How has our population grown?

New Zealand’s population is estimated to have risen by 11.8 per cent in the last decade (much of it in the last three years). The starting point for that estimate is reasonably well-anchored: I used the population numbers for the March quarter of 2006, and the 2006 Census happened in that month. The end-point (March 2016) is only an SNZ estimate, which will be recalibrated after the next census.  But for now it is what we have.

Here is the high-level breakdown of where the population growth came from.

population decomposition

Net migration accounts for about 35 per cent of the total increase.

But even at very high level, this chart somewhat misrepresents the picture.  Many migrants are of child-bearing age, and some of the natural increase will itself have resulted from the net migration flows of New Zealanders and foreigners (both those during this period, and those from earlier periods).

I’ve found it useful to think about the contribution of immigration policy to New Zealand’s population.  At the extreme, almost the entire non-Maori population of New Zealand ultimately exists as a result of  post-1840 immigration policy.

But even over more recent periods, one can distinguish –  at least conceptually – between the choices of New Zealand citizens to come and go (mostly go), and those of foreign citizens.  The choices of New Zealanders aren’t a matter of immigration policy at all.  We shouldn’t, and don’t, try to impede those flows.    By contrast, any foreign citizen living here requires the explicit permission of the New Zealand government.  Some will be permanent residents, others will have work visas, and some will be students.

Statistics New Zealand has data on permanent and long-term migration flows by citizenship.  But, as I’ve noted before, it is only indicative.  People change their minds and their plans.  New Zealanders planning to leave for a few months end up staying away for decades, and vice versa.  And the same happens for foreigners coming here –  some came intending to stay forever, but it just doesn’t work out and they leave.  Others come thinking it might just be something short-term, and they end up getting permission to stay longer.

Over the last decade, these statistics show a net 233000 New Zealand citizens leaving, and a net 440000 foreign citizens arriving.   That inflow of foreign citizens is equal to 89 per cent of the increase in the total population over that decade.

Actually, the contribution of non-citizen migration (the policy-controlled bit) might not be quite that large.  The net migration inflow in the chart above is 177000 people over the decade, and the gap between the citizen and non-citizen net PLT data over the same period is 207000 people.  We know the natural increase, and we have a reasonable fix on the population.  So maybe somewhat fewer New Zealanders actually stayed away than said they were intending too, and perhaps some of the non-citizens who intended to stay went home.    My hunch –  no more –  is that over this period more of the mismeasurement is around the NZ citizen flow (the Australian labour market has been tougher than most expected).   But if the mismeasurement is split evenly between the NZ citizen and foreign citizen data, the direct contribution of immigration policy to population growth over this period would still be around 85 per cent.  And the contribution to the birth rate of those non-citizen migrants is on top of that.

Then again, according to the arrival and departure cards, a net 228000 more people arrived in New Zealand in total than left between March 2006 and March 2016.  That is rather more than the 177000 net migrants implicit in the SNZ population estimates.  So perhaps we’ll find that the population has been growing even faster than SNZ thinks.  If so, the contribution of immigration policy might drop back to around 80 per cent over the decade.

There is plenty of imprecision in all of this. But what is fairly clear is that (a) New Zealand’s population has been growing much faster than the population of most OECD countries, and (b) that the overwhelming bulk of that growth is resulting from immigration policy choices (the scale of the influx of non-citizens).  Reasonable people can differ on the economic implications of those high rates of non-citizen immigration, but that the population would not have been growing rapidly at all without our unusually large non-citizen immigration programme shouldn’t really be in question.

Internationally, there is a variety of experiences of course.  Among advanced countries, one has relatively successful countries with sharply falling populations (Latvia and Lithuania are down more than 20 per cent in the last 25 years) and sharply rising populations (Singapore’s population is up over 80 per cent in that period), and both good and mediocre performers with quite rapid population growth (New Zealand and Australian population growth rates have been similar over 25 years, and Israel has also had about 80 per cent population growth and a productivity performance about as disappointing as New Zealand’s.  Population changes, even those directly associated with immigration, can be a response to domestic opportunities or available foreign ones. In some circumstances they might help strengthen per capita growth, and in other cases they might impede.  One needs to take a country by country approach.

Taking a longer view, this chart is one I’ve used before.  It compares New Zealand’s population growth rate with those of advanced countries and the world as a whole (using UN data).

world population growth

Typically, our population growth rate has far-outstripped those of the advanced countries as a whole.  The exception was the period I referred to in my post on Saturday, between the mid 1970s and the late 1980s, when the large net outflow of New Zealanders was already well-established, but immigration policy was not aggressively pursuing a large inflow of foreign citizens, unlike the situation in the decades before and since.

Convergence…and not

I’ve been under the weather with a bad cold and wasn’t going to write anything today.  But pottering around various websites, I discovered that the Conference Board had last week released its annual update of labour productivity estimates, in PPP terms, for a wide range of countries.

Since my involvement with the 2025 Report some years ago I’ve been intrigued by developments in the eastern European countries, which laboured under Communist rule for decades until around 1990.  By 2009  when we wrote that report, the first ex-communist country had almost caught up to New Zealand’s real GDP per capita.

Older readers will recall the line Bob Jones made much of in the 1984 election campaign, in which he compared New Zealand’s economy in 1984 to a Polish shipyard.  The implication, of course, was that it was the heavy burden of protection and controls that were accounting for New Zealand’s disappointing economic performance.

Of course, for all that was wrong with economic policy in New Zealand in the decades from the 1930s to 1980s, our economy was not remotely as distorted as those of the east European countries.    But in a sense the narratives were similar in the two countries: open up the economies to more international competition, and liberalise domestic markets in a context of secure property rights, and stabilize macro policy imbalances, and one should expect to see a lot of convergence, catching-up with the more successful market economies.  Here is an illustration of the sort of thing that was expected in New Zealand –  a 1989 photo (reproduced in the Herald a few years ago) of then Finance Minister David Caygill’s expectations/aspirations.

caygill 1989 expectations

How have the eastern European countries got on?  The Conference Board has GDP per hour worked data for 11 eastern European countries back to 1990.  Here is how each of them has done relative to New Zealand in the 25 years from 1990 to 2015.

east europe convergence to NZ

The median eastern European country had GDP per hour worked 55 per cent of New Zealand’s in 1990, and that had increased to 77 per cent last year.  All except Russia gained material ground on New Zealand.

That might look unsurprising.  After all, these were very  badly distorted economies during the Communist era.

But, in fact, this chart materially flatters the extent of eastern European catch-up.  Here is the same chart showing these eastern European countries and New Zealand relative to US productivity levels.

east europe cf USA

In 25 years since the fall of Communist rule in eastern Europe, the median country of those 11 had increased labour productivity from only 38 per cent to 48 per cent of US levels.  Russia had lost ground relative to the US.  And so –  less dramatically –  has New Zealand.   (And the picture is much the same if one uses France and Germany as a benchmark, rather than the US.)

They were daft and damaging protectionist/statist policies we had in place during those decades – 20 TV factories indeed –  but they don’t look to have been a big part of the story in our relative decline.



The Herald’s wrongheaded call for an ever-bigger population

The Herald’s editorial today is headed “Population growth is powering NZ economy”.   It isn’t just a statement of the rather obvious, that a rapid growth in the population –  particularly unexpectedly rapid growth – boosts total GDP.    When there are more people, they all need to consume stuff, and they need houses, schools, shops, roads, offices etc.  And unexpected surges in the population boost demand more, in the short-term, than they do supply.    But they don’t do anything much to boost sustainable per capita real GDP.

That isn’t, of course, the Herald line.  Rather, channelling the Prime Minister, they assert that

The population increase is helping to generate the growth in the economy that puts New Zealand ahead of most other and larger economies at present, which in turn makes it a magnet for yet more migrants, as well as persuading more young New Zealanders to stay here.

There is so much wrong with this sentence, it is difficult to know where to start.  First, and repeating it slowly yet again, it is per capita economic growth that matters.  New Zealand has been doing quite badly on that score over the last year or so, even by comparison with other countries.  And as I illustrated yesterday, even on the Treasury’s own, optimistic-looking, numbers, we are expected to be only an average performer over the next four year.  Average isn’t necessarily bad, except that we are starting out so much poorer than most advanced countries, and not closing the gap.

And it isn’t as if jobs are abundant here either,  Our unemployment rate, at 5.7 per cent, is well above most estimates of the “natural” rate of unemployment, and not much below the median unemployment rate for OECD countries.    The number of residence approvals here is subject to a target, so even if there is increased demand from foreign citizens to move here, it only increases slightly the quality of the people we can take, not the total number.  Much of the variation results from two things.  The first is the inflow of students, probably influenced more by the policy change allowing most to work here while they study, rather than by the intrinsic strength of the New Zealand economy.  And the second is the flow –  mostly of New Zealand citizens –  to and from Australia.  Australia’s unemployment rate is also now quite high, at 5.7 per cent, and New Zealanders moving there don’t have access to the welfare safety net and associated entitlements they do at home.

The editorial goes on

The Government would not want to say this out loud, but clearly it is not controlling immigration as tightly as previous governments have done. This attitude undoubtedly comes from the Prime Minister and it is consistent with his disinclination to restrict foreign investment or even monitor its impact on the house market. He deeply believes the country is better off being open and connected to the world’s flows of capital, trade and people. The performance of the economy on his watch suggests he is right. Even the housing affordability is a cost of prosperity. If we want drastic steps taken to stop rising prices we need to be careful what we wish for.

With the exception of allowing students to work, the initial claim here is simply incorrect.  The residence approvals target is the same as it was under the previous government, and even student arrivals have not reached the peaks seen under the previous government.  As for the rest, no doubt it accurately reports the Prime Minister’s views –  he has repeated them often enough –  but there is no evidence to support it.  Productivity growth –  the foundation of sustained long-term prosperity –  has remained disappointingly weak.  And the immigration inflows have been overwhelmingly concentrated in Auckland, and yet the official data show that Auckland incomes are (a) lower relative to those in the rest of the country than we see in most advanced countries (comparing dominant cities and the rest of the country) and (b) that that gap has been narrowing.  Whatever the reason, the strategy is failing.

From there the editorial launches off into its own alternative universe

New Zealand’s desirable population size has always been a contentious subject, though not previously an urgent question. The increase since the turn of the century followed 25 years of static population figures as more people left than arrived.

Immigration policy was a notoriously capricious. Each time the economy dipped, governments would close the door. Now that we appear to have a rapidly growing population again, we need to be discussing how high we want it to go, and how it might be channelled to regions that most need it, and the houses and services it is going to need.

This country would benefit from many more people, and better preparation for their arrival.

There was a period from the mid 1970s to the late 1980s when New Zealand’s population growth was quite subdued.  But for the last 25 years –  not just since the turn of the century –  we have had one of the faster population growth rates of the OECD.  One doesn’t have to take a view on causation to note that people haven’t exactly been flocking to an economic success story.  Incomes here are presumably better than they were in the migrants’ home countries, but our productivity growth rate over that 25 years has been among the very slowest in the OECD.  Starting low, we’ve just drifted somewhat further behind.

I’m also not sure where the author gets the idea that New Zealand “immigration policy was notoriously capricious”.  Yes, there are constant changes at the margin, but to a large extent we’ve been running much the same immigration policy for 25 years now, through several recessions, and some pretty sharp ups and downs in the labour market.  Much the same could be said of the post-war decades, until the Labour government in 1974 closed down automatic access for British and Irish citizens –  and that wasn’t because the economy was doing badly, but just because they thought immigration should be less focused on traditional sources countries.

Of course, I thoroughly agree that we should be having a national debate about immigration policy.  Policy has long been premised, explicitly or otherwise, on the belief that New Zealand would be better, and more productive, if only there were more people.     But there is just no evidence for that proposition, and certainly not enough on which to rest such a large scale economic and social intervention as our immigration policy.  Big countries don’t grow faster than small ones.  When we had 1 million people, there were calls for many more people.  And when we had 2 million people.  And when we had 3 million people. And so on.  And for decades our relative incomes and productivity performance have been deteriorating.  New Zealanders have been getting poorer relative to their advanced country peers.  I’m not sure where the advocates think the critical threshold is where things might turn around –  but clearly 4.5 million people hasn’t been enough either.

The editorial writer talks of channeling people to “the regions”, which is almost certainly even more wrongheaded than bringing in large numbers in the first place.  We’ve seen that in the policy changes the government made last year: giving more points to people with job offers from the regions simply has the effect of lowering the average quality of the migrants we do get, who (on average) have not been terribly highly-skilled in the first place.

Instead of constantly championing the case for ever more people –  even at the cost of encouraging New Zealanders to leave Auckland (a weird way to help people at the bottom) – it is about time there was a serious conversation that stopped pretending everything was fine, and confronted the facts of New Zealand’s economic underperformance, and Auckland’s economic underperformance.  Doing so would force people to think harder about whether there was much realistic prospect of New Zealanders benefiting from an ever-increasing migration-fuelled population.  I’m not suggesting a population policy –  fertility and emigration choices of New Zealanders are their own affair –  rather, the abandonment of the implicit “big New Zealand” population policy we have had through successive governments.   Pretty much everyone accepts (and it is an uncontested OECD empirical result) that our distance from markets (and competitors) is a material penalty, making it harder to generate really high per capita incomes in New Zealand.  There is still no sign that New Zealand is getting much traction in products and markets that don’t rely largely on our natural resources –  and utilizing those natural resources in ever smarter ways simply does not need lots more people. Why penalize everyone more by rapidly increasing the population of a country with such a disadvantageous location?

The Herald is right that without the unexpected surge in immigration total GDP today would be lower than it is.  But without the surge in immigration over the last few years then, all else equal, our interest rates would also be lower, and our exchange rate would be lower.  And New Zealanders as a whole would be better off, because more firms would be better positioned to sell products and services into world markets at competitive prices.  But, probably more importantly in the long-run, our largely fixed stock of natural resources, found on not-very-propitiously-located remote islands, would be spread over rather fewer people.  As a country we’d be better off, and lower Auckland house prices –  no doubt still distorted by unnecessary land use restrictions –  would be a beneficial mark of that success.  As it happens, the regions  –  where the natural resources mostly are (pasture, forests, mines, seas, landscapes) –  would loom larger relative to Auckland, curiously the goal that the Herald’s editorialist seems to espouse.



Scattered thoughts on the Budget documents

A Budget from a government that seems to have no real sense of how strong sustained growth in productivity and living standards arises was perhaps never likely to produce anything of great interest.  The cheerleading for the, demonstrably failing, “ever bigger New Zealand” approach –  failing, that is, to generate any sign of better productivity growth, perhaps especially in Auckland –  and the questionable rhetoric about a more diversified New Zealand economy, was accompanied by yet more claims that somehow New Zealand’s economic performance is better than those of almost all our advanced country peers.  Meanwhile, oppressive taxes are raised on some of the poorest people in the country, to fund pouring more money into things like KiwiRail, regional research institutes, apprenticeships, and high-performance sport.

I heard some comments on Radio New Zealand this morning about “ideological” approaches to spending, and in particular about the share of GDP devoted to core Crown operating spending.  Since politics is about conflicting values and ideologies, I wasn’t sure what the problem was.  But in any case, the tables in the BEFU (Budget Economic and Fiscal Update) suggest that the government plans that its operating spending in the coming year will be 29.9 per cent of GDP.  As it happens, that is also the average share for the three June years 2015 to 2017.  The average share in the last three years of the previous government was 30.2 per cent.

In the last three years of the previous government, taxes were probably too high.  The core Crown residual cash surplus –  which some of smarter people at Treasury encouraged me to focus on when I worked there – averaged 1.5 per cent of GDP over those years, 2006 to 2008.  By contrast, even on yesterday’s numbers there is no sign of a residual cash surplus until the June 2019 year, and over the three years to June 2017, the average residual cash deficit is expected to be 1.1 per cent of GDP.

Through some combination of fiscal drag and continuing savage tax increases on tobacco, and perhaps some cyclical effects as well,  tax as a share of GDP which had fallen as low as 25 per cent in the year to June 2011 is now just under 28 per cent.

International comparisons of spending and tax levels are largely impossible just using Budget numbers.  Countries calculate things differently, and I recall a painful few days once when I was inside Treasury trying to get from the OECD how they translated our numbers into their numbers.

But here are the latest OECD numbers, which use “total outlays” (not just operating spending) and are not done on an accruals basis.  I’ve shown spending as a share of GDP for the median OECD country and for New Zealand.  There is nothing very unusual about the path in New Zealand.  In levels terms, spending as a share of GDP is a bit below the OECD median, but it is also a bit above the median for the other Anglo countries (only the UK is higher).

gen govt outlays 2016

And here is the same chart for revenue.  Again, nothing stands out about New Zealand’s path.

gen govt receipts 2016

Of course, a notable difference is in the deficit/debt position.  We were better-positioned than most going into the recession, and eight years on we are also better-positioned than most.  In one sense that is a legacy of successive governments going back 30 years, but then legacies are only preserved if each successive government makes sensible decisions.

That is fiscal policy.  But in many ways it was the Treasury economic forecasts that accompanied, and underpinned, the fiscal numbers that got me most interested.  Several other economists have noted that they seem to err on the optimistic side.  That is my fear too.

But I was also interested in the starting point.  According to Treasury, we currently have a negative output gap of 0.9 per cent of GDP. That is a little larger than the estimated gap a year ago, and the gap is expected to just as large in a year’s time as it is now.  And that on the back of negative output gaps every year since the 2008/09 recession.

There is a lot of imprecision in these estimates.  But the idea that there is still excess capacity in the economy –  7 years on from the recession  – seems quite plausible.  After all, the unemployment rate is 5.7 per cent, and Treasury (quite plausibly) thinks a “natural” rate of unemployment (given the structural features of the labour market, the welfare system etc) is around 4.5 per cent.  That used to be the Reserve Bank’s long-term NAIRU estimate too.    And as we know, inflation has been very low, persistently undershooting the midpoint of the inflation target (after persistently overshooting the target for most of the previous two decades).  If Treasury is right, it is a pretty sorry commentary on the conduct of short-term macro policy in New Zealand.  And that, not to put too fine a point on it, has been Graeme Wheeler’s responsibility for the past four years.  I continue to be a bit surprised that the Opposition doesn’t point these things out.  People have been unnecessarily unemployed because of the choices/judgements of the Governor.

But in terms of the Budget, it is probably the projections from here that matter more.  Treasury expects real GDP growth rates to average 2.9 per cent over the next four years.  But it isn’t really clear how or why.

It doesn’t seem to be from the effects of macro policy. The fiscal impulse over the forecast period is estimated to be slightly contractionary.  And they seem to have allowed only one more cut in the OCR, but they recognize that inflation expectations have been falling, so real interest rates are going to be no lower than they were a couple of years ago before the ill-fated tightening cycle.  The exchange rate has come down quite a bit, and perhaps they are assuming some quite powerful lagged effects from that fall.  They assume some recovery in the terms of trade, but nothing as dramatic as the increase in dairy prices a few years ago.  And, on the other hand, the level of repair and rebuild activity in Christchurch –  a major impulse to demand for several years –  will be fading.

And then there is immigration. As everyone recognises, the unexpectedly large net immigration flows over the last few years have been a significant boost to total economic activity.    Treasury assumes –  fairly conventionally –  a sharp fall in met migration inflows, from 71000 in the June 2016 year, to only 19000 in the June 2018 year.  But there is no assumed change in immigration policy, and so the assumed change in net arrivals must all be endogenous to relative economic performance and opportunities.  And yet, they aren’t forecasting much of a pick-up in Australia.  To me, something doesn’t quite add up.  How are we going to get a sustained growth acceleration here –  producing per capita real GDP growth almost as fast as in the period from 1991 to 2007/08 (ie after the reforms and through the massive credit expansion) –  with a pretty sluggish world economy, and all with a substantial negative impulse coming from a sharp cut in the population growth rate?

There is so much uncertainty about medium-term forecasts, that any of these numbers could turn out right.  But they don’t look like the most plausible story to me –  and seem too reliant on just assuming that things finally come right.  If so, they don’t represent the most plausible basis for thinking about future fiscal policy options.  Frankly, I’d be a bit surprised if we ended up with incipient surpluses in the next few years any larger than the modest positive balances the government has right now.   I remain very skeptical of the case for keeping the New Zealand Superannuation Fund in existence, let alone putting more money into it at this late date.  But if my doubts about the macro outlook prove well-founded, then the date for resuming contributions –  already almost a decade on from the NZS eligibility age for the first baby-boomers –  will fortuitously be pushed further into the future.

Among the spin yesterday was the continuing claim from ministers and the Prime Minister that New Zealand’s economic performance is better  –  and will be better, on these Budget economic numbers – than that of most of our advanced country peers.  As I’ve pointed out numerous times before, our growth rate for total real GDP isn’t bad by international standards (while remaining weak by historical standards), but that almost entirely reflects the very rapid population growth.  Per capita growth has been very weak by international standards in the last 12 months or so.

How about the outlook?  I downloaded the latest IMF WEO forecasts for advanced countries. Here is a chart showing forecast growth in real GDP per capita for the next four years (calendar 2019 over calender 2015). For New Zealand, I’ve used the Treasury BEFU forecasts for the four years to June 2020 – ie four years from now –  although as it happens the IMF forecasts for New Zealand aren’t much different.

imf weo gdp growth

On these numbers, New Zealand is doing not too badly.  Our forecast growth rates are very close to those of the median country, very similar to the US and UK (among G7 countries) and Sweden and Denmark (among countries nearer our size).  Which is fine in its way but (a) as I’ve noted, the New Zealand forecasts look rather optimistic, and (b) given our starting point, so much poorer than most of these countries, a successful economic strategy would have involved rather faster growth rates.

Slovakia, for example, might be an achievement to aspire to.  On these IMF numbers, between 2007 and 2021 Slovakia will have recorded almost 43 per cent growth in real per capita GDP, while we’ll have managed 15 per cent.   After decades of Communist rule, Slovakia started a long way behind New Zealand.  It has already matched our real GDP per hour worked, and looks likely to be moving past us.

We don’t have very much positive to write home about.





Nationbuilding in Nelson

Today is Budget day in New Zealand and so no one is probably much interested in reading about other economic stuff.  And after the ickiness and dysfunction of some of the stuff I dealt with in yesterday’s post, I wanted a change too.  After my post the other day about nationbuilding, a reader sent me a few links to pieces about the planned Nelson railway and cotton-mill, the economic case for which might, as he put it, be considered ‘thread-bare’.

For younger readers, this all happened a very long time ago.  In fact, I first recall reading about it in 1974 or 75.  I was a budding (very young) political junkie, and my grandfather  – a denizen of the “elite Glandovey Road” (Brian Easton’s term in The Nationbuilders)  – had been given a (distinctly unwanted) copy of Robert Muldoon’s first book, The Rise and Fall of a Young Turk, which he had passed on to me.   In that book, Muldoon recounts his role in a backbench rebellion that helped overturn this nationbuilding, or blatant electioneering, project.

In the 1950s Nelson appears to have been something of a backwater –  a rather pleasant one, no doubt, to judge from Geoffrey Palmer’s account of growing up there then, as the son of the local newspaper editor.  There had long been a hankering for a rail connection from Nelson to the main trunk line.  But the National government of the 1950s had actually been bold enough to close down the local railway line that had operated, wildly economically, for a long time.  As the 1957 election approached, Labour promised to build a railway line from Nelson to Blenheim, thus connecting with the main trunk line.  Labour took the seat in that election, and became government on a rather slim majority.

In March 1960, the Prime Minister went to Nelson to start the earthmoving machines on the new station.  As Muldoon puts it

The railway, of course, should normally have been commenced from the Blenheim end, which was the railhead, but the votes were in Nelson

Sir John Marshall’s memoirs –  he was the minister who had to deal with all after the 1960 change of government  – record of Nash

At the same time he announced –  rather prematurely, since no agreement had been signed –  that Nelson would also have a new cotton mill to provide freight for the railway and jobs for Nelsonians.

This announcement apparently went into quite some detail. Nash’s biographer, Keith Sinclair, records

The boards of the companies had not yet approved the project. Neither they nor the Department nor the Minister wanted the project announced. But Nash liked giving away presents.  At the railway ceremony he said that Nelson was to have a 4 million pound cotton spinning, weaving, and processing mill. Initially it would produce meat wraps, denim, drills, sheetings and the like.

The 1957-60 government had devoted a lot of effort to attracting foreign companies to manufacture here, to take advantage of the high protective barriers –  raised further by that government –  which made local production cheaper than importing finished product, if one could even get a licence to import the finished product.

The next election was approaching and initial negotiations for the cotton mill fell through, which left the government in something of a bind.  The government had to secure a deal, and did so “after talks between the company and the Department which lasted only a few days”.  Perhaps unsurprisingly, the deal proved to have a lot of loose drafting.

A British company would import cotton from Britain (in turn presumably imported from India or the US), and would be guaranteed 80 per cent of the New Zealand market for the first few years.  There was even talk of export markets developing.

As Sinclair records, “there was a public outcry”.  Most newspapers opposed it, as did many business groups.  Even the Manufacturers’ Federation couldn’t support the deal, as it had many clothing and textile manufacturers among its members.    As Sinclair records

“The cotton project was criticized on many grounds. For instance, it hindered the expansion of trade with Asia. To many conservatives and economists the whole concept of a state-guaranteed monopoly was anathema.  But probably more important was a feeling that there was something ludicrous about starting a cotton industry, based on imported cotton in New Zealand.”

Labour lost the 1960 election – doomed by the 1958 “Black Budget” rather than by industrial policy.  Labour’s share of the total vote dropped by 5.87 percentage points.  As Sinclair records, however

Labour’s biggest gain was in Nelson, were the vote rose 2.76 per cent. Apparently the cotton mill had pleased some people.

Shortly after the December election, even the feisty head of the union movement –  F P Walsh –  attacked the deal as the “best racket ever”.

The British company, Smith and Nephew, had moved fast once the deal was signed and within months had, in Marshall’s terms “lost no time in purchasing land, planning the mill, and letting contracts for plant and machinery”. [Could anyone move that fast with today’s planning and resource management laws?] so that things were well underway by the time the government changed.      Approached by the British company, the new government agreed that the contract the previous government had signed was binding and must be honoured.   They had badly misread public and business sentiment.

In Marshall’s words

Throughout the year 1961 these pressure groups grew in strength and vehemence.  As time went on others joined the fray: the Meat Board, the Constitutional Society, the Chambers of Commerce, the Plunket Society, the Social Credit Political League, and some branches of the National Party

We had the unusual spectacle of the Labour Opposition, which had signed the deal, and the National Government, who had confirmed it, standing side by side, with their backs to the wall, trying to defend it. No one else came to their aid.

Muldoon records that he first got involved when, as a first year backbencher out mowing his lawns one Saturday, he was accosted by a neighbour who owned a clothing factory.

“He asked me why we were permitting the Nelson cotton mill project to go ahead when it would cost New Zealand so much in dearer goods and lack of variety.”

He and some backbench colleagues started asking awkward parliamentary questions of ministers of their own government.  Not content with being fobbed off (including being told “importers should now deal with the Nelson mill”), Muldoon pursued the matter in a general debate, noting explicitly that responses from the Minister (Marshall, the Deputy Prime Minister) had not been satisfactory and highlighting a wide range of concerns about the project.  The backbench group concluded that the cotton mill deal was the worst of the “ten new monopolistic industries” set up by the previous government, and became determined to stop it before it went into production.

The controversy heightened further, with the British company seeking reassurances, officials arguing that the mill should proceed, but with Cabinet increasingly rankled by the backbench discontent.  Long caucus and Cabinet meetings ensued in early January 1962, with the Prime Minister telling caucus his personal view was that “For my part, I’d close it tomorrow”.  Some months earlier Smith and Nephew has indicated that they would be will to withdraw, subject to receiving reasonable compensation.   Cabinet finally accepted that proposal on the evening of 12 January 1962. Company representatives were summoned to the PM’s office and a deal was agreed in the early hours of the following morning.  Smith and Nephew was reimbursed for its actual costs, and the Crown took over the assets.  The planned Nelson-Blenheim railway project had by then already been abandoned.

Muldoon notes that he and his colleagues

had saved the right of choice for the consumer and scuppered a proposal that should never have been started. The final cost of buying out the contract was money well spent and has already been repaid many times over in economic terms.

Marshall notes

from this time on, the policies, plans and projects for industrial development became matters of much wider public interest and more critical community assessment. Secondly, we set in motion, through the new Tariff and Development Board, a complete review of the criteria for approving new industries.

The citizens of Nelson were rather less impressed. Geoffrey Palmer notes that

my father wrote strong editorials condemning the decision to stop the mill….The decision caused outrage in Nelson.

This piece from a contemporary publication captures some of the local mood, in words and pictures.  Labour retained the Nelson seat for many years.

All in all it seem like a fairly good outcome for the country.  Public and business opinion combine to resist a particularly egregious example of manufacturing protectionism and the advance of the Labour Party “manufacturing in depth” strategy.  And for all the later concerns some had about the FPP electoral system, stroppy backbenchers acting behind the scenes and in public made a real difference.

Then again, when the cotton mill building was completed it was sold to another protected business –  becoming an assembly plant for British Leyland for the next few decades.

It was a signal victory for its time –  marked in part by the space key figures give it in their later books.   The cotton mill was closed before it became a long-term drag on the economy.   But it isn’t that obvious that the quality of decision-making is much higher, and more rigorous, than it was in 1960 when Walter Nash kicked off this project.  These days perhaps it isn’t import protection that is at stake, but sports stadia, convention centres, “roads of national significance”, and –  perennially –  railway lines. I guess Project Palace isn’t quite at the level of the cotton mill but it isn’t clear why we need taxpayers’ money spent trying to identify how many hotels might, or might not, be needed, and marketing the opportunities to foreign investors.  Fortunately, we got rid of the Tourist Hotel Corporation some decades ago. It isn’t obvious what any market failure might be in the market for the provision of accommodation for overseas visitors.

Oh well, I guess one has to take wins where one finds them.

The OCR leak: some disclosures

Will I come to regret this post?  Probably not, but only time will tell.  It also may not be of wide general interest, but that is fine.

Regular readers will recall that I got caught up in the Reserve Bank’s OCR leak.  More specifically, gaping breaches in the Bank’s systems (a near-total reliance on trust) and an actual leak of the March OCR decision would not have come to their attention, and been addressed, if I had not passed on to them information that arrived unwanted in my email in-box on the morning of the release, which suggested the possibility of a leak.  Frankly, if anyone was the innocent party in the whole episode it was me.  I wasn’t the leaker, I wasn’t the major media organisation that failed to disclose the leak by its employees for several weeks, I didn’t even receive what information I had from the person who was the leaker, and I wasn’t the central bank that ran security systems that made such a leak astonishingly easy.

And so I was more than a little miffed to have the Governor of the Reserve Bank describe me and my conduct as irresponsible in his press release announcing the results of the inquiry –  an inquiry that would never have taken place if it had not been for my initiative in alerting the Bank to the issue.  What particularly irked me was that in the same statement the Governor (a) took no responsibility for the laxness of the Bank’s own systems, and (b) seemed to go out of his way to stress how helpful the media organisation, MediaWorks, had been.   It also puzzled me a little that there seemed to be no sanctions imposed by the Bank on the leakers – MediaWorks and its staff.

That prompted me to lodge a series of requests for information –  from the Bank itself, and from its Board (which is paid to operate at arms-length from the Bank to scrutinise the performance of the Governor and hold him to account).    The Bank has actually responded to one other OIA request in this area: the Taxpayers’ Union asked about the cost of the Deloitte inquiry, and was told a few weeks ago that the cost was $58952.28 (plus GST).  My OIA requests have been treated in a more typical Bank way –  not just extended for one month, but all the way out to 1 July, with talk of the possibility of charging.

However, I also sought from the Bank under the Privacy Act material relating to me that was held by the Bank and generated or obtained between the morning of the MPS release on 10 March and the day I lodged the request.  They didn’t respond in 20 working days, but it wasn’t that much after the initial deadline when I was sent a fairly large collection of material yesterday.  I had kept the request quite focused –  I wasn’t after copies of media reports, or out to embarrass junior people who were not involved in the leak investigation and might have been exchanging speculative emails.  All the material I obtained was comments from people directly involved, mostly people from the senior management group including the Governor.

I have tossed up about whether to release this material, and am doing so for two reasons.

The first is that I think it does shed useful light on how the Bank went about dealing with the information I provided to them, and the priors and presuppositions of key people involved.  It is only a partial view of course, and I hope in time the Official Information Act requests will provide some more clarity.  Unfortunately, the Bank has deliberately stalled the release of that information (which it can be onerous neither to collect/collate nor to review).

The second is more personal.  Various people wisely suggested that I separate my irritation at having been personally attacked by the Governor from the wider issues of how the Bank has dealt with the issues of the leak, MediaWorks involvement, lock-ups etc.   Some experienced former colleagues had even got in touch to suggest I must be misinterpreting things, and the Governor’s statement about irresponsibility couldn’t have been meant to include me.  And so I decided to write a private letter to the Governor, outlining my perspective on my involvement in the whole issue and, in light of those points, inviting him to explain, or reconsider, his public assertion that my conduct had been irresponsible.  If possible, dealing with such issues privately is generally likely to be more constructive.

It wasn’t long before I got a very terse response from the Governor confirming that he did indeed regard me as having behaved irresponsibly.  I didn’t do anything with that, other than to pass the message on to those optimistic former colleagues.

But then I received yesterday’s collection of documents.  Publishing them, together with my letter to the Governor and his reply, will enable people to form their own views.  I’m sure many will see what they want to see, and some of those inclined to support Graeme Wheeler more generally may agree with the views he, and his senior colleagues, expressed.   Anyone is entitled to his or her own view.

As for me, I have to live with my own conscience.  There would be nothing shameful in concluding that, with the benefit of hindsight, one might have done some things differently.  After all, the Governor himself –  who had much more time – has changed tack twice since the inquiry was released (from no penalties for MediaWorks to indefinite exclusion from press conferences, and from immediately discontinuing lock-ups to investigating the possibility of reinstating them).   I have asked myself some of the questions others have posed, but reading the material I received yesterday led me to conclude more strongly than previously that I had done the right thing –  not necessarily the things the Bank would have preferred, but those which best balanced the public interest and the protection of my own interests.

Here is the link to the material the Reserve Bank released.

OCR leak inquiry Privacy Act response from RB

My earlier posts on the leak and related issues are all here

And here is what I took from the newly-released material.

The first point I noted is that, with the exception of a brief email from John McDermott on the morning of the MPS release, in which he wrote to me “Thank you for letting me know”, no one (management or Board) seems to have considered, at any point in the subsequent six weeks, expressing appreciation to me for coming forward and passing on the information that I had.  One doesn’t try to do the right thing in the hope of being thanked for it, but it is a telling omission nonetheless.

The second point is that I was pleasantly surprised to learn that the Bank seemed to take the information seriously from the start.  By 11:30am on 10 March, Deputy Governor Geoff Bascand had asked the senior manager responsible for risk and audit to undertake an inquiry, noting (page 2) “we cannot be sure it is a leak as opposed to speculation but need to enquire into it with diligence and urgency on the assumption it is”.

That was fine, and he even noted that “in the first instance, he [Michael] is the messenger”.   But in the same email Bascand had already moved on to treating the information I had passed on as an “allegation”, and two of the three questions he expects answers to are about my conduct.

Somewhat surprisingly, in a world in which a “no surprises” policy is generally supposed to prevail between government agencies and the Minister’s office, it appears (page 4) that the Bank only decided to tell the Minister of Finance’s office about the possibility of a leak after I had made a brief mention of the information I received on my blog on the afternoon of the release (having advised the Bank some hours earlier that I was likely to mention it).  That looks like poor political management, but also tends to confirm the unease I felt at the time, that the issue might be hushed up if at all possible.

Geoff Bascand’s biases become increasingly apparent in one of the unguarded emails that requests like this throw up.  After they advised Bank staff of the situation late on 10 March, the head of HR emails Bascand with a brief expression of sympathy.  Bascand’s response is nothing at all about the possible vulnerability in the Bank’s own systems (he being the senior manager responsible for the Communications functions), the possibility of an actual leak, or anything of the sort, but is all about the messenger.

By this time, and perhaps reflecting his biases, it is becoming clear that Bascand has trouble with the meaning of the word “allegation”.  I have commented on this previously, but it is more stark in the light of the information in this release.  In his message to all Bank staff (page 5) late on the afternoon of 10 March the heading is “Allegation of leak information”, and in a five line email the word “allegation” is used twice.  Nowhere, by contrast, does he note something like “we have received information suggesting that information may have been leaked”.      To repeat, allegations are claims are that are made, something that (at least according to my Oxford dictionary) involves “to assert without proof”.

To repeat, at no time between 10 March and 14 April (the release of the short-form inquiry report) did I make any “allegations”.  All I did –  and the emails are in this batch, on page 1 –  was to pass on hard information that I had (an email) while stressing repeatedly that I had no idea whether it was the fruit of a leak, or something else.  At the time, as I’ve said before, I struggled to believe a leak was possible.

It took a while for the leak inquiry to get going.  I’ve covered previously the Bank’s approach to me to assist the inquiry –  an approach which was extremely professional and which carefully referred only to the “possibility of a leak”.  I talked to the Deloitte investigators a few days later.  I gave them a copy of the text of the email I had received, and we had an amicable conversation in which, inter alia, they indicated that the Bank was very grateful to me for having come forward.  At the time I took that at face value, and commented openly on my support for the process the Bank had put in place.  It is worth noting –  because it comes up later –  that the Deloitte investigators did not ask me who sent the email to me, and indicated that they would not expect that I would tell them.  I wrote a post following that meeting with the investigators, mentioning briefly the discussion we had had, but focusing mostly on structural changes that I thought were warranted (abandonment of lock-ups etc) regardless of whether or not there had been a leak on this occasion.

That post seemed to spark some media interest.  The documents contain an email to Mike Hannah (RB Head of Communications) from Hamish Rutherford of Fairfax (someone else who appears to have had trouble with the meaning of the word “allegations”) and over the next couple of days there was a flurry of media coverage, here and abroad, and some clarificatory posts from me (partly annoyed at the continued public use of the term “allegations” by media and Bank representatives).  That in turn sparked various emails among senior managers at the Bank.

Mike Hannah is the first (page 13).  Interestingly, he claims that he would have picked up and responded quickly to any email I had sent before 9am on 10 March.  If so, that is good to know now, although it wasn’t the impression I was under at the time.  But he also notes that the Bank would not necessarily have done anything differently: “we’d have watched the markets very carefully , and might have had to consider going early if we saw action”.  But as everyone recognises, there was nothing visible happening in markets.

Hannah also responds to my point that one reason I hadn’t contacted the Bank in the brief window before 9am was my unease about the Bank’s reaction if in fact it had not been cutting that morning.  He considers it a “flimsy” story, but in fact the tone of the senior management comments –  from him, Bascand and Wheeler – throughout these documents only confirms that was an entirely reasonable fear on my part.  One thing that is striking in these documents is the apparent total inability of such senior people to imagine themselves in someone else’s position with someone else’s (lack of) information. They knew there was a cut coming. I didn’t.

The Governor responded to Hannah (at 1:48 am –  perhaps he was travelling).  From the tone of his email he seems to regard the whole exercise as a “quest for publicity” by me, adding that “my sense is that he is digging himself into a hole” – I’m still not sure, from context, how.    He seems aggrieved (on which more later) that a former employee of the Bank would blog about the enquiry.  It is really quite a weird reaction: one might hope that the Governor would have been most concerned about getting to the bottom of the substantive issue, and would expect considerable public scrutiny at even the possibility that an OCR decision had been leaked.  Recall that by this point –  objections to the misuse of “allegations” apart –  I had been supportive –  in public and in private –  of the whole inquiry process the Bank had put in place.

The Governor forwarded that email to the chair of the Bank’s Board, Rod Carr.  Instead of keeping an appropriate distance from management, Carr weighs in suggesting that perhaps I was now feeling guilty, that my actions were not a “sign of good citizenship”, and that somehow advising them a few minutes earlier  –  see Hannah’s comments above –  might have protected “NZ’s reputation”.    To his credit, Carr does flag the possible need to abolish lock-ups.

A few days later, Mike Hannah reports to the Governor on his approaches to the attendees at the media lock-up.  Hannah remains reluctant to believe that any media person/body can be responsible –  even though I had told him by inference (on the first day) and told the Deloitte team directly a week earlier that the email I received had come from a person in a media organisation.    More generally, at this point, Hannah still seems reluctant to believe that there had been a leak at all –  perhaps understandably given that he ran the lock-ups –  noting of his conversations with journalists “it may all be humour, bluff, etc, but it may also reflect scepticism about Reddell’s credibility”.    Given Hannah’s reluctance to accept the possibilities, the Bank’s in-house counsel (one of the few to emerge creditably from these documents) had to go back to Deloitte (page 16/17) to confirm that I had in fact said the email came from a person in a media organisation.

The Deloitte report indicated that, finally, on 5 April, MediaWorks owned up to the fact that there had been a leak, and that their staff had been responsible.  Perhaps unsurprisingly, there is no email in the system from senior RB managers saying “gee, Michael’s information turned out to be about something real; just as well as he came forward”.

Instead, the documents skip forward to Sunday 10 April.  By then, the Bank had the draft Deloitte report and was providing comments on it, and drafting press releases.

Geoff Bascand had sent out an email expressing surprise that no (MediaWorks) names were named in the Deloitte report –  in particularly that the report did not name the person who had sent the email to me.  Hannah responds identifying his suppositions about who it was, and he indicated that his draft press releases included the name of the person he suspected.  He also noted that he  had “not yet included Reddell’s name” –  the operative word apparently being “yet”.  Reflecting the Bank’s cast of mind, he noted that this was “not to save him” but simply because he still wanted more information.  The next morning, Hannah emails senior colleagues indicating that the draft press release had been done by him and the Governor jointly.  He urges that the Bank needs to get Deloitte to ask MediaWorks for the name of the person who emailed me (even if just to confirm that they would not provide the information).

In response, Nick McBride points out that he would not expect MediaWorks would provide anything more, and urged that the Bank should avoid focusing on individuals, stressing “it is MediaWorks that is responsible”. He goes on to note that “there is also a strong basis for speculating that a journalist emailing from the lock-up was normal behaviour, for Mediaworks at least”.   Interesting, he notes that MediaWorks will be particularly reluctant “if it senses the Bank’s ‘no mercy’ approach and the lack of credit it is likely to get for its admission”.    Given that there were no sanctions imposed on MediaWorks in the 14 April announcement, and the statement went out of its way to praise the cooperation of MediaWorks, something must have changed between then and 14 April.

That same day  – Monday 11 April –  also saw an odd email exchange between the Bank and Deloitte.  The Bank asks for copies of all emails from MediaWorks, and in response is told that “the only other email correspondence that we had with MediaWorks was the email exchange about Mr Reddell’s phone number –  now attached for your reference” [although for some reason not included in the material the Bank released].  My phone number isn’t exactly a secret –  it is in the White Pages.  But that same exchange also confirms that what the Bank released on 14 April is not, despite the impression given in the Bank’s statement, the full Deloitte report at all.  Instead, it appears to be a “short form” “public version”.  Someone should probably request the full report.

The Governor himself was engaged in providing comments on the draft report.  His attitude is evident in the following exchange.  A manager in the audit area of the Bank advises senior management that he has asked that Deloitte delete the word “all” from a description of how I had “cooperated with all our inquiries”, since I had declined to name my source (despite never being asked to, either by the Bank or Deloitte).  Not content with that excision (which wouldn’t have bothered me) the Governor insists that they must delete “Mr Reddell cooperated with our enquiries”, noting “as he didn’t disclose everything that was necessary this therefore gives a misleading impression”.  The fact that the inquiry would never have occurred at all without my original initiative clearly escaped him.

The remaining emails relate to the period after the release of the (public version) of the inquiry report on 14 April.  There is the gratuitously nasty one from someone outside the Bank (page 25) but my interest is mostly in the stance of the Bank’s senior management and Board.

According to Mike Hannah, in an email to the Governor and Board chair, by now I am “obviously smarting from a well-aimed and deserved reprimand”, and am “irresponsible again” for suggesting that the lock-ups had had lax security.  Reading that did prompt me to wonder which senior manager oversaw the procedures for and administration of the lock-ups which had just been revealed to have been breached.

And then the ante starts getting raised further.  According to Geoff Bascand,

“nothing will satisfy Michael. He is a deeply aggrieved person.  Everything will be interpreted through his victim filter”.

I’m not sure where Bascand gets any of this from.  And a simple apology from the Governor for publically tarring me as “irresponsible” would satisfy me.  Bascand continues to seem to think I somehow regret leaving the Reserve Bank, when I had been quite clear for several years prior to doing so that I was keen to get out, and do as my mother had done for me, and be around for my growing children.    That had only become financially feasible by late 2014, and by then the (personally) optimal thing was to stick around long enough to collect a looming redundancy cheque, which is currently helping pay for house alterations.  As I said to John McDermott at the time, my only concern had been that the Bank might change its mind.

The Governor also weighs in (page 27) and we get here the fullest explanation of his view of my irresponsibility

I firmly believe Michaels behaviour was irresponsible in failing to inform the Bank immediately, in not informing Deloitte as to who contacted him and blogging continuously on the matter even when the investigation was underway. I believe the reasons he trotted out for his actions to Deloittes were extremely weak to say the least.


I also find all this rich from someone who worked in the Bank for a long time and I believe should have used much better judgement- also Michael has repeated denigrated the work of colleagues that he worked alongside for many years and I believe also he has been reckless in his criticism . I believe many of the points he makes are misplaced and can readily be countered by a competent economist.

Some of this was familiar ground (see his brief letter below), but much was not.  The suggestion that I  –  or presumably others  –  should not have written about the matter while his investigation was underway almost beggars belief.  His internal inquiry about a possible failure of internal process is not exactly on a par with a matter that might be sub judice because it is being dealt with in a court of law. This is a (potential and actual) systems breach in high profile powerful public agency.

Unfortunately, the Governor seems to have allowed his judgement on the specifics of the (possible) leak issue to have become clouded by his irritation at the scrutiny and challenges that I have posed to the Bank, and him in particular, over the previous year or so.   And the substance of his point seems wrong  – I have tried to be very careful, when being critical, to focus responsibility on the Governor (as the law does) and his senior managers, and not on the many able staff who work in the organisation.  I’m quite relaxed about the idea that the Governor will often disagree with my points of view   –  that is hardly surprising, and not really that different than it was when I was inside the organisation –  and, yes, reasonable people (including some other “competent economists”) will differ on many of these issues.  But none of that is, or should be, germane to the specific issue of the leak that (a) occurred on his watch, and (b) would not have come to light without my help.

Since I was interested in lowering the temperature on the personal aspects of this, I approached a friend of mine who is on the Board seeking some sense from him as to why the Governor’s stance towards me on this issue was reasonable.  Perhaps he was in an awkward position, but I was largely fobbed off with a “circle the wagons in defence of the Governor” attitude.  And so I wrote to the Governor, copied to the Board.

That letter is here.

Letter to Graeme Wheeler OCR leak press release

The Governor’s very brief response is here.

Graeme Wheeler Ltr to M Reddell April 2016

The final email in the set of documents that the Bank released is an email from the Governor to his senior colleagues and the Board chair, forwarding them a copy of the letter, with the terse observation “I find this letter quite extraordinary”.

Some readers will get to the end of all this and perhaps still think the issue at stake is that I should have got in touch with the Bank a little earlier than I did on 10 March.  A few commenters on earlier posts have argued that.

Contrary to the sense that pervades many of these emails among Reserve Bank senior managers and Board members, I owed the Reserve Bank nothing.   But I do feel some sense of residual loyalty to the organisation and so I did what I reasonably could, in a way that directly helped them uncover a serious leak (and subsequently amend their own procedures).    If anyone reading these emails thinks that, in my shoes, they’d have rushed to tell the Bank earlier, at risk of being scoffed at and ridiculed had the Bank not in fact been cutting that morning, well all I can say is that they have a thicker skin than I do.  Bascand and Wheeler would no doubt have been poised with some barbed turn of phrase about “there goes Michael again”, ready to tell others the story the next time I ran a post they disliked.

At one level, the attitudes in these emails don’t surprise me greatly –  although perhaps I’m a little  surprised that despite the OIA and the Privacy Act they wrote these things down.  And I’m a little relieved that none of them are from my own two previous bosses.  I don’t think they reflect well on the Bank, or its Board, but that is also something for others to judge.


Whenever I hear the term “nationbuilding”, and particularly when calls come for this or that programme in the name of “nationbuilding” I shudder somewhat. I spent some time working in southern Africa in the 1990s, and after-effects of the disastrous “nationbuilding” programmes of people like Kenneth Kaunda and Julius Nyerere were already apparent.  Since then, the sheer awfulness of Hastings Banda and Robert Mugabe have also become increasingly obvious.   “Nationbuilding” has a ring of something post-colonial, whether in Africa or Latin America, and (to me) a ring of persistent failure.

New Zealand has had its share (perhaps more than its share) of “nationbuilders”, people who seek to use the power of the state and its (our) resources to pursue one or another vision of what the country could become. There was Julius Vogel with the massive debt-fuelled expansion.  And Sutch/Savage/Nash, financially fairly austere perhaps, but with a vision of an insulated New Zealand with a large manufacturing sector (those 22 TV factories). We’ve had NZ Steel and Tasman Pulp and Paper –  and the Raspberry Marketing Council.   We’ve had those who actively encouraged (and even subsidized) large-scale immigration.  We’ve had the Think Big strategy of Muldoon and Birch.  And latterly another wave (of decades-length) of large scale (supposedly) skills-based immigration, supposedly as a “critical economic enabler” –  as if somehow the people we have aren’t really “good enough” for those holding the levers of power.   And there are all sorts of other programmes that fly a bit further under the radar –  film subsidies for example, or grants to those who capture the imagination of bureaucrats –  or which simply never managed to command enough public support in time (the slightly younger Roger Douglas’s call for sixteen state-funded carpet factories).  Each of these programmes that has been implemented made a difference, but how many of them were for the good is, at very least, an open question (my provisional answer is none of them).   And if they weren’t good, there was almost no effective accountability for any of the designers.

I pulled off my bookshelf this morning Brian Easton’s 2001 book The Nationbuilders, 15 profiles of people Easton saw as having “shaped the New Zealand nation in the middle years of the twentieth century”.  They are mostly political and bureaucratic figures, or people whose contribution was around politics and policy.  None was particularly market-oriented (Coates and Muldoon appear, both from the activist ends of their respective centre-right parties).  One major business figure was profiled –  James Fletcher – but even his success was in no small measure down to the huge government construction projects.  Oh, and there was Dennis Glover, who founded Caxton Press.

Which is a somewhat longwinded introduction to an article in the Dominion-Post a few days ago in which Shamubeel Eaqub called for this week’s Budget to be a nation-building one.  It wasn’t simply a line in passing –  the phrase appears three times in a not-overly-long column.  In this case, “more public debt” is the call –  in this case to build houses (30s revisited), public transport, and “rail in critical infrastructure corridors” (1870s revisited).

He continues

The reality is that the current expenses or lost revenue could be easily redirected into debt repayment to fund some serious amounts of new investment.

If we raised a 100 year bond, as Ireland has done recently, we could probably borrow about $30b for every $1b in debt repayment. Incidentally we spend about $1b a year on accommodation assistance. Redirected to borrowings, we could perhaps build about 82,000 houses on existing Housing New Zealand land in Auckland.

Set aside for the moment the long track record of poor quality government capital investment –  not just here but abroad – and then consider a key difference between Ireland (and Belgium which also recently issued a 100 year government bond) and New Zealand.

First, both have very high levels of government debt (general government gross debt in excess of 100 per cent of GDP) and so the idea of locking in some of that debt for a very long time must seem quite attractive to the respective debt managers.  Neither country seems to be launching an expansionary fiscal policy with the proceeds.

And second, there is quite a difference between the price of Irish or Belgian debt, and that issued by the New Zealand government.   Belgium issued its 100 year bond at a nominal yield of 2.3 per cent.  Ireland issued its at 2.35 per cent.  The ECB has an inflation target of just under 2 per cent, and inflation in last 25 years has averaged 2.2 per cent in Ireland and 2.0 per cent in Belgium.   At most, a reasonable estimate of the expected real interest rate over 100 years is perhaps 0.5 per cent.   That should represent quite cheap borrowing (although whether it is really cheaper than a succession of 10 year bonds only time will tell).

What of New Zealand?  We don’t have a 100 year bond.  But the New Zealand government does issue quite long-term inflation indexed bonds. A bond with 14 years to maturity has a yield of around 1.82 per cent, and one with 19 years to maturity yields around 1.93 per cent.  The implied 5 year rate in 14 years time (ie the last 5 years of the 19 year bond) is around 2.2 per cent.  Who knows at what yield the New Zealand government could issue 100 year bonds (having taken all the inflation risk back on itself) but it seems unlikely that it would be less than 2.5 per cent.   That is a huge difference in likely real borrowing costs from those European sovereign issuers.  And yet Eaqub proposes we borrow to spend (“invest”) at those high yields, even though the real productivity performance of the New Zealand economy over decades has been far inferior to that of either Belgium or Ireland.   In our case, a 2.5 per cent real interest rate not only materially exceeds past and likely future productivity growth rates, it may even exceed the likely future rate of real GDP growth.

For the government to borrowing at 2.5 per cent real might look reasonably attractive if the benchmark is New Zealand interest rates over, say, the last 25 years.  But being in debt at all, as a government, should have been extremely unattractive during that period given how high New Zealand’s interest rates have been (and, laudably, successive governments markedly lowered our public indebtedness).  Perhaps a long-term real borrowing rate of around 2.5 per cent real might be borderline attractive if we could count on excellent governance and disciplines and an assurance that projects would be subject to rigorous cost-benefit analyses.  The track record on that score isn’t promising.

On a perhaps-related issue, Treasury last week released a series of blog posts on the financial return to the Crown from its investment in Air New Zealand, from the time of the Crown bailout in 2001.    As a purchaser of last resort (in late 2001, post 9/11, no one was keen on airline shares), the Crown should have got quite good entry levels.  And Air New Zealand remained listed on the stock exchange, with minority private interests throughout the subsequent 15 years, ensuring some level of ownership-based market discipline.  Air New Zealand is widely regarded as a very well-managed successful airline, and for now is riding the back of relatively low oil prices and an upsurge in inbound tourism.

Over the period since 2001, the nominal 10 year government bond rate has averaged 5.3 per cent.  And yet the internal rate of return the Treasury analyst calculated on the Crown’s investment has been 8.4 per cent per annum –  and much of that is unrealized, and dependent on the current, still relatively high, Air New Zealand share price.    Buy the entire equity index and I suspect few investors would regard a 3 percentage point equity risk premium as reasonable (from memory, historic market estimates are typically in a 4- 7 percentage point range).  But Air New Zealand is not as risky as the index as a whole –  it is far far more risky.  Government debt financed that Air New Zealand investment, and taxpayers don’t seem to have gotten a remotely adequate compensation for the risk they assumed, even in an industry with lots of competition and market disciplines.  It isn’t clear why advocates of large scale borrowing now – in a country with still quite high real long-term interest rates –  think they would do better in generating economic returns.

So-called “nationbuilding” projects have usually been a way of wasting (with a fairly high degree of confidence) the nation’s resources in pursuit of some politician’s or economist’s pet vision.  Government don’t –  or perhaps rather shouldn’t –  make nations, and in particular they certainly don’t make the wealth of nations.  That is down to individuals, firms, and the networks of society.  There is an important role for government –  and whatever government does needs to be done as well (or least badly) as possible – but “nationbuilding” as a call seems no more likely today to result in a good, high-yielding, projects, than it did in 1870 or 1980 or 1935 or……