zealand conditions –  export earnings and access to credit in London –  drove the behaviour of domestic credit in New Zealand, not those of the larger Australasian area.   New Zealand’s sovereign debt was extremely high around the time of the Great Depression, but nothing like as concerning to lenders as that of Australia.

Gary Hawke’s 1973 history of the Reserve Bank, Between Governments and Banks, remains the best account of the background to the founding of our central bank.    A more easily accessible perspective, by Matthew Wright –  a New Zealand historian on the Reserve Bank’s staff – is here.

If they build it, what if no one comes?

Michael Reddell Public finance, Wellington

A throwaway line of mine a couple of weeks ago about the Wellington City Council’s enthusiasm for the proposed airport runway extension prompted a couple of comments here from Tim Brown, chair of Wellington International Airport Limited (WIAL) –  owned 66 per cent by Infratil and 34 per cent by the Wellington City Council.  As I noted in response to Tim, I was predisposed to be sceptical about the proposal, but would be keen to see the analysis when it was published.

This week a swathe of reports was released, including a cost-benefit analysis prepared for WIAL by Sapere Research Group.  The Dominion-Post led with talk of $2000 million of benefits for an investment of $300 million or so, suggesting that there really shouldn’t need to be much further debate about the economic merits of the proposal.

But, of course, any cost-benefit anaIysis is only a reflection of the assumptions fed into it.   So I spent some time yesterday reading the report.  I had a few questions and observations, and was left unpersuaded that this was a proposal that either my rates or my taxes should be used to fund.  Quite possibly, this proposal could offer even worse value than Transmission Gully –  as the WIAL report notes, the benefit to cost ratio  for that project is only 0.8.

The report proceeds by analysing three options:

  • Option 1:  Build the extension now, to be open from 2020.
  • Option 2:  Build it in 10 years time, to open from 2030,
  • Option 3:  Using the equivalent of the capital cost of the extension instead to promote Wellington airport as a “tourist and airfreight hub” for the next 40 years (the estimated economic life of the extended runway).

The alternative options seem designed to deal with the irreversibility involved in committing now to build now.  I’m not convinced that the delay option does that to any useful extent.  Will it be any clearer 10 years hence whether a material number of long haul flights from Wellington will be viable?  It doesn’t seem quite like a decision on whether to invest in a new technology now, or wait a few years until it is more apparent what the potential of that technology is.

In any case, the bottom line is the estimated benefit-cost ratio for each of the three options.

Option 1                               1.7

Option 2                               1.6

Option 3                               1.4

Even just reading that far into the summary, my eye was drawn to Option 3, and then Option 2, and only finally to Option 1, WIAL’s preference.  Why?  Well, if a heavy promotional programme could really boost passenger numbers etc as much as extending the runway (as the scenario assumes), why not just go for that.  If it works, most of the benefits accrue anyway.  And if it doesn’t, the programme is not irreversible and could be canned five or ten years hence.  As for Option 2, it delivers almost all the benefits of Option 1, without having to do anything for 10 years.

The report had quite a lot of interesting material about how a longer runway will allow airlines to use aircraft more efficiently than they do now.  Load factors will, apparently, be able to be increased on the trans-Tasman flights and a longer runway will also apparently allow landings and take-offs to be done in ways that put less pressure on engines and tires than is the case now.   That all sounded plausible enough, but they also sounded like gains that should be able to be captured by WIAL in, for example, its landing charges.

It was a little hard for me to tell – I might have missed something in the tables – but main factor in the success or failure of the airport extension if it went ahead seems to be whether and, if so, how many long haul international flights and passengers would be added.   The sceptics’ worry is that if they build it, perhaps no one will come.

The cost-benefit analysis does not look at that scenario at all.  It uses traffic volume forecasts and scenarios prepared by another set of consultants.  Using Monte Carlo simulation techniques they generate scenarios that are supposed to represent 5th and 95th percentiles around the central forecasts.

Even in the low scenario, international passenger numbers are forecast to grow by 2.5 per cent per annum over the next 45 years in the business-as-usual baseline.  Add in the runway extension –  and recall that this is the low scenario (the 5th percentile) –  they are forecast to grow by 3 per cent per annum.  Over 45 years, those cumulate to really big differences:  204 per cent growth vs 278 per cent growth .   The consultants estimate that there is only a 5 per cent chance that passenger numbers will fall below these levels.  But how credible is that?   Shouldn’t we at least see a scenario in which no long haul services use Wellington airport, and the only gains result from the ability of existing operators to use aircraft more efficiently?

One of the puzzling – or perhaps not so puzzling –  aspects of the report is the complete absence of any analysis of Christchurch airport’s experience with long haul flights.

The traffic forecasts, prepared by InterVISTAS, involve a central scenario in which in thirty years time there would be 56 long haul departures a week from Wellington (eight per day on average).   This is defended with the observation that “Wellington in 30 years time. (FY 2045) will have less than half the number of average weekly frequencies on long haul services as Auckland has now.”  And this was supposed to reassure me?  In addition to having almost four times the population of slowly-growing Wellington (and a larger hinterland), Auckland is inevitably a more natural gateway to New Zealand than Wellington is.  The authors go on to defend their assumptions with the observation that Adelaide has 44 weekly long haul departures (their forecast for Wellington in 2035).  But Adelaide is a city of 1.3 million people.

And still no mention of Christchurch.  Christchurch has about the same population as Wellington.  And if Auckland is one natural gateway to New Zealand, Christchurch is the other, given the much greater tourist appeal of the South Island (and the impossibility of long haul flights into Queenstown).  I couldn’t find an easy reference to how many direct long haul flights there are out of Christchurch at present, but there seem to five weekly flights to Singapore.  A new service to Guangzhou is also starting this month, so perhaps that is another five flights a week.  Other wide-bodied aircraft use Christchurch airport, but to get beyond Australia you still have to stop in Australia.

And it is not as if long haul international flights from Christchurch are relentlessly increasing.  I have distant memories of flying direct into Christchurch from Los Angeles, but that was 10 years ago, and the service is long gone.  AirAsia’s direct flights from Malaysia to Christchurch didn’t last long either.

Surely it is such an obvious comparator that the Christchurch experience really should have been addressed directly?  I can think of a couple of areas where demand for flights in and out of Wellington might be greater than those to and from Christchurch –  business and government, and they are probably more lucrative than leisure travellers –  but we should have seen the analysis?  At the moment, it looks as though the Christchurch story might be a little uncomfortable and so has been quietly ignored.  (Canberra comparisons might also have been interesting.)

For a long-lived asset one would normally expect the discount rate used to make quite a difference to the viability of the project.  Cash flows far into the future aren’t worth very much if the providers of the capital have a high cost of capital, and thus need a high discount rate to be used.

The main analysis in this report uses a real discount rate of 7 per cent.  I am a bit puzzled by that.  The authors defend it by reference to the Treasury’s guidance on evaluating infrastructure and single-use building projects (eg hospitals and prisons).

Frankly, I’m sceptical that that is an appropriate discount rate for this project.  And I would be astonished if Infratil –  the dominant shareholders in WIAL – treated their own marginal cost of capital for a project like this as being as low as 7 per cent real.  Perhaps a case might be made for something that low in respect of projects that depend simply on existing traffic (growth) patterns –  eg the current extension to the domestic terminal at Wellington –  but at the margin this runway extension has the feel of a much higher risk project.  After all, they could build it and no one might come.  I’ve written previously about government discount rates, and also linked to a recent Reserve Bank of Australia article suggesting that private sector firms are typically using hurdle rates of at least 10-13 per cent nominal (almost as many in the 13-16 per cent range).

However, the report does include some sensitivity analysis.  For the central scenario of Option 1 (build the runway extension now), recall that a 7 per cent real discount rate produced a benefit-cost ratio of 1.7.  Using a 10 per cent real discount rate only reduces that to 1.6.    I don’t understand why that is.  Perhaps it is because the capital costs are quite small compared to the additional operational costs airlines would face in putting on the new services (thus many of the costs and benefits are matched in time) but it still doesn’t seem quite right –  especially from the perspective of the ratepayers/taxpayers asked to put up the capital cost now.

The report included in its calculation of the benefits to New Zealand the GST paid by the additional foreign visitors.  I was a bit puzzled by this, but perhaps I’m missing something.  If we assume that the economy is on average fully employed, isn’t it likely that one additional form of exports will be, in part at least, at the expense of some other form of exports?   Discovering huge oil deposits, say, will crowd out manufacturing or tourism exports.  New Zealand as a whole might be better off, but not to the extent determined just by the increase in one form of exports.  Same goes for even high value airport extensions surely?

Many of the gains in the report seem to flow from the additional competition that it is assumed that the longer-runway will make possible.  They cite some impressive numbers for how much lower fares are for international routes out of Christchurch or Auckland relative to Wellington.  But if we grant that that is a plausible story, again surely this aspect of the extension should be able to be self-financing?  For example, if having a longer-runway in Wellington lowered airfares for people from the lower half of the North Island by 10 per cent (the report talks of 20-30 per cent premia at present), surely the airport departure charge for those sorts of flights could be adjusted accordingly?  The report spent surprisingly little time discussing such issues/options.  Perhaps there are Commerce Commission obstacles to such charging?  But if so, surely they should be identified in the report?

While WIAL is a commercial operation, it seems pretty clear that the runway extension does not really stack up on commercial grounds.  We aren’t told on what basis Infratil would be happy to proceed with this project –  if they really are at all –  but the report is clearly written with a political (and voter) audience in mind, rather than a commercial one.  Section 2.9 devotes several pages to various sets of central planner objectives –  the current Wellington City Council’s 25 year vision, international air transport policy, current central government tourism targets, national infrastructure plan goals, and something chillingly called the “Leadership Statement for International Education”.  Not much about the market, or risk and return there.  Just the whims of a current set of bureaucrats and politicians, who might be beguiled into using other peoples’ money to proceed with this project.

Perhaps this is too glib, but there does seem to be a relatively straightforward solution.  It isn’t obvious why Wellington City Council still holds 34 per cent of the airport.  If the project really stacks up for Infratil, it should be a good time for Wellington City to sell its stake[1], and let the private sector go for it.  It looks like a pretty risky proposition, but (I’m a bureaucrat by background not a business person and ) if private shareholders want to put their capital behind it then I’m fairly happy for it to proceed (assuming the environmental issues etc can be adequately addressed).

Of course, a common response might be that the putative benefits are national or regional and the costs would fall to the operators of the airport.  I’m not persuaded.  As I’ve noted, many of the gains documented in the report seem as though they should be able to be appropriated by the airport operator, at least to the extent required to cover its own cost of capital.  If airlines can use planes more efficiently, presumably landing rights at Wellington would be more valuable than they are at present?  That should be charged for.   And if investing in a runway extension really would markedly lower flight prices for Wellingtonians, surely those of us who fly can be charged for the saving?  Great projects taken to market by the private sector hardly ever see all the gains captured by the promoters/investors. Bill Gates and Steve Jobs got rich from Microsoft and Apple, but the rest of us did even better as a result and by rather more than we paid for the product.

As it is, the Christchurch experience should be a salutary warning to the citizens and ratepayers, especially  those in Wellington.  If the initial comments from government ministers seem mildly encouraging (ie discouraging to WIAL), the track record suggests reason for caution even there (this is the government now amenable to funding the Auckland inner city rail loop, and which has been right behind the Christchurch convention centre).  As for Wellington City Council, the sceptical comments from Greens councillor David Lee notwithstanding, I wonder what will stop these planners pursuing their vision, egged on by the Chamber of Commerce?  What lessons have they taken, for example, from the disaster of  the Dunedin stadium?  I hope that, at very least, no binding commitments are made by the council until after next year’s local body election.

To their credit, WIAL is holding a series of lengthy public sessions in the next couple of weeks at which apparently their experts will be available to answer questions.  If I have time I will try to go along, and if any of my concerns are materially assuaged I might come back to the issue later.

[1] To which my only caveat would be a concern about what even lower-value projects they might use the resulting cash for instead.

These remote islands are different?

Michael Reddell Immigration, New Zealand economic performance

I was having a discussion the other night in the margins of the Goethe Institute event about the extent to which we should think about New Zealand’s economic advantages and opportunities as natural resource based.  I’ve been running a proposition that the only thing really going for us is the land, its attendant resources (fish, wind, geothermal, as well as pasture, forests, and –  at the low value end –  tourism opportunities), and the technologies and management skills that enable us to sustain reasonably good incomes from them.  Those resources can support really good incomes, but I’m sceptical as to how many people they can support such incomes for.

The person I was talking to posed an interesting angle which I hadn’t thought of before.  What if the North Island and South Island disappeared and New Zealand just consisted of Stewart Island (or the Chatham Islands).  What would 4.5 million people do in such a country?

As I’ve thought about it over the last few days, I’ve increasingly concluded that most of them would leave.  The opportunities would be just so much better elsewhere.

4.5 million people on an area the size of Stewart Island or the Chathams isn’t implausible.  Both are bigger than Singapore or Hong Kong –  Stewart Island (1680 sq kms) has more than twice the land area of Singapore (718 sq kms).

My nine year old daughter recently got fascinated by a book on our shelves about remote islands, so we’ve spent quite a bit of time together learning about some small, remote and very obscure places, such as.

Kerguelen                                                                                 7215 sq kms

Falkland Islands                                                                     12173 sq kms

St Helena                                                                                     420 sq kms

Seychelles                                                                                    455 sq kms

Reunion                                                                                       2512 sq kms

Azores                                                                                          2346 sq kms

And less obscure perhaps, but still relatively remote islands

Fiji                                                                                                 18270 sq kms

Hawaii                                                                                            28311 sq kms

Tasmania                                                                                      90758 sq kms

Iceland                                                                                          103001 sq kms

For reference, the South Island has 151,215 square kms of land.

But the total population of all those ten countries and territories is about 4.4 million.  Distance really seems to matter.  It is not that one can’t sustain good incomes in these places, but that not many do. History, revealed preferences, and revealed opportunities seem to have seen to that.

In the Stewart Island thought experiment my interlocutor posed, Stewart Island would be about as remote as the median of my 10 territories above.

Really smart people could choose to live there and with strong pro-market institutions perhaps they could build First World living standards there.  But it wouldn’t be Singapore or Hong Kong, even if it were populated by people from those places.  Geography doesn’t doom a country or territory to poverty, but it can make it a great deal harder.

Nothing in the global distribution of population or economic activity suggests that a Stewart Island New Zealand would have anything like 4.5 million people –  unless some social engineer, defying logic and history, kept shipping people in  (there are always some places poorer).  If, by some chance, 4.5 million people had ended up on Stewart Island, and governments didn’t interfere, I reckon many or most of them would have subsequently left –  to Australia, back to Britain if they could, perhaps even to South America.  The Falklands Islands does now support quite a high level of GDP per capita, for its 3000 people.   But the fishing and hydrocarbons wouldn’t go far across, say, three million.

Of course, New Zealand is not Stewart Island.  Our total land area puts us the middle of the list of countries of the world.  But we are still incredibly remote.  Last bus stop before Antarctica is unfair  (the Falklands and Kerguelen are closer), but not so very far wrong.  It just is not the sort of place, around the globe, that seems to be able to support First World opportunities for many people[1].

Of course, we have some advantages.  A temperate climate appeals as a place to live.  And northern European, specifically British, institutions and the rule of law have enabled people to secure pretty good livings wherever they have settled.  For perhaps 75 years, after all, New Zealanders had some of the very highest material living standards anywhere in the world.  But it was on the back of land-based industries.  And the overwhelming bulk of our exports still are, but with many more people than we once had.

So long as we don’t completely mess things up, New Zealand will never be what Uruguay is today (not much more than half New Zealand’s GDP per capita, the fruit of decades of really bad economic management last century).  But if, as a matter of policy,  New Zealand continues to  drive up its population quite rapidly, Uruguay might even have  better per capita possibilities in the very long run than New Zealand.   The same could probably be said, with even more force, of Romania (similar incomes today to those in Uruguay –  legacy of decades of even worse economic and political management last century).  They are just nearer where the people are. Locations still seem to matter.

New Zealand just isn’t a great place for many people to do terribly well.  Implicitly, New Zealanders have recognised that in the exodus to Australia that has occurred over the last 40 to 50 years.  The conventional wisdom on the right for a long time was that that was just a reflection of our mad policy regimes from the late 1930s onwards (heavy protection etc).  But it looks to have been more than that.  Decades on from the economic reforms, the average net outflow over time remains large (although it ebbs and flow with the Australian labour market), even as it has become more difficult for New Zealanders to make a smooth and secure transition to Australia.

One of my commenters is adamant that New Zealand’s immigration policy is “just” a replacement policy.  He is wrong on that .  (Over the last 15 years there has been an average annual net outflow of New Zealand citizens of around 25000 and an average net inflow of non-citizens of around 40000.  And our official target for residence approvals for non-citizens has been 45000-50000 per annum –  although not all who come stay).

But even if he were correct, there is no “just” about it.  What the government is doing is intervening to stymie a self-correcting mechanism that is going on in the private sector.   New Zealanders have seen, and responded to, the better opportunities (as they judge them) for themselves and their families in Australia.  They are moving to a place that –  with similar institutions –  is proving better able to generate high advanced-country incomes for more people.  What possible reason can the government have for interposing its own judgement, deciding that the resulting population and labour market outcomes are unacceptable, and actively seeking to bring in many more from abroad?

Perhaps as a policy approach it was more understandable in the 1950s and early 1960s.  After all, at that time our relative incomes were still high, and New Zealanders weren’t leaving in any appreciable numbers (the total outflow of New Zealand citizens in the 15 years to 1964 was 8283). And in the population discussion in New Zealand post-war, the idea of building up the population for national security reasons was also present.

But this is 2015 not 1950, and the economic signals have been pretty clear for a long time now –  and the central planners keep on ignoring the message.  Perhaps they believe the opportunities here are great.  But where is the evidence?  Remote places tend not to support very many people, and certainly not at the level of incomes New Zealanders aspire to.  Perhaps that won’t always be the case, but the onus should be on the planners to demonstrate that this island is different.

I’ve occasionally suggested that if “optimum population” meant anything,  New Zealand’s might be two million or 200 million.  With 200 million people, New Zealand would be a very different place, but it seems unlikely that in a world our size 200 million people would ever regard these remote islands as the best place possible to live and generate economic activities with an expectation of advanced country incomes. Peripheries seem, naturally, to be lightly populated places.

(To anticipate comments, I’m not arguing for a “population policy”  –  the idea seems absurd, but that is what we now have de facto –  but for leaving New Zealanders to determine these things for themselves.  In recent decades, the birth rate has been slowing and many New Zealanders see better opportunities abroad (most years), suggesting that their choices would leave us a fairly flat population.  But still one more than ten times that of Iceland –  which has 40 per cent of our land area, and is a great deal closer to prosperous population centres and markets.

[1] Australia faces somewhat similar issues, of course, but just has more natural resources.

An interesting approach to urban land use property rights

Michael Reddell Housing

Last week I put out a post on possible mechanisms to enable groups of neighbours to protect their interests in their own and each others’ properties, while allowing the flexibility for them, rather than councils, to determine what, if any, and when changes in the land use rules affecting that group of properties would be put in place.  It was prompted by a combination of the Productivity Commission’s recent discussion of the private covenants that reportedly apply to most new developments, and  the conflict in various Wellington suburbs around the council’s desire to determine which suburbs should be more intensively built and which should not.  Neither the Commission’s apparent distaste for private covenants, nor the situation where councils can somewhat arbitrarily –  and without any compensation for the regulatory taking –  alter private property rights, seemed very appealing.

This afternoon, I stumbled on this post from the Not PC blog.  It is several years old, but still seems very relevant.    The gist of his proposal is as follows:

FIRST, ENACT A CODIFICATION of basic common law principles such as the Coming to the Nuisance Doctrine and rights to light and air and the like.

Second, register on all land titles (as voluntary restrictive covenants) the basic “no bullshit” provisions of District Plans (stuff like height-to-boundary rules, density requirements and the like).

Next, and this will take a little more time, insist that councils set up a ‘Small Consents Tribunals’ for projects of a value less than $300,000 to consider issues presently covered by the RMA and by their District Plans. These Consents Tribunal should function in a similarly informal fashion as Small Claims Tribunals do now, with the power to make instant decisions.

This would mean that instead of talking to a planner about your carport, about which he couldn’t give a rat’s fat backside, you decide for yourself.  And, if your carport would violate one of the covenants, you then talk about it to your neighbour—with whom you and he would have plenty of negotiating room.  And once you (and your neighbour if necessary) have made your mind up, The Consents Tribunals would consider your small project on the basis of the codified common law principles, the voluntary restrictive covenants on your title, and the agreements (if necessary) you’ve negotiated with your neighbour(s). Simple really.

You should be able to reach agreement in an afternoon, and have your title amended the next day.

No doubt there are pitfalls in this scheme that I don’t see. But I thought it was worth drawing attention to.  Finding mechanisms that allow both greater flexibility and protection of property rights, but on a basis that puts more weight on mutual consent, and rather less on rather arbitrary administrative or political fiat, should have considerable appeal.

A cause for great celebration?

Michael Reddell Immigration

Hamish Rutherford had an article in the Dominion-Post yesterday in which he quotes the Prime Minister as claiming, on the one hand, that the recent high net migration inflows are a “time of great celebration” and, on the other hand, that most of the arrivals are something the country “can do nothing about”.    Rutherford had a follow-up piece yesterday with some comments from me and from a couple of other economists –  a nicely balanced group; one relatively negative, one relatively positive, and one “it depends”.

Actually, I suspect nobody much shares the Prime Minister’s glib “time to celebrate” sentiment.    You can be as much a believer in more liberal immigration, or even open borders, as you like, but it still repays stopping to look at just why things are as they are.  Ours isn’t that positive a story.

Of course, contrary to the headlines, the net inflows we’ve been seeing recently are not “record migration” in any meaningful sense.  Yes, the net PLT inflow is at a record level, and perhaps even as a share of the population at any time in the last 100 years or more.  But the limitations of the PLT numbers are well-known.  If one looks instead at the total arrivals less total departures, the inflow over the last year has been around 60000.  By contrast, in 2003 the annual inflow peaked at 80000.  New Zealand’s population is now around 15 per cent larger than it was in 2003, so the per capita inflow over the last year or so has only been about two-thirds the size of what we experienced in 2003.  So the current inflow is large, but not really at record levels.

And although the target number of residence approvals for non New Zealand (and non-Australia) has been 45000 to 50000 per annum for years (despite the growing population), only 43000 approvals were granted in 2014/15, compared with almost 53000 in 2001/02.   I think MBIE even objects to the use of the word “target”, but however one characterises the number that Cabinet set, it isn’t met precisely each year.  In fact, perhaps reflecting the relatively weak domestic labour market since the recession, 2009/10 was the last year in which residence approvals were above 45000.

And can we control the total net flow numbers?  Well, not really since New Zealanders are free to come and go, and of course any foreigners who has come here (needing advance approval) can also leave any time they like.    Since the trough in 2011/12, the increase in the net PLT flow has been roughly evenly split between New Zealand citizens and other citizens, but over the last 18 months the decline in the net NZ outflow has levelled off, and all the further increase has been down to increased net inflows of non New Zealand citizens.  At around 6500 in the last month, that net inflow probably is a record, even in per capita terms (SNZ don’t report the total migration data by citizenship).  Every non-New Zealand citizen coming to New Zealand needs the approval of New Zealand authorities.

net plt by citizenship.png

It is worth bearing in mind that there is still a net outflow of New Zealanders each month.   The last times there were even modest inflows were 1983 and 1991, both occasions when Australia’s economy was in recession.  Given that the stock of New Zealanders living abroad is now much larger than it was in either 1983 or 1991, it would have been easier to envisage a larger net inflow of New Zealanders this time if our economy and labour market were really performing well.  But they aren’t.  We can’t rule out a small net inflow of New Zealanders at some point, but it hasn’t happened yet.

We can see the role that Australian conditions are playing by looking at the flows of New Zealand citizens to and from Australia, and the flows of New Zealand citizens to and from other countries. If the story were one of a strongly-performing New Zealand, I’d have thought we might expect to see New Zealanders flocking home from all corners of the globe (and not leaving for the rest of the world).    New Zealand citizen arrivals for the rest of world (other than Australia) are at quite a low ebb –  well below, for example, what we saw in 2003 when our unemployment rate was dropping sharply.

citizen arrivals row 2

And New Zealand citizen departures to the rest of the world, while quite notably lower than they were in earlier decades (tighter restrictions in place like the UK?) have been pretty stable for the last six years.

Instead, all the action in the New Zealand citizen flows is in those between New Zealand and Australia, suggesting that it is conditions in Australia that are at the heart of the story.

The unemployment rate in Australia is around 6 per cent, and there is now a much greater awareness than previously that the rules in Australia have changed for New Zealanders.  Any one going now, and who has gone in the last 15 years, is largely on their own if, for example, they can’t find a job, or they lose their job.  And their kids are often in some limbo, not really New Zealanders and unable to become proper Australians either.  Without that sort of welfare backstop if things go wrong, it is much more attractive than it was for anyone remotely risk averse to stay at home until the Australian labour market is much more robust.  It may be less attractive to try even then than it once was.  And that is so even though average incomes and real living standards in Australia are higher than those here, and that gap has shown no sign of narrowing.   But it is not that to any material extent there is a net outflow of New Zealanders from Australia (although the uptick in New Zealanders coming home isn’t something we’ve seen before), it is simply that for the time being the outflow to Australia has dried up.

Given that the adverse income gap has not narrowed and that our unemployment rate is high, nothing in that is a cause for celebration in New Zealand.  If anything, rather than reverse.  The more highly productive Australian economy has been an attractive option for New Zealanders for decades – enabling New Zealanders to improve their lot (and taking downward pressure off factor returns in New Zealand).  If that alternative outlet is less easy or safe to take advantage of, New Zealanders as a whole are a little worse off.  If, for example, people relocating from Invercargill to Auckland were made ineligible for welfare benefits,  Invercargill as a whole would be worse off economically –  even though some of the parents in Invercargill might be pleased to have their kids and grandkids a bit closer to home.

And what of New Zealand’s economic performance relative to Australia?  Real GDP per hour worked is a pretty good timely measure of relative productivity performance .  As the statistics stand at present –  who knows what revisions will eventually show –  the New Zealand performance in the last few years has been really bad by comparison with Australia’s.  Data suggesting no productivity growth for four years, while Australia has gone on achieving productivity growth, just reinforces a sense that the reduced outflow of New Zealanders to Australia –  partly temporary and probably partly permanent  –  is something bad for New Zealanders, not something to celebrate.

real gdp phw

It needn’t always be so.  I wish we had the sort of strong sustained economic performance, built on rapid productivity growth, that was putting us a path to income convergence (once again) with Australia.  If so, I reckon we’d see the net outflow turn into a material sustained inflow.  That would be cause for celebration.  This is not.

And all that with barely any discussion of the non-New Zealander flows.  But just briefly.  The Prime Minister correctly notes that foreign students are an export industry.  But I’d be more reassured by that if it were not explicit government policy to encourage foreign students, not on the intrinsic strength and quality of our own (middling at best) universities, but as a pathway to residence here.  Since there is no evidence that such permanent immigration to New Zealand has represented a net economic benefit to New Zealanders –  neither MBIE nor Treasury nor relevant ministers have been able to cite anything remotely convincing –  it seems that we are really just back in the export incentives business.  Instead of writing cheques, we write (the possibility of) a visa.  Export incentives “worked” in the pre-liberalisation period to –  people do what they are incentivised to do so we got more subsidised exports –  but it still wasn’t good policy.  It wasn’t under Muldoon and Rowling, and being done by Steven Joyce and John Key doesn’t change the proposition.  I’m not, at all, suggesting we should discourage export education, but let it stand on its own merits if the current numerical success is really to be a cause for celebration.

The Prime Minister also reckoned that “many of the arrivals fell into either highly skilled or investor categories”.   In the last year, just 1353 residence visas were issued under the investor and entrepreneur categories  (about a third as many as were being granted in the early 2000s) and as I noted in an earlier post MBIE’s research has highlighted just how questionable the net economic benefit of these migrants has been.

 One of the MBIE papers is on the web.  It discusses some work on investor migrants –  who already, in effect, buy their way into New Zealand.  The aim of the programme is to import people with business expertise and entrepreneurial skills, presumably to boost productivity in New Zealand.  And yet in these surveys of people at various stages of the investor migrant process  (and  in which respondents must have been at least partly motivated to give the answers MBIE wanted to hear, even if results were anonymised), 50 per cent of the money investor migrants were bringing in was just going into bonds, and only 20 per cent was going into active investments.  We aren’t short of money, but may be of actual entrepreneurial business activity.  And 70 per cent were investing only the bare minimum required or just “a bit more”.  And these people aren’t attracted by the great business opportunities in New Zealand, but rather by our climate/landscape and lifestyle.  It doesn’t have the sense of being a basis for transformative growth.

Set alongside the 1353 investor and entrepreneur visas were 4477 parent visas last year.

As for the highly skilled, I have covered previously and, in a succession of posts, at somewhat tedious length the question of just how highly skilled our skills-based immigration programme is.   Here, from the tables in MBIE’s excellent resource, Migration Trends and Outlook, are the numbers for 2014/15 –the top few occupations for the principal applicants for residence applications under the skilled migrant stream.

Chef 699
Registered Nurse (Aged Care) 607
Retail Manager (General) 462
Cafe or Restaurant Manager 389

It doesn’t have a strong sense of something to celebrate – the highly skilled of the world flocking to New Zealand and in the process strengthening our own skills levels and productivity.

And finally, the Prime Minister is quoted as saying

“Show me a country which is booming around the world where more people leave it than come to it”

Glad to Prime Minister.  Consider Poland, which has been one of the strongest performing OECD countries in the last decade, and which has had steady net migration outflows.  Poland is gradually catching up to the living standards in Western Europe, but it has a long way to go.  In the meantime, the opportunities for many Poles are still better abroad.  Perhaps it is easy to dismiss Poland as just an ex-communist country, but it has done what New Zealand has failed to do –  make substantial progress towards converging with living standards elsewhere in the advanced world.  In 1989, Polish incomes were estimated to be less than a third of those in the United States.  Now they are almost half.

Bulgaria and Romania are less striking stories, but they are also countries with substantial net migration outflows –  again, the opportunities abroad are better than those at home.  But both countries have managed to grow materially faster than New Zealand since 2000, and have matched New Zealand’s per capita income growth in the years since John Key has been in office.

gdp pc nz vs poland etc

net migration nz and poland etc

Immigration policy is not, by any means, the whole story.  It probably isn’t even the bulk of the story in these countries.  But net inflows of people aren’t always good and net outflows aren’t always bad.  It depends.    There is no real reason to believe that the current net inflows to New Zealand –  or even the reduction in net outflows to Australia –  are cause to celebrate.  I suspect that, if anything, the inflow is compounding the underlying productivity problem.  But there is certainly no sign that it is either a response to us having solved those problems  ourselves (and thus being on some convergence path back to the rest of the advanced world) nor that the inflow will be any more likely to bring about a transformative lift in productivity than the previous inflows over the last 25 (or 75) years have.

Immigration, society, and the limits of knowledge

Michael Reddell Immigration

Last night the Goethe Institute and the New Zealand Initiative hosted a panel discussion on aspects of immigration.  The focus was not on the economic aspects  –  my arguments that our immigration policy has acted as a drag on economic performance got a mention only in the question time –  and I found it something of a challenge to pull together some moderately coherent thoughts around the implications of large scale movements of people, and what that means for cultures and societies –  indeed, whether those concepts themselves have much meaning or instrumental value.

Two of the speakers were themselves immigrants –  one had first come as a student in the late 1980s, and the other as a refugee from Rwanda after the mass murder of 1994.  They spoke from their experiences, and both offered interesting, if somewhat contrasting, perspectives.

Rob McLeod, former chair of the Business Roundtable (and countless other boards and committees) made what is probably best described as an in-principle case for open borders, although he pulls back from that in practice.  We had only a relatively short time each to present our own perspective, so I hope I’m characterising him fairly.  His principles for shaping immigration policy were

  1. Diversity is good; prejudice is bad. Exclusion and restriction are costly.
  2. A high premium on liberty and freedom to choose
  3. An obligation on everyone to obey the law.

His proposition was that the scope of the market should be extended as far as possible, and that those countries that had been open to immigration had generally benefited from it.  In the cases of possible exceptions, such as South Africa and Fiji, the roots of the problem had rested in coercion.

McLeod went on to note that more liberal immigration would generally enhance world welfare, and that world welfare should count for something in domestic policy setting.  He briefly made a case for immigration as one tool to counter terrorism, which he observed had (some of) its roots in poverty.  (My mind kept running towards Baader Meinhof, the Red Army Faction, and the IRA –  and that scion of a wealthy Saudi family, Osama bin Laden.)     I wasn’t quite sure how much more liberal McLeod would be in practice if he were in charge of immigration policy, but he did suggest that perhaps immigration quotas and targets might be something that should be negotiated multilaterally.

I was more sceptical.

My approach over recent years has been shaped by increasing doubts as to whether large-scale immigration has ever done very much economically for those who were in the country before the immigration began.   There is an arguable case in respect of the European migration to the United States, Canada, Australia and New Zealand.  Average incomes of the indigenous populations of those four countries are plausibly higher than they would have been if the colonies of large scale settlement had never been established.  But, even to the extent that is so, it is mostly because a new and more economically productive set of institutions  and people came in and largely displaced or replaced what was already there.  That might be the historical basis for modern New Zealand, but it isn’t a particularly attractive model to shape immigration policy debates today.  It was, essentially, a phenomenon of imperialism.    Mass migration generally was.

In my own remarks last night, I put a lot more emphasis on the part that cohesive cultures play in enabling societies –  state, clubs, churches or whatever –  to function effectively.  Cultures  –  broadly defined – develop, and are sustained, for a reason –  they encapsulate the tacit knowledge and understanding that help societies to work better.  They capture the things that unite people, in ways that strengthen the ability of those societies to manage the inevitable differences and difficult choices.

It isn’t clear to me that democratic societies can function very well in the longer-term without a reasonably strong common culture, or as a fall-back a single very dominant one.  Authoritarian ones might –  one could think of the Ottoman Empire.  Of course, we haven’t many strong and stable democracies at all (so the sample is small) but they seem particularly uncommon in the minority of states where there are major divides along racial or religious grounds.  Perhaps the only example I can think of at present is Israel –  and who would really be surprised if for one reason or another that experiment did not last many more decades.

The issue here is not about denying the gains from trade or the benefits of difference.  And since are no human clones, we all interact with (marry, work with, play sport with) people who are different than us.  And we gain in the process.  The question is more one about human nature, and the way in which strong well-functioning communities tend to form among those with whom we have important things in common.    And those strong common bonds enable communities to better do the things they exist for.  In the case of the state, we might think of that is mutual protection (external defence, law and order), mutual support (whatever form a society’s welfare system takes), and all the decisions states and communities take that affect the allocation of property rights.

In small communities –  eg families    the commonality might result from blood ties.  I might disagree forcefully with my brother but nothing changes the fact that he is my brother.  At the level of large communities, blood ties don’t bind us together.  It has to be about shared values (eg religions, including secularism) and, at very least, shared experiences and shared historical reference points.  Maintaining that commonality is perhaps never easy, but it is likely to be relatively easier with a relatively stable and homogeneous population, not one constantly displaced by large inflows of people from often quite different backgrounds (not better or worse, but different).  The challenge seems likely to be particularly great for free and democratic societies.

I argued that large scale immigration programmes are best seen as social engineering (and about as likely to prove useful as most such large scale government interventions).    Rather than allowing societies to evolve organically, negotiating their conflicts from a base of shared experience and mutual common destiny, immigration programmes put the government hand on the scales and tilt things, often rather sharply, one way or the other.   Our history was like that –  every Anglo immigrant who arrived in the years when Britons had fairly open access, tilted the scales, and the balance of power in society, further away from Maori.  The same went for Canada and Australia.   That may have suited the majority, but what of the minority that had once been the majority?   The limits of knowledge should forcefully confront all putative social engineers, who all almost always well-intentioned but (being human)  rarely recognise the long-term consequences of the choices they foist on us.

I’ve argued that we would be better off economically if we cut back quite severely our immigration programme.  But I think that if we did so, we’d also be better positioned as a society to build and sustain a degree of cohesion, drawn from shared experience and commitment, that would enable us to confront future challenges more effectively, and to deal with the permanent tension between the interests of Maori in New Zealand and those of the rest of the population.

Here is a fuller version (only five pages or so) of what I said last night.

The Sharing Game

And, yes, I did see the Prime Minister’s comment that recent record migration was “a reason to celebrate”.  I (mostly) disagree with him, but am out of time today, so will offer some rather narrower economic observations on his claim tomorrow.

What has been happening to private rents?

Michael Reddell Housing

I don’t usually look at Sunday’s Herald but I was filling in time in an airport yesterday and noticed an article on private residential rents, drawing on MBIE’s tenancy bond database.  I don’t think I had previously realised that the data were easily available, at both a TLA and regional level.

One of the striking aspects of the house price boom has been the way rents have lagged well behind house prices.  House price to rent ratios have increased substantially.  Of course, in many ways that should be no surprise.  After all, real interest rates have fallen very substantially over the last 25 years or so  (having risen sharply over the previous decade).  Even in New Zealand – with the highest real interest rates in the advanced world –  real interest rates are lower than at any time in modern history (the heavily regulated period of the 1970s and early 1980s excepted).  Falling rental yields might reasonably have been expected, and that is what we have seen.

The MBIE data go back to the start of 1993. Since then, consumer prices (the CPI) have risen by around 60 per cent.   Average private rents on this measure have risen by about 150 per cent in that period.  The QV measure of house prices has risen by just over 300 per cent in that time.

Perhaps what is most striking, and something the Herald article didn’t bring out, is how similar Auckland’s experience has been to that of much of the rest of the country.    Since the start of 1991, Auckland rents, on this measure, have risen by 158 per cent.  Those in Gisborne –  the median regional council – have risen by 130 per cent.  Auckland rents have risen faster than those in most of the country, but they just don’t stand out the way that the increases in Auckland house prices do.

rents since 93

And if we restrict the analysis simply to the period since, say, 2007, the picture is not materially different.

And what of incomes?  Nominal GDP per capita increased by 144 per cent from 1992q4 to 2015q2.  Even in Auckland, rents have not increased much relative to (national) average per capita GDP.  Purchasing a house might have become “unaffordable” for many, but accommodation doesn’t appear to have.

And that conclusion is reinforced when one recognises that these MBIE data do not purport to be like for like measures.  The average house today is larger than the average house in 1993.  The average house is better appointed now than in 1993 (more likely to have double-glazing, heat pumps, or central heating).  And as the home ownership rate has dropped in the intervening years, it is likely that the median rental property in 2015 is further up the 2015 spectrum of New Zealand houses than the median rental property in 1993 would have been along the spectrum of New Zealand houses in 1993.

In the CPI, Statistics New Zealand attempts to adjust for the quality and compositional issues.  However, they only appear to report, in Infoshare, rental prices since 1999.  And even that series, which includes both public rentals and private rentals, is made harder to read by the abandonment of market-related rents for state houses in 2000/01.  But since 2001 (ie after the levels adjustment from the policy change), the CPI rentals component has risen by 37 per cent (very similar to the change in the CPI over that period), whereas the MBIE private rents series has risen by 87 per cent.  Per capita nominal incomes have risen by 71 per cent over that same period.    Even over the period of the biggest house price boom in modern history, a constant-quality house looks to have become more affordable to rent, not less.  And, of course, that is what one would normally expect.  Stable long-term ratios of house prices to incomes, for example, tend to reflect the fact that as incomes rise, the size and quality of houses tends to increase.

Of course, if land use restrictions –  in conjunction with policy-driven population pressures –  had not driven urban land (and house) prices sky high, we might perhaps have expected to see real rents falling.    All else equal –  which it never is –  sustained lower real interest rate lower the real cost of providing rental accommodation services.  But the fact that Auckland rents have not increased enormously relative to those in the rest of the country tends to reinforce the idea that it is not so much an issue of an extreme shortage of accommodation in Auckland, as of the regulatory restrictions on land use.  Such restrictions, which “bite” more in Auckland because of the population pressures, offer returns to landlords through actual/expected capital gains.

And for anyone interested in the rental increases at the TLA level, here is that chart.  (To deal with a few missing observations at the start of the period, this chart uses the percentage increases from the first 12 months of the series  to the most recent 12 months).

rents since 93 by TLA

Converging on the US: trends in government spending

Michael Reddell Fiscal policy

I was dipping into the latest update of the OECD Outlook database, and landed on the tables for government current spending and revenue as a share of GDP.

Spending first. I’ve shown here the shares for the US, New Zealand, and for a median of the OECD countries for which the OECD has data all the way back to 1970. Unfortunately, the New Zealand data aren’t available before 1986 – which was probably about the time government spending as a share of GDP peaked here.

gen govt disbursements.png

What I found interesting was how general government spending as a share of GDP in New Zealand has converged with that of the United States. Back in 1970, the United States was only just below the median for the other member countries for which there is data all the way back.  Now, both New Zealand and the United States are well below the median (whether for this sample, or for the whole OECD – for which group the median is now 42.6 per cent). The role of the US government in its economy may, in effect, be even larger than that in New Zealand, since there are so many “tax expenditures” in their system. Mandated private spending, such as that under Obamacare, would also add to the effective US total.

Of course, our government accounts are close to balanced, and those of the United States are not. When we look at current government receipts we are about half way between the US and the OECD median.

gen govt receipts.png

What about changes over the last few years? For all the talk of austerity, in only two OECD countries – Hungary and Poland – is current government spending as a share of GDP lower this year than it was in 2007, the last pre-recessionary year. In New Zealand, for example, general government spending this year is estimated to be almost a full percentage point of GDP higher than it was in 2007. At the other end of the chart, 11 of these 29 countries have government current spending five percentage points or more higher than it was in 2007. Check out Finland – an increase that almost defies belief over such a short period, at least outside wartime.

spending 07 to 15.png

And what of taxes? The median country is estimated to have seen almost no change in the government revenue share of GDP since 2007. New Zealand is among the countries with the largest reductions, but then we were running surpluses prior to the recession. Greece has, quite remarkably, managed a very large increase in the revenue share of a falling GDP.

receipts 07 to 15.png

Most of the countries with large increases in the government spending shares are still estimated to have material negative output gaps. In principle, an eventual recovery might help shrink the relative size of government. But, for most, it is not remotely clear where the sustained recovery is going to come from, and when.

On which note, for a bit of gloomy weekend reading, I suggest Ambrose Evans-Pritchard’s piece on Finland. The tragedy of the euro, compounding what would in any case have been a difficult economic adjustment.

Housing: what would the market do?

Michael Reddell Housing

My post last week about the Wellington City Council’s consultation meeting, on its proposals to amend the district plan to allow more medium-density housing in Island Bay, attracted some attention and a range of interesting and thoughtful comments.  Readers seem to have taken from the post what they wanted (those opposed to more density focused on the critical comments about the Council’s case, those in favour on the critical comments on the residents and the planner mentality that dominates the Council).   Perhaps that reflects my own ambivalence.  In general, I favour allowing greater flexibility to property owners, but I don’t think we  would see much pressure for the sorts of development that concerns many residents, at least beyond the immediate fringes of the central city (Thorndon, Mt Victoria, Kelburn etc) if councils did not continually and actively resist the expansion of the physical footprint of cities.

It perhaps also reflected the fact that I’m not overly affected personally.  We are probably 12 minutes walk from the “town centre”, not the rather arbitrarily-chosen 5 or 10 that the Council focused on.  If a slightly largely population increased the chances of the convenient neighbourhood supermarket surviving into the years of my dotage, so much the better.   And it would be almost impossible for any conceivable development to materially impair either our sun or our views.

However, there is no point pretending that the sentiments of residents are just illegitimate or misguided.  Or that what happens elsewhere in their neighbourhood cannot impinge on their wellbeing. Nor do I favour riding roughshod over the concerns –  in fact, on a city or countrywide basis it is just not going to happen.  As I’ve pointed out previously, I’m not aware of any examples anywhere where tight land use restrictions, once put in place, have been substantially unwound.

Perhaps as importantly, the  private marketplace itself has mechanisms to deal with the sort of issues and concerns that drive the vocal residents of Island Bay or Khandallah, at least in respect of new developments.

As the Productivity Commission’s recent land supply report noted

Restrictive covenants in new subdivisions are a very common feature of property developments in New Zealand.  The mayor of one fast-growing New Zealand city told the Commission that all subdivisions in their area were subject to detailed covenants.

And according to one source I looked at, around 55 million Americans now live in “homeowner association” complexes –  some mix of apartment blocks and suburban developments/gated communities etc.    These arrangements  presumably exist because they meet a demand, and hence enable developments to occur more profitably than otherwise.  They add value to the people’s homes.    They are not just a legacy of centuries gone by, but have become much much more popular in the last few decades (at a time when local authority planning restrictions have also become more onerous).

I’m no expert in these sorts of arrangements.  As the Commission notes, in some cases they just last until all the homes in a particular development have been built (ie they govern what is first put on the section, and nothing subsequent to that), but many others are permanent.  The rules are often very detailed –  the example the Commission cites particularly caught my eye when it specified the details of the size and construction of the letterbox.  The focus is clearly intended to be on collective action provisions that limit the possibility that some future action of a neighbour might impair the value of my property.

I wouldn’t want to live in such a tightly restricted subdivision myself.  As one succinct summary put it, they aren’t the place for people who don’t like being told what to do.

The Productivity Commission seemed rather ambivalent about these covenants.  They had three “findings” and one “recommendation”.  One was arguably just a factual statement

Covenants established in new subdivisions are increasingly common and impose detailed restrictions on purchasers.

although that could easily have been reworded to include the phrase “provide considerable protections, and impose detailed restrictions on, purchasers”.  That is, after all, what contracts do in all areas of life.

The Commission finds that

regulatory controls on covenants should reflect both the costs and benefits of covenants

which is fair enough perhaps, but fails to recognise that these are already a market solution to a revealed demand.  Market contracts might reasonably be assumed to have internalised the costs and benefits already.  The case for regulation isn’t really made.

The Commission also notes that

Covenants reduce the flexibility of land use now and in the future, and increase the cost of constructing dwellings.

Of course, the first part of the sentence is true, but really the point of these voluntary contracts.  Voluntary contracts exist to enhance welfare.  Flexibility is not an unalloyed good.  The second point is unsupported in the report –  all it seems to amount to is that buyer and sellers have voluntarily agreed that, as a condition of buying in that development, they will not use certain lower end building materials. Why is that a public policy issue?  It does not detract from the ability of other people to build using those materials and technologies.  And each covenanted development presumably has to survive the market test, in competition with other covenanted developments, and standalone dwellings (new or existing).

Consistent with the uneasiness that pervades the discussion, the Commission then recommends (page 118) that

The Ministries of Justice and of Business, Innovation, and Employment should review the legislative provisions governing covenants with a view to:

  • reducing the proportion of landowners required to agree to covenant changes from all to a super-majority; and
  • introducing a statutory sunset period on restrictive covenants of 25-30 years.
I don’t have a particular problem with super-majorities (they are not uncommon in other collective action areas, eg bondholders dealing with distressed debtor).  But, equally, nothing stops such contracts developing voluntarily, and it isn’t clear what the Commission sees the problem as being.  Nor is it clear how the Commission would minimise the risk of abuses of minorities.  Perhaps, at minimum, any super-majority would have to be prepared to offer to purchase the property of an aggrieved minority at a price which reflected the assessed benefit of the changed provisions to the majority.
More egregious is the suggestion of mandatory sunset clauses, effectively banning private property owners from voluntary collective action solutions for more than, say, 25 or 30 years (and as property will trade on the basis of expected future use, even the value of a 25 year covenant will start to decay pretty quickly after, say, 15 years or so).  Again, what is the public policy interest that should override the freedom of homeowners to enter voluntarily into contracts?   The Commission cites one jurisdiction in which the term of covenants is statutorily limited (Ontario, at 40 years), and one example (Massachusetts) where after 30 years covenants can be renewed for 20 years at a time.  But it appears that the rest of the 55 million Americans living in such developments are free to establish permanent covenants, which can generally only be dissolved by unanimous agreement.

The Productivity Commission is uneasy about these increasingly widespread private contracts.  But I wonder if we shouldn’t think about moving in the opposite direction.  Why not facilitate covenants of a sort in existing neighbourhoods?  Is there any obvious reason why, say 1000 households in Island Bay or Khandallah should not be able to  mutually agree that only, say, the current planning rules will apply to their sections in perpetuity, with perhaps a 75 per cent majority required to change those rules in future?  I can’t think of one.  I guess one can argue that the developers, and purchasers, in 1890 should have envisaged these issues and established the covenants then.  But, actually, the then borough had only 600 rateable properties, and if they have given the matter any thought the residents might reasonably have assumed they had effective control through the ballot box.    When Councils pick off one suburb at a time –  as opposed, say, to amending the district plan to allow more medium-density housing everywhere in the city –  effective control through the ballot box is much attenuated.  Which suburb has the “misfortune” (from the aggrieved residents’ perspective) to be chosen for medium-density housing, is no longer a matter of collective agreement among affected residents, but of who can lobby the most effectively and  shift the issue onto some other suburb.  That isn’t the market at work.

I’m not sure what the current legal position is.  Perhaps local property owners could already put in place such restrictive covenants now, with the consent of every one of those involved?    But why not consider amending the relevant legislation to provide for a standard set of rules that a group of homeowners could voluntarily adopt, by say, a 90 per cent initial majority of those in the area concerned?    That would empower homeowners (you would presumably vote for change when the increased value of your land, under rules allowing more intensification outweighs the risks of loss of sun, views or the “changing character of the neighbourhood”).  And it would remove the arbitrariness that exists in the current law.  I’m not suggesting giving legal force to an ability to force your number to mow his or her lawns, or get rid of the gaudy letterbox, but it would enable communities to “protect” themselves (mutually agreeing to entrench existing planning laws for their own properties)  –  or to remove those protections themselves to take advantage of new opportunities –  at a level that existing planning legislation often attempts to do, until it doesn’t (ie until some distant planner or councillor suddenly decides it is time for change).

Perhaps the grand houses that once filled The Terrace might once have been subject to such covenants.  Such houses are probably not the best used of that land today.  Owners would be free to recognise that opportunity, but to do so collectively.

Half of me thinks this is a second-best suggestion, but so widespread are such covenants in private developments here and abroad that I’m not even sure that is true.

Of course, the quid pro quo for such an amendment –  which would, at the margin, probably slow any process of intensification of a particular neighbourhood that might otherwise take place –  would have to be legislative provisions that removed the  ability of councils to restrict the physical expansion of cities and towns.  If, say, all land was automatically zoned residential (in addition to any other approved uses it might have)  and, as a default, was able to be built on to a height of two storeys, there would be ample scope for population pressures –  themselves largely now the consequence of policy choices – to be met with new building on new sites.

From voters’ perspectives, such a bundle of changes look as though it ticks most boxes.  It allows much more new peripheral development more cheaply than occurs now [1].  That, in turn, would remove some of the artificial pressure for intensification  –  arising from councils directly, and from the market because councils restrict the physical expansion of cities.  And, at the same time, it recognises a right for local communities, at a much lower level than whole cities (or even whole wards), to collectively make decisions about the nature of future potential land use changes for their properties.  Since such contracts are increasingly widespread in new developments here and abroad, they seem to reflect real pressures that have real economic value to citizens as property owners.

There is no real, or necessary, tension between keeping housing affordable and allowing property owners to act collectively, in response to opportunities (costs and benefits) to make decisions as to how their land is able to be used.

[1] And, yes, pricing the infrastructure and transport connection issues still has to be resolved.