Skills matter….and we already seem to have them

Earlier this week the OECD released Skills Matter, a 160 page report on the results of a programme of surveys of adult skills in OECD (and a handful of other) countries.  As usual with OECD reports, it is full of fascinating charts.  Here is how they describe the programme:

In the wake of the technological revolution that began in the last decades of the 20th century, labour market demand for information-processing and other high-level cognitive and interpersonal skills is growing substantially. The Survey of Adult Skills, a product of the OECD Programme for the International Assessment of Adult Competencies (PIAAC), was designed to provide insights into the availability of some of these key skills in society and how they are used at work and at home. The first survey of its kind, it directly measures proficiency in several information-processing skills – namely literacy, numeracy and problem solving in technology-rich environments.

It is worth emphasizing that the survey involves attempting to directly assess skill levels, not formal qualifications.

The first such survey was done a few years ago, but this is the first round to include all OECD countries and, in particular, the first to include New Zealand.   They even provide a 20 page country note on New Zealand.

The bottom line for New Zealand?  The news is good.

Here is how our adults scored on literacy.

oecd literacy 2

And numeracy

oecd numeracy

And on “Problem-solving in technology-rich environments”

oecd problem solving

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand.    Perhaps there is something very wrong with the way the survey is done, and it is badly mis-measuring things, but those aren’t usually the OECD’s vices.  For the time being, I think we can take it as reasonably solid data.  And the broad sweep of the cross-country results makes some sort of rough sense: typically the poorer countries are to the left of the charts (relatively less highly-skilled).

But if the skill levels of our adults are so high, on average, by international standards (and, as it happens,  we have quite a high rate of tertiary qualifications as well), it should perhaps raise questions again about the size and nature of our immigration programme.

After all, as I noted, the poorer and lower productivity countries are generally to the left of these charts. But New Zealand is one of the less well-performing OECD countries on that score.  Here is real GDP per hour worked for OECD countries in 2014.

real gdp per hour worked 2014

And when the OECD lines up the skills scores against the productivity data one of the largest gaps (lagging productivity) is for New Zealand   The cross-country scatter plots don’t show a tight relationship by any means, but they do tend to suggest that the skills and talents of our people aren’t what holds New Zealand back.

And yet we aim to grant 45000 to 50000 new residence approvals each year (a scale three times the size of US and UK programmes, per capita), supposedly with a focus on skilled migrants.  What is the logic?  And where is the evidence that this is the right place to focus in tackling New Zealand’s long-term economic underperformance?  Reinforcing those doubts, we know that other data show the incremental returns to tertiary education –  a different thing from skills, but one hopes not wholly unrelated –  are also among the lowest in the OECD.

A reasonable person might instead look at the data and suspect that, for whatever reason, the economic opportunities in New Zealand just aren’t that good.  Perhaps that is about location and distance, and a seeming inability to break out of a dependence on (a fixed supply of) natural resources or to increase productivity in those natural resource sectors rapidly enough.  But whatever the underlying reason, the opportunities haven’t been found here –  our export share of GDP has been static for decades, per capita tradables sector production hasn’t changed for 15 years, and a huge number of New Zealanders have kept on leaving for better opportunities abroad (mostly in –  on these measures –  slightly less skilled Australia).

One might have severe doubts about the logic of using policy to actively pursue bringing in lots more people  –  it might be no more sensible here than it would be in Wales, or Scotland, or Nebraska, or Newfoundland, or Tasmania (who’ve been spared the depradations of Think Big bureaucrats and politicians with immigration as a lever).  Perhaps it would be a little less worrying if the new arrivals were typically very highly-skilled people –  but recall that the highly-skilled people we already have aren’t succeeding in generating high returns (high productivity) here now.

But in fact, our immigrants aren’t that highly-skilled at all.  At the frivolous end of the spectrum, we were giving a small number of Essential Skills work visas to shelf stackers and kitchen hands.  More seriously, among those gaining residence visas in the skilled migrant category, the top four occupations in the last year for which we have official data were

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%

But it isn’t just a matter of occupational lists.

As it happens, the OECD report looks directly at the skills level of immigrant populations.  There are a few countries where immigrant population skill level match those of native born populations.  Perhaps that isn’t too surprising where most migrants come from countries with very similar cultural or linguistic backgrounds.  Among subsets of migrants, one could think of the flow among NZ/Australia/Ireland/UK, or between Chile and Argentina, or between the Czech Republic and Slovakia.  At the other extreme, some countries now face the challenges of very large skills gaps between migrants and native-born (most of the Nordic countries are now in this situation).  New Zealand doesn’t do too badly on this count – after all, we have control on who comes in, we have a notional skills focus, and the UK remains the largest single source of residence approvals. But there is a clear skills gap between immigrants and native-born New Zealanders.  Importing people doesn’t look as though it has been a means of raising skill levels here, or in most other countries.  In general that shouldn’t be surprising –  successful countries solve their own problems, and when they succeed they might share their bounty with newcomers. But a different sort of people is very rarely the answer to serious economic challenges.

On paper, there is some evidence suggesting that migrants to New Zealand have higher formal qualifications than the average New Zealander.  Nonetheless, as Julie Fry reported in her Treasury working paper a couple of years ago

Evidence suggests that immigrants are, on average, more qualified than the
New Zealand-born.  However, they also face language and adjustment barriers, at times including discrimination, which on average take 10-20 years to overcome.  In common with overseas patterns, recent New Zealand immigrants have poorer outcomes than others in the labour market, although those outcomes improve over time.   Immigrants who are from culturally similar source countries (such as Australia and the United Kingdom) adjust more quickly.   On average, migrants from Asia take longer to adjust, and migrants from the Pacific Islands never reach parity with the New Zealand-born, reflecting the fact that they enter mainly on family reunification grounds and non-skills-based quotas.
Our immigration policy seems seriously misguided.  It has been sold as a “critical economic enabler“, but if anything looks more as though it might be serving as a disabling factor.  There is no evidence that we are short of people, or of skills.  Skill levels  –  individually and collectively –  could no doubt always be higher than they are.  But immigration policy hasn’t been, and isn’t, raising skill levels in New Zealand –  nor is it doing so anywhere else in the OECD.
(And to anyone who wants to run an individual sector skills shortages argument, I commend to them the post I wrote on that topic a couple of weeks ago.)

 

The End of Alchemy?

I’ve been reading recently a couple of books by former officials, the common theme of which is probably “avoiding the next collapse”.

Mohammed El-Erian spent much of his career at the IMF, and at one stage was even touted as an outside possibility to become Managing Director of the Fund (being Egyptian when people were trying to break the European lock on the job).  These days he works for Allianz, the big German insurance and asset management company, and previously ran PIMCO, a major subsidiary of Allianz.   I’ve always been a bit skeptical of El-Erian but picked up his book The Only Game in Town –  which a reader had kindly passed on  – with interest.   His key idea is that there has been too much reliance on central banks in the last decade to stimulate activity, and that countries need a wider range of policy responses, better targeted at the underlying issues, to get us back on a more sustainable path.

Initially it sounded plausible, and there is some interesting material in the book, but I came away unconvinced that El-Erian really had much of significance to add to the current debate.   A key part of his argument rests on the not-uncommon line that global monetary policy is incredibly stimulatory (the same line Graeme Wheeler runs here), which gives little weight to the idea that the neutral or natural rate of interest might have changed (fallen) quite substantially.  The fact that advanced country inflation is so low, despite the low interest rates, suggests there isn’t very much stimulation going on.  And there are external reasons to think that neutral interest rates have fallen –  notably the falling rates of population growth (involving less need for new capital) and the declining rate of productivity growth (also likely to associated with a reduced demand for new capital).  If so, central banks haven’t been the heroes of the last few years (as El-Erian’s tale has it), but rather bureaucrats sluggishly recognizing and reluctantly adjusting to the changing external conditions –  often enough champing at the bit to take interest rates back up to levels that might have been appropriate a decade ago, but simply aren’t now.

And yet in the index to  El-Erian’s book there are no references to neutral or natural interest rates (let alone Wicksell), and no references to demography or population growth rates.  In the text there are many more references to PIMCO than to productivity.

Of course, markets have often also been slow to recognize what has been going on  –  and probably no one has a fully convincing answer –  but most central banks deserve little of the praise El-Erian bestows on them.

Of course, his praise of central banks is partly a rhetorical device – a stick with which to beat governments, most of whom have done little in the way of structural reform in recent years.  But he doesn’t actually have much specific to offer on boosting productivity growth. And I’m also more than a little sceptical because of El-Erian’s enthusiasm for multilateral solutions (“the world needs to return to the wisdom of strong multilateralism’) –  perhaps a not unexpected enthusiasm from a former senior IMF official and quintessential internationalist.  In a book published only a few months ago, El-Erian laments the seeming inability of the EU to deliver on their “ever closer political union”: perhaps he might lament it, but few citizens of European countries seem to.  He can’t seem to face the alternative –  that the process might actually be about to head in reverse.    Perhaps even less relevantly, he calls for reforms of the IMF as key part of his list of desirable changes.  Whatever the answers to the current problems ailing the world, I find it difficult to see that:

  • giving the IMF more money
  • giving China more say
  • removing the European lock on the MD job, and
  • strengthening the ability of the Fund “to name and shame countries”

is a material part of the answer.  What legitimacy, one might reasonably wonder, might the IMF have?  What interests does it pursue?  And even if it had legitimacy, none of those measures are ever likely to materially change economic outcomes for the better.

But the main point of this post was to write about The End of Alchemy, by Mervyn King, the former Governor of the Bank of England.  It is a book prompted by the financial crisis of 2008/09, but it isn’t directly about that crisis.  It isn’t a memoir. King suggests that such books are “usually partial and self-serving” –  no doubt, but surely readers can compare and contrast and reach their own judgements (for example, I found his former boss, Alistair Darling’s account of the crisis very useful) – and reckons that future historians can have his account “when the twenty-year rule permits their release”.  Of course, British taxpayers can’t force former Governors to write a memoir, but when a longstanding Governor (including through the biggest crisis in modern times) of considerable intellect and capacity with the pen retires laden with state honours (Knight of the Garter and peer of the realm –  Lord King of Lothbury)  perhaps it wouldn’t have been unreasonable to have hoped for a bit more accounting for the crisis and his role in it.  Ben Bernanke’s book won’t be the last word on the US crisis, but the debate is better for it having been written.

Following the end of his Bank of England term, King visited New Zealand a couple of years ago, and I had the opportunity to participate in a couple of roundtable discussions with him at the Reserve Bank.  I wasn’t the only person who came away from those sessions struck by his reluctance to acknowledge any mistakes whatsoever.  Even tactically, after such a costly banking crisis and disruptive few years, one might have expected some minor concessions, but there was nothing. Senior people tend to look better, more credible and authoritative, for being seen to recognise that all humans –  even them –  make mistakes, even if just small ones.  It was, for example, no secret that in the years prior to the crisis King had had little or no interest in the financial stability functions on the Bank of England.

In many ways King’s book is much more ambitious than any memoir, and it is a stimulating contribution to a different debate: how should we best organize banking systems and financial regulation to produce the best long-term outcomes for the countries of the world.  It is quite ambitious in its reach –  both in the material he covers, and in audience he aims at.  It is explicitly not a book aimed just at economists, but at “the reader with no formal training in economics but an interest in the issues”.  I suspect the book will stretch such readers, but mostly in a good way –  even if I disagree with him in a number of areas, I’d recommend it.  There is a lot of context and background material that is often taken for granted (as well as fascinating bits of obscure history such as the monetary arrangements of French overseas territories in WWII), and King writes fluently and authoritatively.  The downside, perhaps, is that there is so much background, that King devotes less space to fleshing out the case for his alternative perspective than might have been desirable.

There is a lot of stuff in the book that I like.  King is very skeptical of central banks’ forecasting capabilities –  which, of course, didn’t stop him presiding over the development of the current forecast-based system at the Bank of England –  and has long been recognized as a sceptic of the euro.  He is one of the few senior (establishment) people in Europe willing to openly discuss –  and not deplore – the possibility of a break-up of the euro.

And some of his practical policy suggestions seem very much along the right lines.  Higher capital ratios for banks, with an important role for a more constraining leverage ratio (a tool used by most bank regulators, but eschewed by our own Reserve Bank), are appropriate responses to the high (demonstrated) risk that governments will bail-out failing banks, and to the limited ability of apparently-sophisticated capital models to truly capture the changing nature of the risks around complex credit exposures.  Higher required capital ratios, especially for large banks, come at little or no efficiency cost, especially in jurisdictions where the tax system treats debt and equity reasonably neutrally.    And higher liquidity requirements are a prudent part of any system in which, come a crisis, a central bank will act as lender-of-last-resort in the face of intense liquidity pressures.  Requiring banks to hold a larger proportion of liquid assets, so that they can’t just “force” central banks to lend on assets that are highly illiquid even in good times (which is what happened, including in New Zealand, in 2008/09), is a step in the right direction.  Most central banks have moved this way since the 2008/09 crisis, and market pressures have (for now) worked in the same direction.  King suggests that what has been done already is not enough.

But I’m still left uneasy about some key aspects of his argument.

For example, he puts a lot emphasis on the point that credit to GDP ratios are a lot higher than they were a few decades ago (although in places like New Zealand and Australia data suggest they may still be lower than they were in the 1920s).  In this context he discusses the possible contributions of falling real interest rates and a liberalization of domestic and international financial systems.  But in many countries, the largest single component of domestic credit is lending for housing.  And in many countries –  the UK and New Zealand among them –  it is now widely recognized that planning restrictions have created artificial scarcity in urban land supply, bidding the prices of urban land and houses.  Younger generations purchasing houses need to borrow more to buy such houses (in effect, borrowing from the older generations, including –  indirectly –  the sellers),  That raises the level of gross credit in an economy, and perhaps even erodes the financial stability of the system, but it is best understood as an endogenous response to the binding planning restrictions (especially in combination with population growth pressures), not as something driven out of the banking system.  And yet in a book of almost 370 pages there is no mention of this factor at all.    Perhaps banks have aided and abetted the rigging of urban land markets by governments, but the fault surely largely rests with governments not banks.

His historical account of the evolution of central banks, and particualry of the Federal Reserve, is entirely conventional, in playing up the number and severity of  the crises the pre-Fed United States experienced. But he doesn’t seriously engage with either the argument that the crises were themselves partly the outcome of the extensive regulatory restrictions the US had in place in those pre-Fed decades, nor with the experience of some other countries –  notably Canada – which operated for decades with no central bank and no systemic crises.  This isn’t the opportunity to review all the arguments and evidence on those issues, but on my reading King comes down far too readily on the side of the instability of the system –  perhaps with some of the zeal of a convert.

In many ways, Britain itself is a good illustration of the point. Prior to 2008/09, the last really serious systemic financial crisis in the United Kingdom was that prompted by the outbreak of World War One (an episode King discusses, and which is more fully dealt with here).  That crisis wasn’t really the result of any systemic weaknesses in the financial system –  rather governments suddenly changed the rules of the game, having more pressing geopolitical concerns in mind.  Even the crisis in the United Kingdom in 2008/09 was primarily the result of the troubled banks’ exposure to offshore markets –  loan losses on UK domestic banking books never posed a systemic threat.  The key offshore market, the US, was one that was highly distorted by other regulations.

King concludes his book thus

A long-term programme for the reform of money and banking and the institutions of the global economy will be driven only by an intellectual revolution. Much of that will have to be the task of the next generation. But we must not use that as an excuse to postpone reform. It is the young of today who will suffer from the next crisis –  and without reform the costs of that crisis will be bigger than last time.

But I simply didn’t find persuasive the claim that the costs of the next crisis will inevitably be bigger than the last one.  After all, in most countries the experience of the 2008/09 recession was much less severe than that of the Great Depression –  the last really big common advanced country crisis.  Perhaps this points to one of the other issues that King didn’t really address.  If the extent to which GDP per capita and productivity measures are today so far below the pre-crisis trend level is all down to the financial crisis itself, and the associated failings of the financial system, then perhaps King’s case gets stronger.  But he doesn’t make the case for that claim, and since the productivity slowdown was already underway well before the financial crisis, it isn’t necessarily an easy case to make successfully.

Since I got to the end of the book, the title itself has been troubling me.  King is careful to define his “alchemy”

By alchemy I mean the belief that all paper money can be turned into an intrinsically valuable commodity, such as gold, on demand and that money kept in banks can be taken out whenever depositors ask for it.  The truth is that money, in all forms, depends on trust in its issuer…..For centuries, alchemy has been the basis of our system of money and banking.

No one, surely, disputes the importance of trust in a market economy. But if there are distinctive characteristics of  the issue as it affects money and banking, the issues around trust aren’t unique to money and banking.  I trust that the food on sale at the supermarket hasn’t been poisoned.  If ever widespread doubt arises about the validity of that assumption, there will be serious economic disruption.   Perhaps we could prosper with a different banking system –  most practical alternative suggestions seem to me unlikely to make very much difference –  but the West has done quite astonishingly well with the one it has (notwithstanding the current mediocre decade).

And King simply does not seriously engage with the question of how government, bureaucracies, and “government failure” have given risen to some of the distinctive challenges around the banking system.  If, for example, a tendency to bail-out failing banks is a feature of the political system, if regulators tend too easily to see things from the perspective of the regulated, and so on, how confident can we be in the robustness of alternative policy models, which depend on the active ongoing decisions of a new generation of policymakers and officials?  I think King is partly right to describe the last crisis as not primarily the fault of particular individuals –  many of whom were responding to the incentives they faced –  but have the political and bureaucratic and market incentives really changed that much?     Would, for example, Gordon Brown (keen on promoting the City of London as a global banking centre) have appointed Mervyn King as Governor in 2003 if Mervyn King had been known to be all over the issue of financial stability and actively making the case for much tighter controls on banks and the banking system?   What is it that means those same incentives and constraints won’t be at work again as the memory of the last crisis fades?

King devotes some space to the debate as to whether monetary policy should be used to lean against asset price booms and the build-up of credit (or just focus on the inflation target, in the upswing, and after any bust).  This was a major debate at the Bank of England –  including at the Monetary Policy Committee level –  as far back as the late 1990s.  King seems to hanker for the “do something” camp –  that perhaps “doing something” with monetary policy might have led people to reassess their future income prospects earlier, and limited the extent of the imbalances that built up. Of course, as he recognizes there were problems. In a world of national policymaking, a central bank that tried to lean against the boom would tend to see a higher exchange rate, and in some respects a more unbalanced economy.

I’ve always thought that the other problem was that –  thankfully –  central banks typically have a rather constrained form of independence.  Had the Fed or the Bank of England –  or the RBNZ for that matter – tightened monetary policy materially more aggressively during the boom, the pressures on policymakers to change the target –  or the powers of the central bank –  would have been great.  In Britain, the inflation target is set each year by the Chancellor –  I find it scarcely credible that Gordon Brown would have welcomed a years-long undershooting of the inflation target he himself had set, and not just as a result of “forecasting errors”, but as a matter of deliberate policy choice.  Perhaps there is something in the old line about the job of the central bank being to remove the punchbowl just as the party is getting into full swing, but the actually the waiter can really only remove the punchbowl with the consent of the partygoers.  In the last boom, there was simply no appetite anywhere for materially tougher policies –  and no one knew the future, and many credit booms (even those of 00s) haven’t ended badly.  King rightly stresses the importance of “radical uncertainty”, but central banks and financial regulators are no more gifted with insight or fine judgement than the rest of society.  And they face institutional incentives, for good and ill, as the rest of us do.

King is clearly uneasy about the current low level of world interest rates. And in one sense, he is right to be so –  we all want to better understand the underlying forces that have delivered such interest rates (not just policy rates, but the extraordinarily low bond yields).   And it is also, clearly, correct that monetary policy is not an instrument that can generate the sort of faster long-term productivity growth that most countries would now welcome.  But to suggest, even if only implicitly, that somehow things would have been materially  better if only policy rates had not been held so low for so long seems more like wishful thinking than hard-headed analysis.  If he has such analysis, it didn’t make it into the book.

It is an interesting and stimulating book, well worth reading.  In a way it is shame that he overreaches.  His mostly-sensible actual policy recommendations do not, to me, seem to represent anything like the sort of transformation his title implies.  But nor, I suspect, is such a transformation needed.

Is NZ less receptive to immigrants than Australia?

Tyler Cowen had an interesting and thoughtful piece on Marginal Revolution yesterday, headed Why Brexit happened and what it means. He summarises his answer as “ultimately the vote was about preserving the English nation” –  on this telling, primarily about immigration. And despite his own pro-immigration inclinations, he runs a sympathetic interpretation of why a majority of British voters might reasonably have voted as they did.

He runs a story in which there is something distinctly different about Britain (along with Japan and Denmark)

One way to understand the English vote is to compare it to other areas, especially with regard to immigration.  If you read Frank Fukuyama, he correctly portrays Japan and Denmark, as, along with England, being the two other truly developed, mature nation states in earlier times, well before the Industrial Revolution.  And what do we see about these countries?  Relative to their other demographics, they are especially opposed to very high levels of immigration.  England, in a sense, was the region “out on a limb,” when it comes to taking in foreigners, and now it has decided to pull back and be more like Denmark and Japan.

The regularity here is that the coherent, longstanding nation states are most protective of their core identities.  Should that come as a huge surprise?  The contrast with Belgium, where I am writing this, is noteworthy.  The actual practical problems with immigration are much greater here in Brussels, but the country is much further from “doing anything about it,” whether prudently or not, and indeed to this day Belgium is not actually a mature nation-state and it may splinter yet.  That England did something is one reflection of the fact that England is a better-run region than Belgium, even if you feel as I do that the vote was a big mistake.

I’m not sure I’m totally persuaded by the idea that immigration was the main factor explaining the British vote.  One of a package of issues no doubt, but whether it is the main story is another question.  After all, Lord Ashcroft’s poll asked thousands of people why they had voted as they did.  Here were the results

Leave vs Remain podium rankings

  • Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

Among both Labour or Tory voters the biggest single reason for voting Leave was, on respondents’ own accounts, “the principle that decisions about the UK should be taken in the UK”.    If governments are going to do something as silly as ban powerful vacuum cleaners, at least it should be our own government that does it.

Perhaps voters were reluctant to own up to concerns about immigration as the most important factor?  And perhaps immigration and the changing character of the country was important beneath the surface –  as the economic underperformance of the last nine years has probably been.  But it isn’t an open and shut case that this was mostly an immigration referendum.  After all, stories – accurate or not –  about the EU wanting to ban bendy bananas, or force people to use metric units, have had considerable traction in Britain for decades.

And if you were British you might reasonably think you would be at least as well off having your own government makes the choices for you.  Things might seem different in the rest of Europe where, for example,

  • in 1970, Spain, Portugal and Greece were under authoritarian dictatorships,
  • in 1980, the Baltic states didn’t exist as recognized entities, and Poland, Rumania. Bulgaria, the Czech Republic, Slovakia, Slovenia, Croatia and Hungary were all under failing Communist rule (and four of those countries didn’t even exist independently),
  • Finland Ireland, and Norway (the latter not in the EU, only the EEA) weren’t independent countries as recently as 1900,
  • Germany had its unsavoury 20th century history (accompanied by Austrians cheering for the Anschluss),
  • Denmark, Belgium, Netherlands and Luxembourg were all occupied by Germany for several years,
  • Having been defeated by Germany in 1871, and narrowly  (and at vast cost) winning World War One, France then endured the shame of German occupation in World War Two, the collaborationist Vichy regime, and the crisis of 1958,
  • Malta’s 40 years between independence and joining the EU was the historically abnormal self-rule phase.

It doesn’t leave many countries where citizens can look back over the last 150 years and say “yep, we ran ourselves over long periods of time pretty well really”.   But Britain did. Now, as we know, there is plenty of anti-EU sentiment in much of the rest of Europe as well, but it seems quite readily understandable, just in terms of their own country’s history, that UK voters would prefer their own governments to make decisions for them.    And it doesn’t take a huge political and bureaucratic edifice to establish a free trade area, or a mutual external defence arrangement (such as NATO).

Having said all that, what really prompted me to write this post was this line in Cowen’s post.

Of course, USA and Canada and a few others are mature nation states based on the very idea of immigration, so they do not face the same dilemma that England does.  By the way, the most English of the colonies — New Zealand — has never been quite as welcoming of foreign immigrants, compared to say Australia.

I’m at a loss to know what he is basing that final sentence on.  For better or worse –  and given the economic opportunities here, I think it has been mostly for the worse –  that proposition seems to be defied by the data.

At times, I’ve had people run the line to me that since in 1500 the non-indigenous populations of New Zealand, Australia, Canada and the United States were all, essentially, zero, and since New Zealand has by far the smallest population of any of those countries we must have been less open to immigration.  But those other places started European settlement and immigration earlier than we did –  and were closer to Europe, at times when travel costs (mostly elapsed time) mattered hugely.

I’m going to start my comparisons from 1870.  That is partly because I was using the Maddison database and its first annual New Zealand population numbers are for 1870.  But it also seems reasonable on other grounds. In both New Zealand and Australia the influxes (and outflows) associated with the respective gold rushes were over by then, and by 1870 the New Zealand Land Wars were winding down –  never thereafter was there any serious question about settler control of the North Island.  The large scale Vogel immigration and public works programme began shortly thereafter.

Here is a chart showing the total populations of New Zealand and Australia since 1870, both normalized to 100 in 1870, and done in logs so that readers can see changes in growth rates over time.

aus and nz popn since 1870.png

Over the full period –  145 years – New Zealand’s population has grown materially more rapidly than Australia’s.  Of course, the largest differences were in the first decade, but the gap hasn’t narrowed since.

I’ve often run the argument that New Zealand’s post-WWII immigration policy was materially misguided, at least on economic grounds, given the absence of new favourable productivity shocks or technological opportunities that would support top tier incomes for a rapidly growing number of people in these distant islands

Here is same chart starting from 1945.

aus and nz popn since 1945

 

You can see the period from the mid 1970s to the late 1980s when New Zealand had very low rates of net immigration, but over the full period New Zealand’s population growth has still modestly exceeded that of Australia.

And here is the most recent period since 1991 –  which uses official New Zealand population data, and ties in quite well with the change in immigration approach in New Zealand that largely prevails to today.

aus and nz popn growth since 1991

Again, our population growth has been a bit faster than that of Australia.

Now it is perfectly true that in the immediate post World War Two period, Australia was much keener on taking continental European migrants than we were.  Then again, in the 1960s and 70s we had large inflows of Pacific Island migrants, and there was nothing comparable in Australia.

But, and here is my other key point, we’ve had faster population growth than Australia even though we’ve had huge outflows (net) of New Zealand citizens, that swamp any outflow from Australia of Australian citizens.

Here are the numbers on the total net outflows of New Zealand citizens for each decades since the 1950s

Net PLT outflow of NZ citizens (March years)
1950-59 -2494
1960-69 -34,057
1970-79 -161,231
1980-89 -229,874
1990-99 -146,229
2000-09 -263,651
2010-16 -138,705

That is a total of 976000 people, from a country which at the start of the period had only 2 million people and now has around 4.6 million people.

Some of the people who left will have died by now, but official estimates reported by Statistics New Zealand suggest 600000 New Zealand born people living abroad (and perhaps 1 million New Zealand citizens living abroad).     Australia has five times the population of New Zealand, and yet estimates of the total number of Australians living abroad are around one million.

Yes, there are differences in rates of natural increase from time to time, but the big story of recent decades in particular has been one in which New Zealand has taken materially more non-citizen migrants (per capita) than Australia has, reflected in the slightly faster population growth we’ve had despite the huge continuing outflow of New Zealanders.

In fact, you can see this in the respective policy-controlled bits of the immigration programmes.   This chart is cobbled together using data since the late 1990s on Australian permanent migration approvals under their Migration stream and Humanitarian stream, and New Zealand data on residence approvals. To the Australian numbers I’ve added the net inflow of New Zealand citizens to Australia, and to the New Zealand numbers the (much smaller) net number of Australian citizens moving to New Zealand.

migration rates nz and aus

Most years, the rate of permanent immigration of non-citizens to New Zealand has been higher  –  often materially higher – than that to Australia.  And the Australian numbers have dropped back since the end of this chart as the flow of New Zealanders moving to Australia has fallen back.

Perhaps Cowen had some less numerical basis in mind for thinking that New Zealanders have been less welcoming of immigrants than Australia.  But I’m not quite sure what it could be (although there is always this site).  And given our continuing economic underperformance, it is quite remarkable how receptive New Zealanders have been to such high rates of immigration (roughly three times per capita the size of net non-citizen inflows to the US and UK) –  especially as the programme is repeatedly sold as an economic-based measure, a “critical economic enabler” in the words of the government department responsible for immigration policy matters.

 

 

 

 

More states or fewer?

I was going to write something today about monetary economics, the 2008/09 crisis, and reform options for financial systems and economies, but….the Brexit aftermath is pretty much all-absorbing, at least to a politics/economics/geopolitics junkie.   So far, it is difficult to see why anyone would be very surprised about what has happened since Friday, but of course it is very early days.  Media coverage seems dominated by perspectives from those –  including the journalists writing the stories – almost personally affronted that the populace of a major, quintessentially moderate, country could have voted as they did. The stories highlight, without really needing to try, the disconnect between what might be loosely described as a metropolitan urban liberal mindset that downplays the local in favour of a network of internationalist rule-setting, and what might loosely be described as a more small-c conservative mindset that puts a greater emphasis on the local and the national as the basis for rule-setting and governance.  Peter Hitchens highlights this contrast in his column here – highlighting how detached the majority of MPs of both main UK parties have become from the views and attitudes/priorities of very large shares of their voters.  The situation probably isn’t much different in a whole variety of advanced countries.

But what got me particularly interested over the weekend was talk of the United Kingdom itself breaking up.  Of course, that started a long time ago.  The Irish Free State (as it was then called) became independent in 1922.  If Northern Ireland should eventually reunite with the Republic of Ireland –  and frankly I would be surprised if it happens in the next few decades, given the risk of reigniting the decades-long civil conflict – it would only be the culmination of the Home Rule movement that was convulsing British politics as far back as the 1880s, and which saw Britain facing the possibility of an army mutiny and civil war on the eve of World War One.

The chances of Scotland becoming independent seem somewhat higher –  after all, the Out vote got 45 per cent in the last referendum only two years ago.  If the headline-grabbing opportunity to push for a new referendum is the desire to stay in the EU –  and for all the hype, even 38 per cent of Scots wanted out –  they had better hope there is still an EU to belong to a decade hence.  But even if not, is the idea of Scottish independence so different from that of Irish independence –  which we all now take for granted, even if (at the time) it probably came at a considerable economic cost?  Scotland had been independent for hundreds of years, and if it did well economically from the Union and its people played a huge role in the British Empire, who could begrudge them the right to govern themselves?

After all, although it wasn’t always so, the people of England and Wales make up 90 per cent of the population of today’s United Kingdom.   Even without Scotland and Northern Ireland, England and Wales would be the fourth most populous country in Europe, just a little behind Italy.

But then I got thinking about other countries.  Hasn’t a move towards more countries been underway for some considerable time?  The unification of Germany and of Italy were huge developments in the mid 19th century, but they were largely completed by 1870.   Our own Land Wars finished around the same time, securing a single state entity on these islands. The US grew hugely (in territory) during the 19th century, but had largely reached its current size with purchase of Alaska (from another large state) in 1867.  Even the acquisition of Hawaii was almost 120 years ago now.

I found a list of countries ordered by population in 1900.  Here was the 25 largest:

China 415,001,488
Indian Empire 280,912,000
Russia 119,546,234
USA 75,994,575
Germany 56,000,000
Austria-Hungary 51,356,465
Dutch East Indies 45,500,000
Japan 42,000,000
United Kingdom 38,000,000
France 38,000,000
Italy 32,000,000
Ottoman Empire 30,860,000
Spain 20,750,000
Brazil 17,000,000
Mexico 12,050,000
Korea 12,000,000
Northern Nigeria 8,500,000
Egypt 8,000,000
Morocco 8,000,000
Philippines 8,000,000
Southern Nigeria 7,500,000
Siam 7,200,000
Persia 7,000,000
Romania 6,630,000
Belgium 6,136,000

Of these, the two parts of Nigeria (both then administered by the UK) are now one country.  Quite a few of the other countries are much the same as they were then, subject to some (mostly relatively minor) border adjustments (eg the return of Alsace-Lorraine to France).

But the bigger story surely is the break-ups.   What was the United Kingdom is now two countries, the UK and Ireland.  What was Korea is now –  at least for the time being –  two countries, North and South Korea.  India as it was is now Sri Lanka, India, Pakistan, Bangladesh and (depending where the boundary lines were drawn) Burma.  And the erstwhile Russian, Austro-Hungarian, and Ottoman Empires have split into dozens of new independent countries between them.

What of today’s 25 most populous countries?

China 1,376,048,943
India 1,311,050,527
USA 321,773,631
Indonesia 257,563,815
Brazil 207,847,528
Pakistan 188,924,874
Nigeria 182,201,962
Bangladesh 160,995,642
Russia 143,456,918
Mexico 127,017,224
Japan 126,573,481
Philippines 100,699,395
Ethiopia 99,390,750
Vietnam 93,447,601
Egypt 91,508,084
Germany 80,688,545
Iran 79,109,272
DR Congo 77,266,814
Turkey 78,665,830
Thailand 67,959,359
United Kingdom 64,715,810
France 64,395,345
Italy 59,797,685
Tanzania 53,470,420
South Africa 54,490,406

Of these countries, only the last two comprise what were smaller entities in 1900 –  and neither is, perhaps, an advert for the cause of ever-larger unions.   Tanzania was previously the colony of Tanganyika and the protectorate of Zanzibar (ruled by a Sultan, under British oversight).  Zanzibar was granted independence in 1963, but this was quickly followed by a bloody revolution, at the end of which Zanzibar was absorbed (semi-autonomously) into the new Tanzania.  And, of course, South Africa in its current legal form was the fruit of the Boer War, essentially a war of conquest in which –  at great cost –  the British Empire and the British colonies beat the Afrikaaner states.

Have there been other mergers attempted?  Well, yes, after World War One the artificial state of Yugoslavia was created by the powers.  That has now long gone.  Czechoslovakia also emerged from that settlement –  also (peacefully and successfully) gone.  In the 1950s there was political union between Egypt and Syria: it last for all of three years.  The British created the Federation of Rhodesia and Nyasaland in the 1950s, and it was also gone a decade later.

Can one think of exceptions?  No doubt.  Various colonial enclaves have been reabsorbed by the surrounding power, peacefully or otherwise –  Goa, Hong Kong, Macau.    But there isn’t much else for more than 100 years, and none that I can think of where the voluntary choice of the respective populaces has led to the formation of larger states from smaller states (happy to hear if I have forgotten any).  Germany reunited –  but then it never separated voluntarily, and indeed in 1945 the intention was never two separate states.

None of this should really be very surprising.  The other great trend of the last couple of hundred years has been towards democratic government. People clearly  seem to want to rule themselves with – and be governed by  – people with whom they feel some significant sense of common identity and shared perspectives (which might be ethnic, or religious, or linguistic, or simply historical).  Little really –  in the scheme of things –  divides New Zealand and Australia, and yet there is no great appetite for the two to become one.   The metropolitan elites might wish it were otherwise –  and might even believe quite genuinely that everyone could be better off it only things were done their way –  but the citizens of the world show little sign of being convinced by their story.  Are the people of the world poorer as a result?  Possibly –  despite the huge volumes of cross-border trade –  but some things seem to matter more to most of them.

And it isn’t as if the trend towards more and smaller states looks like having run its course.  Even in Western Europe, there is Scotland, demands from Catalans for independence, and the ever-present question of what unites Belgium other than, say, a football team.

In that light I was quite puzzled by Wolfgang Munchau’s FT column today. In many ways it was a hardheaded piece, noting that the risk from the UK referendum for the rest of Europe may be greater than those for the UK.  Highlighting Italian risks in particular –  and Italian stocks fell savagely on Friday –  he ends

To prevent such a calamity, EU leaders should seriously consider doing what they have failed to do since 2008: resolve the union’s multiple crises rather than muddle through. And that will have to involve a plan for the political union of the eurozone countries.

How he imagines that the citizens of the Eurozone countries will ever agree to political union, especially now, is beyond me.    I guess the traditional European elite approach is not to give them a say.

UPDATE: For anyone wanting a more systematic treatment of some of these issues, see Alesina and Spolaore The Size of Nations (my copy of which I finally found on my shelves).  They devote an entire chapter to the EU.  In a book published in 2005 – with an expanding EU, and the general contentment with the early years of the euro –  they seem (perhaps understandably) slightly  uncomfortable with how the EU fits with their general model in which lower trade barriers and fewer wars would typically result in more states, not fewer.  But they conclude their EU chapter boldly: “Quite simply, it is not possible for Europe to become a federal state”.

 

Makhlouf again

In almost any well-functioning country, The Treasury should be one of the very best government agencies: a repository of wisdom, experience, rigour, and the skepticism that comes from seeing all too many “bright ideas” put forward over the years.  If the Secretary to the Treasury is going to give public speeches –  and there are reasonable arguments that someone in that role shouldn’t (one doesn’t come across public speeches from the chief executives of MBIE or MFAT, two other major departments) –  we might reasonably expect something judicious and rigorous, and which provides at least some fresh and interesting insights on the issues he is addressing.    It should be a public reflection of the very best of the sort of insight and advice The Treasury is offering their primary “customer”, the Minister of Finance.

As an example, speeches by Ken Henry, the former head of the Australian Federal Treasury, almost always met that standard –  I looked forward to reading them, and expected to see some or other issue or argument a little differently as a result.  It isn’t about whether or not one agrees with the points the speaker is making – often one learns most from thinking hard about cases made by able advocates of an alternative view –  but about the quality of what is on offer.

The speeches of our current Secretary to the Treasury simply don’t reach that standard.  On Thursday I wrote about Gabs Makhlouf’s recent speech about disruptive technological change.  Only a true believer can have felt better for reading it –  deriving, perhaps, a sense of validation in having such a senior official, a pillar of the establishment, say it.

Perhaps more disconcerting was Makhlouf’s speech earlier this week titled (apparently with reference to the title of Oscar Wilde’s famous play, The Importance of Being Earnest: A Trivial Comedy for Serious People) The Importance of Being Auckland: Strengths, Challenges, and the Impact on New Zealand, delivered to something called the “Committee for Auckland Advisory Group Summit”.

It is a disappointingly poor speech –  I wish I could say I was surprised, but I wasn’t really.  It was a piece that combined lightweight analysis, (very) selective choices of evidence, and a use of rhetoric that might have been becoming from a Cabinet minister pursuing voters, but should have been beneath a senior public servant.  It was all too similar to previous speeches: not just one bad example amid an otherwise solid record.

There were three main parts of the speech.  I don’t have anything to say on the material on infrastructure, much of which is simply a list of points from another report.

Makhlouf begins with a celebration, in a section headed “Auckland’s Strengths”.  The text reaffirms Makhlouf’s position as a true believer: a rapidly growing population is apparently something to celebrate, and the cultural/ethnic diversity of the city is “exciting”.  Here is what he has to say

Why do I find this exciting? It’s because high levels of diversity provide dividends including through increases in innovation and productivity.

Auckland’s diversity is particularly critical for our international connections. There’s much more to international connections than trade. It’s the other international flows – flows of capital and people, and the accompanying flow of ideas – which are the key to reinventing trade, and which will lay the foundation for a more prosperous New Zealand in the long-run.

The high number of overseas-born Aucklanders can bring new skills, new ideas and a diversity of perspectives and experiences that help to make our businesses more innovative and productive. And perhaps most importantly, they often retain strong personal and cultural connections to other parts of the world, which opens up, and helps us to pursue, new business opportunities.

Auckland is truly New Zealand’s gateway to the world. It’s not just that there is a big number of companies here doing business internationally. It’s the port and airport linking the country to global markets; and tertiary institutions, researchers and innovators linking us to global knowledge.

Which might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

He might also have linked to the recent presentation by Jacques Poot (in a Treasury guest lecture), in which Poot was keen not to sound very optimistic about just how large those economic benefits of diversity really are, or to the work of Bart Frijns – an (immigrant) professor in Auckland (see last sentence of the extract above) –  whose recent work suggests that on some measures, in some contexts, there may be net costs, not benefits at all.

Of course, one can’t say everything in a single speech, but when a credible case could be made that the Auckland-centred model is in serious trouble, it is bordering on the seriously unprofessional to not even allude to any of these sorts of points, even if only to explain why the Secretary interprets then differently than, say, I might.

So keen was Makhlouf not to undermine his good news creative fiction about the Auckland economy that the one difficulty he does allude to is buried under a different heading “Social Outcomes”.

Let me start with social outcomes. Auckland scores well on quality of life indicators but other measures suggest not everyone is able to enjoy what Auckland has to offer. Social outcomes vary significantly across Auckland, highlighting the potential importance of sub-regional thinking and analysis to lift social outcomes across the board in Auckland.

Issues with the labour market contribute to patchy social outcomes across the city. While Auckland has higher productivity than other urban centres in New Zealand, it also has an underutilised labour force. For example, the five year average unemployment rate in South Auckland is 11.7 percent compared with 6.3 percent for the rest of Auckland and 6 percent for New Zealand overall. That’s the sort of discrepancy that has a real impact on the quality of life of families and communities.

To the first paragraph one can only say “And?”   In what city –  or decent-sized town –  ever did “social outcomes” not “vary significantly”?

Similarly, differences in the unemployment rate across groups within cities will occur everywhere –  if we had the data, I’m sure the unemployment rate would be higher (and probably the participation rate lower) in Porirua than in Karori/Kelburn.  It might be good if were not so, but it isn’t obviously an Auckland-specific issue.   After all, across the country as a whole, the average unemployment rate over the last five years for Europeans has been 4.3 per cent, while that for Maori has been 14.7 per cent, and that for Pacific populations has been 13.4 per cent.  Given that the population of South Auckland is disproportionately Maori/Pacific, the issues in South Auckland seem most likely to be mainly national than (intra-Auckland) suburban.

But there is an Auckland underperformance that might almost escape you if you didn’t read that second paragraph quite slowly and carefully.  The unemployment rate in Auckland is higher than that in the rest of New Zealand.   For a long time, that wasn’t so.

auckland U makhlouf

The chart shows the gap between the unemployment rate for New Zealand as a whole.  Over the history of the HLFS until around 2007, Auckland’s unemployment rate averaged a bit below that of the rest of the country.  There was some clear cyclicality to the gap –  Auckland’s economy/labour market seems to have been more badly hit in recessions (I’ve highlighted the 1991 and 1997/98 recessions) and does relatively better in good times.  In a well-functioning economy, that better performance is what I’d expect.  After all, the Auckland labour market is so much deeper, and more diversified, than that in other centres, that it should be easier for workers and firms to find each other, matching the  skills offered and required, than in a smaller area, typically prone to more idiosyncratic shocks.

But even by the end of the last boom, Auckland’s advantage seemed to be fading.  And in every single quarter since the start of 2007 –  nine years now –  Auckland’s unemployment rate has been above that in the country as a whole.  The gap is slowly closing again –  but the operative word is “slowly”.  It is a quite stunning example of the (frankly rather surprising) extent of Auckland’s economic underperformance.  It certainly has “social” implications for the people adversely affected, but make no mistake, it is a striking economic issue.    And with barely a mention by the government’s chief economic adviser in a speech on the importance of Auckland’s economy.

I was going to write quite a bit about the second half of Makhlouf’s speech, on house prices and housing supply.  I have lots of scrawls in the margins of those sections, about both substance and style.    Like Graeme Wheeler, Makhlouf appears to have it in for “speculators”.  And I’m sure, for example, that Makhlouf’s comments that central and local government have “been working well together” in “addressing the housing challenge” must be a great comfort to those priced out of the market by the combination of central and local governments rules and policies.  They are probably more interested in outcomes –  which are shockingly bad – than in knowing that the bureaucrats are working well together.

But perhaps the line that caught my eye most was one that Treasury consciously chose to highlight on its Twitter feed: “Auckland NIMBYism hurting New Zealand”.    Perhaps “NIMBY” is a convenient shorthand in the popular press, and among sloganeers.  One might have hoped that the Secretary to the Treasury might have avoided clearly pejorative labelling of people, whose interests stands in the way of his preferences.  There is no analysis –  even by way of allusion – to the fact that in most new residential developments, private covenants (voluntary contracts) provide exactly the sorts of binding protections (and more) that residents of Orakei or Epsom might be looking to councils for in the current Auckland debate.  Reasonable people might differ on where the lines should be drawn, and quite which existing features of communities should be able to be protected.  But to simply decry the interests of property owners seems closer to demagoguery than to detached analysis and insightful policy advice.  It also occurred to me to wonder quite what the longstanding residents and property owners in existing suburbs might make of someone fairly fresh off the plane from the UK telling them how their suburbs should be changed.  I’m quite sure that Makhlouf has the best interests of New Zealanders at heart, but when you are a newly-arrived outsider, sometimes you need to be conscious of quite how you sound, and quite what your stake is in the country you are advising on, relative (say) to those who have lived their whole lives in Auckland.

In closing his speech, Makhlouf offered this odd paragraph:

The famous photographer Sir Cecil Beaton once appealed to people to “be anything that will assert integrity of purpose and imaginative vision against the play-it-safers, the creatures of the commonplace, the slaves of the ordinary.”   From what I can see, many Aucklanders are heeding that call in their own way.  And having the right infrastructure, supported by economic incentives that send clear, efficient and effective signals, will enable Aucklanders to continue to exercise their dynamism and diversity and to do the best that they can do.

When I looked up Beaton, his seemed a somewhat reckless life, ending in financial stress.  Perhaps it is the style the dreaded “speculators” emulate –  but then we already know Makhlouf disapproves of them.  Surely most people, in most places, in most times, crave the security of a home, an income, a family, the commonplace things that mostly conduce to sustained happiness (and prosperity for that matter). Risk is, of course, part of life, and many of the great financial successes involved some mix of great risk and great luck.  But we seem to be in an upside-down world in which a Secretary to the Treasury (self-described cautious guardian of the government’s finances) scorns the natural concerns of the vast mass of people.  One might add, that  –  with the full support of the Treasury –  we’ve been eschewing the commonplace, and the “play-it-safers” in our Think Big policy for Auckland over the last 25 years.     And there is little good –  for the vast mass of Aucklanders (and New Zealanders) – to show for it.

Makhlouf quotes various English figures in his speech.  I’ve always been quite keen on Kipling.  In his famous poem “If” comes the lines

If you can make one heap of all your winnings
    And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
    And never breathe a word about your loss;
you’ll be a Man, my son!
I’m not sure that giant policy experiments, showing no sign of paying off 25 years on, are really quite what Kipling had in mind.  But I’m sure that simply ignoring the signs that things aren’t going well wasn’t.
New Zealanders deserve a great deal better from the Secretary to the Treasury.

 

 

 

Brexit

I guess people need to mourn their defeats, but flicking around various TV channels’ coverage the comment that staggered me most was that of the prominent English historian, Simon Schama, who declared –  well before the result was clear –  “if Leave wins, it will be a repudiation of knowledge; a repudiation of reality’.

Or simply, perhaps, just a choice by UK voters to have their country governed by their own MPs, their laws interpreted and applied by their own judges, and so on.   Rather like New Zealand, Australia, Canada, or the United States.   Many other commentators have seen the vote as a vote against the Establishment,  which is no doubt true in part  – as the election of Jeremy Corbyn was, and perhaps the success of date of Donald Trump has been – but if so, comments like those of Schama, totally dismissive of the choices of his fellow citizens, might go down as a classic example of the sort of attitude and approach that many saw encapsulated in the EU model, and the way in which too many countries have been governed in recent years.

The market reactions so far seem hardly that surprising – except perhaps in highlighting the bounded rationality that had left so many (I was among them) almost unable to believe that, even though the polls had been a dead-heat for weeks, a Leave vote could actually happen.

The headline fall in the value of sterling is striking  – currently down 9.9 per cent against the USD.  But it brought back memories of the wild days of the New Zealand foreign exchange market, especially in the early years after the 1985 float.   But as recently as 28 October 2008, the NZD was down 9.3 per cent in a day (and more like 12 per cent against the yen).  The trend was strongly down in that global crisis and recession, but there was also a sharp bounce the following day.  I recall watching CNBC each evening during the 08/09 crisis.  It might be another few days for that  –  and to be glad it is “spectator sport” rather than something I have direct exposure to.

 

UPDATE: I thought this piece by US economics columnist Megan McArdle was a very nice articulation of views I share almost entirely.

UPDATE 2:  An absolutely fascinating set of results from exit-polling of referendum voters

 

 

How I think about our long-term underperformance problem

Tempting as it is to write about the failures and weaknesses of the New Zealand public sector –  and there is plenty more grist to the mill, reinforcing Kerry McDonad’s forcefully expressed concerns, even in this morning’s newspaper –  or the inadequate performance of the Reserve Bank in conducting monetary policy, as the TWI now sits above 76, I’m going to write today about some longer-term issues.

Of all the issues I write about on this blog, probably the one that concerns me most is New Zealand’s long-term structural economic decline, relative to other advanced countries.  That decline has been underway for many decades, and if the rate of decline has slowed there is certainly no sign of the gaps beginning to close. Once upon a time that decline seemed to bother people, but sadly we seem to have got used to it.  And perhaps too people are more cynical –  they’ve heard various stories over the years as to what might reverse the decline, and even when tried none seem to have worked (enough).

This photo, after all, was taken in 1989 – a generation ago now.

caygill 1989 expectations

I don’t think the current state of the affairs is good enough.  There is no political leadership that treats the issue as a priority, debate is virtually non-existent on any sustained basis, and the economic conditions that have seen almost a million New Zealanders (net) leave permanently in recent decades haven’t changed.  I don’t want my kids to grow up to discover that most of the best opportunities for them and their kids are abroad.

Readers here recognize the serious relative decline we’ve experienced over many decades.  But I often get comments, whether sympathetic or critical, asking what I would do to change things –  often with the text, or sub-text, “and why are you always banging on about immigration policy at the expense of everything else?”.

There are plenty of things about our economic policy (broadly defined) that I would change.  Many of them are in areas where I have not spent a lot of time or effort looking at the issues and options in great detail, and so in a spare-time blog I don’t write about them.  And quite a few seem to me like things that would be worth changing, but might not make that much difference at all to measures like GDP per capita, or per hour worked.  I prefer to focus my efforts in areas which might make a material difference –  individually, or even as a package –  and, perhaps, to critiquing proposals that others suggest might make a big difference, but where I disagree.  I happen to favour fully-funded school choice, while I suspect most readers don’t.  In terms of economic performance, no one would argue it matters that much, so why alienate people who might be sympathetic to my core arguments and analysis?    Then again, some of my friends on the (economic, pro-market) right are deeply uneasy about my immigration analysis, so from time to time I do like to remind them that my underlying model is a strongly market-oriented one.  In the end, there are only so many hours in a day, and only so much of my time I want to devote to these issues.

When the National Party led government assumed office in 2008, they set up the 2025 Taskforce.   As it is described on the Treasury website

As part of the Confidence and Supply Agreement between the National and ACT parties reached immediately after the 2008 election, the Government committed to closing the income gap with Australia by 2025 and to establishing an advisory group both to report annually on progress towards achieving that goal and to make recommendations about how best to achieve it.

I don’t suppose the National Party would have been averse to the gap closing.  But the Taskforce was pretty much forced on them by ACT – minor parties entering Confidence and Supply Agreements get to pick a few policies that the dominant governing party agrees to implement, and this was ACT’s that year.

It was an under-resourced exercise from the start.  The one Australian member appointed to the Taskforce by our government was staggered at how little time and resource they were given. Treasury provided the Secretariat to the Taskforce, and I got closely involved in that process –  I was at Treasury at the time, and having worked closely with Don Brash previously, he –  as chair of the Taskforce – was keen to have me involved.  The first report of the Taskforce, issued in late 2009, is the one fairly comprehensive attempt in term of the current government to provide a list of recommendations that, if adopted, offered a reasonable chance of being able to catch up with Australia.  Based on historical experiences with convergence, catching up over 16 years looked to the Taskforce to be demanding, but not impossible.  If most of the words in the Report flowed directly from my pen, the recommendations are those of the Taskforce members.  But at the time, I agreed with most of them –  even if, even then, not all seemed overly important.

Yesterday I went back and read through the 50 or so specific recommendations in the report (they are on pages 8 to 11 are the link above).    I could go through them one by one, but that would bore most readers, and bore me, and in many cases wouldn’t add much value.  But, like the Taskforce, I support:

  • lowering the share of GDP accounted for by government spending,
  • stronger institutional disciplines around new spending proposals,
  • steps to cut the high number of working age people on welfare benefits,
  • increasing the age of NZS eligibility and indexing the age to future changes in life expectancy,
  • introduction of a funder-provider model for the hospital sector and the school sector, allowing new provider entrants whether government or private owned.
  • removal of the substantially increased childcare subsidies introduced a decade or so ago,
  • government-imposed fee caps on university fees should be abolished,
  • reductions in tax rates should have regard to “the evidence that taxes on capital income can be particularly detrimental to economic performance”,
  • all government shares in businesses where competition is actual or feasible should be sold,
  • the NZSF should be wound-up and proceeds used to repay government debt,
  • congestion charging should be introduced in central Auckland (in particular) and full economic road-user charging should be introduced as feasible,
  • mining developments “on or under sensitive Crown land should generally be permitted provided that they pass a full cost-benefit test”,
  • a Regulatory Responsibility Bill should be enacted,
  • an independent Productivity Commission should be established,
  • resource management law should be reviewed from first principles,
  • in zoning land for residential purposes, local authorities should have to report regularly on, and take explicit account of, differences in land prices between residential-zoned undeveloped land and other undeveloped land in similar areas,
  • provisions allowing for probationary periods in employment should be extended
  • increases in youth and adult minimum wages – relative to median incomes –  over the previous decade should be reversed,
  • all remaining tariffs should be removed unilaterally,
  • foreign investment restrictions should be liberalized,
  • Zespri’s kiwifruit export monopoly should be removed.

A few of these have actually happened, or might soon happen.

I’d support all of those proposals.  But as I came away from my involvement with the Taskforce, I gradually came to the view that they just didn’t seem like enough to make large in-roads on the productivity and income gaps that had opened up over previous decades.  People operating within different “models” of the economy might disagree, but as I tried to think hard about the distinctive features of New Zealand’s underperformance I couldn’t convince myself that this was a game-changing agenda.  After all, radical as it was in some respects, it was less far-reaching in the important respects than the reform agenda implemented over 1984 to 1993, which hadn’t reversed our decline.  Arguments that “oh, we just hadn’t gone quite far enough” don’t typically ring very persuasively –  whoever is running them is simply inviting policymakers to double up on a bet which, so far, has shown no signs of paying off.

There is probably a variety of “models” people have in mind for thinking about New Zealand’s economic underperformance.  I’ll stylize (caricature) two of them as “small government” and “smart government”.  One of the finest representatives of the small government school in New Zealand was the late Roger Kerr, who had thought hard about economic performance and New Zealand for a long time, and was always will to engage on the issues.  I think he probably thought –  and his public and private comments at the time suggest –  that the 2025 Taskforce report didn’t go quite far enough, and didn’t grapple with all the issues it could have, but that if only we got government spending down to perhaps 15 to 20 per cent of GDP, facilitated foreign investment, reformed the provision of health and education, privatized government and local authority operating businesses, liberalised the labour market, and sorted out the RMA and the creeping advance of other regulation, we’d be well on the way to catching Australia and other richer OECD countries.

I’m not sure there is single person representative of what I would call the “smart government” school, but it is the sort of thinking that these days seem to pervade places like the OECD, and key domestic government agencies – be it Treasury, MBIE, or even the Productivity Commission.  It is the hunt for a smarter set of interventions –  ones around R&D are popular, but it might include top-down visions as to what cities should look like, granting eminent domain powers to Urban Development Authorities, getting a better class of immigrants going to different regions, getting better data on how best to intervene in individuals’ lives etc.  If this seems like a caricature that is partly because (a) there is no properly developed case made for a set of reforms  along these lines that might transform New Zealand’s prospects, and (b) because in this post I haven’t the space to develop the alternative fully myself. But the gist seems to be that our problem isn’t government interventions, but just that we had the wrong bureaucrats and ministers making the wrong interventions, and if only we adopted this alternative set we’d be fine.     And, of course, there is no doubt plenty of regulation/law required in a modern market economy, and we should always be trying to improve it.

My stance is much closer to the Kerr end of the spectrum.  In particular, I think it is a safe observation that governments, and government interventions, are more often the source of a country’s economic problems than the answer to them.  Of course, governments don’t exist in a vacuum, and so government policies are often a reflection of the societies they govern, and the problems and dysfunctions in those societies.  But the problems often manifest in misplaced economic interventions.  On the other hand, “culture” matters too: keeping taxes low, regulation light, markets open, and property rights secure wouldn’t transform Zambia, say, into an OECD success story, at least not in a single lifetime.

But in thinking about New Zealand, we have some advantages. These include:

  • we were already rich (high GDP per capita or per hour worked) for a long time,
  • we shared a culture (broadly speaking) with most of the richest and most successful countries in the world (Anglo and Northern European)
  • as part of that, we share key institutions such as the rule of law and reasonable protections of private property rights.

That should help us narrow down our search for answers.  We can try to think, in a reasonably structured way, about similarities and differences between New Zealand and these other (typically much richer, higher levels of productivity) countries.

On the similarities side, it is worth bearing mind that the overall size of government isn’t that different than in these other countries (be it spending share, ownership of assets, or regulation), and actually on one of those dimensions –  government spending as a share of GDP – there is quite a wide range of experiences among successful countries, and we are towards the middle of the pack.  But if government spending as share of GDP was perhaps 55 per cent, there might be a good case for seeing pulling back the size of government spending (and hence overall tax rates) as key element in any package of reforms (a putative list of Top 5 Reforms).

House price problems are pretty similar too.  Scandalous here and in most of those countries too, but not a prima facie reason to think distorted housing supply markets might be at the heart of our productivity and economic performance failures.

For all the opportunities there might be to improve our schools and universities, “skills” doesn’t really look like a credible huge difference.  We used to have quite a low rate of participation in tertiary education, but even that has change in recent decades.  I’d also tend to emphasise the similarities, more than the differences, between our welfare system and those in the successful advanced economies – in some areas, ours might be less of a “tax” on growth and economic performance (eg NZS deters labour market participation less, and in some more so, but overall the differences don’t look decisive.

What are some potentially significant differences:

  • we are small (but not extremely so, cf Ireland, Denmark, Finland, Iceland),
  • we are remote (though on typical measures) similar to Australia),
  • we’ve had persistently low rates of business investment (including in R&D) going back decades, even more obviously once one allows for population growth differentials (countries with faster-growing populations,
  • we remain heavily natural resource dependent (like Australia and, to a lesser extent, Canada),
  • we have had, for decades, the highest real interest rates in the OECD,
  • despite our substantial and sustained deterioration in economic performance, our real exchange rate has not adjusted downwards,
  • we have had very little growth in exports as a share of GDP, such that our export share is now very low for such a small country (small countries typically do more foreign trade than large ones)
  • we’ve had a lower national savings rate than many of these countries,
  • we have typically had the largest negative NIIP position (per cent of GDP) of any of these countries,
  • our single moderately large city has been an economic laggard (GDP per capita) in recent decades, unlike the typical advanced country experience,
  • we’ve had a very large, decades-long, net outflow of our own citizens (unlike most successful countries, although similar to what Ireland had for decades)
  • we have an unusually large target level of non-citizen immigration
  • over the decades since our economic deterioration became evident, we have had  faster population growth than many, but not all, these countries.

I suspect that most of those who think about the challenges of New Zealand’s economic underperformance would grant most of those stylized facts.  I’ve tried to write them in a way that doesn’t overstate any of them individually.  Perhaps some will think I’ve left out some key stylized facts, and if so I’d happily consider them.  Stories and explanations, and policy prescriptions, need to be fitted to the stylized facts.  But equally, everyone starts with a “model”, and some implicit assumptions about what facts matter. But we can all have blind spots.

My story has developed to try to take account of the sorts of similarities and differences I’ve listed above.  I start by looking around the policy interventions that might be messing things up (recall that my underlying model is that firms invest and generate prosperity in countries with sound basic institutions unless government interventions materially distort those prospects).

Plenty of people worry about New Zealand’s savings rate, but when one looks across time and across countries it isn’t obvious that our government policy settings around savings (ie differences from those abroad) can explain different savings outcomes.  That was the somewhat-reluctant conclusion of a Treasury exercise I had some involvement with a few years ago.  Perhaps an alternative explanation might see relatively modest savings rates as an endogenous response to whatever makes the business investment environment here sufficiently unattractive to generate those low rates of investment. After all, business depreciation and retained earnings (to take advantage of great business opportunities) are a large, and often neglected, component of national savings.   And it isn’t as if government is running large deficits either.

And low business investment must also be related –  common causal factors – to the very low rate of growth of exports (most of the potential market for many firms is the wider world), which in turn must be related to the persistently high exchange rate.  Some people try to argue that our interest rates have been high because we have so much debt, and markets “punish” us for it, but actually our debt (NIIP) has been large for 25 years  –  plenty of time for people to adjust their behavior and see any “risk premium” dissipate.  Perhaps as importantly, high risk premia are simply inconsistent with persistently high exchange rates –  when markets are really jittery, asset prices are typically weak, not persistently surprisingly strong.

Low business investment (as a share of GDP) might also be related to a relative lack of profitable opportunities here –  even if the exchange rate was lower.  There is a lot of resistance to this idea, but the resistance typically does not take seriously economic geography.  People repeatedly focus on the places where there are lots of people (in the advanced world) and hardly at all on the places where there are not lots of people –  presumably because profitable opportunities are just not there (in Nebraska, as opposed say to San Francisco).  People leave –  or don’t go to –  those places when they have better alternatives.  New Zealanders, for example, move to Australia.

So I’m driven towards a story that emphasizes the combination of the limited high-returning economic opportunities that our location/distance seems to have offered, the role of excess aggregate demand (which has given us persistently high interest rates, despite the apparently poor opportunities, and a high real exchange rate), and at the same time a population that is still growing rapidly (trend basis, not just the last year) largely now as a result of immigration policy.  And –  to revert to the point about looking for government interventions that, however well-intentioned, are messing things up  –  we have an unusually large non-citizen immigration programme, especially for such an unusually underperforming country.  Among the government’s economic policy interventions, it is large and distinctive.

For quite a few years, I believed the rhetoric that it was all “good quality” migration, but as I looked into it I found – as others have, including The Treasury –  that actually, it really isn’t such good quality migration after all (better than some countries’ experiences, but just not really that skills-focused).  Perhaps really able, highly-skilled, people don’t want to come in large numbers to a small, remote, underperforming country, that doesn’t seem to be able to support lots of highly profitable outward-oriented industries dependent on things other than the (essentially) fixed quantity of natural resources?

I could write lots more, but this post has already got rather long.  My point was not, in a single post, to make a comprehensive case for every strand of my argument.  Thinking about it this morning, I realized that I laid some of the foundations – especially around the interest rate/exchange rate/investment nexus –  in a series of posts a year ago.  But readership has increased very substantially since then (and my impression was that most readers back then knew me, and had some past exposure to my arguments, which is no longer the case).  I may dig out some of that material and re-run some updated posts in coming weeks.

And having got to the end I still don’t want to leave the impression that other  potential reforms don’t have a place.  A standard line  –  the 2025 Taskforce used it –  is that distance/location aren’t things we can do much about, so we just need to make sure we run really good policies to offset the disadvantages.  I have quite a lot of sympathy with that view –  and good policy is always better than poor policy –  but as a general proposition it can be a distraction from identifying any key areas in which ill-judged policy interventions (even ones that might make sense for other countries in other circumstances) might actually be working us against making the most, in per capita GDP terms for New Zealanders, of what we have and where we are. I think our highly unusual –  in context –  immigration policy is a prime example of that.