Labour on New Zealand’s economy

It is probably only about 14 months until the next election.  We have a government that has presided over eight pretty-mediocre years of economic performance –  not all of it their fault, as there are global factors at work –  with no real idea what they should or could do to reverse New Zealand’s decades of staggering relative economic decline.  Often enough, it seems that the current government doesn’t even really care, so long as they can successfully persuade enough of the public that things aren’t too bad, or (worse) that our problems are actually marks of some sort of success.

Of course, our key economic agencies –  Treasury, MBIE, and the Productivity Commission –  show no real sign of offering the sort of quality advice that takes seriously the specifics of New Zealand’s situation and offers solutions that might make a material difference.  I’m not really sure why.  For them individually  –  and maybe for senior politicians too – perhaps it doesn’t matter very much.  For the upper tier of New Zealand, life is pretty comfortable.  And it isn’t always clear that politicians want hardheaded advice that seriously addresses New Zealand’s problems.  The Muldoon government wasn’t that keen on robust Treasury advice in the early 1980s either, but it didn’t stop the agency investing in capability and offering the best professional advice they could.

But this post is about politicians, and particularly about the Labour Party.  12 months out from an election, eight years since they last held office, at a time when no one would really claim the economic situation is particularly rosy, one might have hoped that the main Opposition party would be offering a pretty compelling alternative narrative: a diagnosis of what has gone wrong economically and the outlines of a rather different approach to policy.  I’m not suggesting that they should have all their policy detail published this early, but surely there should be enough to leave floating voters –  or potentially detachable voters –  with a sense that the main Opposition party was offering a different path, that would make a material difference?

I watched Grant Robertson’s interview on Q&A yesterday and was as unimpressed as ever.  There are occasional glimmers of recognition of some of the symptoms.  As he notes, per capita GDP growth has been very weak, and to the extent there is growth in total real GDP most of it is just based on the demand effects of a rapidly rising population.  He knows house prices are a problem, and I was pleased to see reference to the idea that house price to income ratios of around 3 might be a more normal level.  There was at least a hint that the economic performance of the non-metropolitan regions has left quite a lot to be desired –  although no apparent recognition that per capita incomes in Auckland have grown more slowly than those in the rest of the country for the last 15 years.  And last week he usefully drew attention to the very weak dairy price forecasts from the OECD.

But that was about it.  I heard two fairly specific proposals.  One  was to ban offshore buyers from the housing market. And the second was to revise the Reserve Bank’s monetary policy mandate.  Reasonable people can differ on the merits of a (non-resident) offshore buyers ban  –  and I happen to agree that we shouldn’t be ruling out even daft future policy options in preferential trade agreements that try to tie the hands of future Parliaments –  but it must be a pretty peripheral issue.  After all, Australia bans offshore buyers purchasing existing houses, and Sydney and Melbourne house prices are if anything more ruinous than those in Auckland.  And offshore buying seems unlikely to be a material phenomenon in the New Zealand second tier cities where price to income ratios are still far above 3.

And as for changing the Reserve Bank Act and the Policy Targets Agreement, it is all very well to say that the mandate is “broken”, but Labour has shown no signs of offering an alternative that would make any material difference to our real economic performance.  They offered a reasonably sophisticated attempt at a redraft in 2014.  I argued at the time inside the Bank, and subsequently, that the alternative wording –  while not necessarily objectionable –  would not have made any very material difference to the conduct of monetary policy, let alone to New Zealand’s longer-term economic performance.  As a readers know, I do think the Reserve Bank Act needs substantial reform, and I would probably favour some changes to the PTA and the related provisions of the Act, but they aren’t in any sense “the answer”.  I guess we’ll have to wait and see what specific proposals in this area Labour will campaign on in the next election.  But we should never expect that different monetary policy arrangements will make much difference to a nation’s longer-term prosperity.

What else was there in the interview?  There was talk of using government procurement policies to support New Zealand businesses –  which is probably illegal under our existing trade agreements, and in any case sounds mostly like old-fashioned protectionism, which rarely makes sense anywhere, and particularly not in a small country.  There was talk of investing in infrastructure and education.  Within limits, the infrastructure point is probably reasonable –  rapidly rising populations need more infrastructure –  but there was no hint of how this might lift trend productivity or per capita income performance.  As for education, it always sounds good to offer to spend (“invest”) more on it, but such proposals rarely seem to engage with the evidence suggesting returns to tertiary education in New Zealand are already among the lowest in any OECD country.  If anything, there are hints there of a possibility that too much is being spent, not too little –  at least if one thinks of education as an investment item, rather than just another part of consumption.

There was talk of “building wealth from the ground up”, and of “working with our farmers to get more value-added products” (as if, somehow, government officials and politicians are better able to make specific dairy product choices than their own managers and owners), but nothing remotely specific.  And there was not a single mention of the exchange rate –  even though ours has spent the last decade or so 20 per cent higher in real terms than in the previous decade.    And even on housing, where Labour has shifted ground in some important areas, Robertson was about as feeble as the rest of the political class –  he wants housing to be affordable, but doesn’t want house prices to fall.  It is easy enough to say “lets raise incomes and undermine those price to income ratios that way”, but it is just words without any suggestion of a strategy that would materially lift the rate of growth of per capita incomes.

Labour has been heard to suggest that something should be done about immigration.  Of course, I agree that something should be done, but I’ve been watching for months for any sense of how Labour is actually thinking about the issue.  The most I’ve seen has been occasional talk about “temporary pauses”, which mostly seems like a substitute for hard-headed thought or engagement with the issues.  It isn’t as if immigration policy is much different now than it has been in the past 15 years –  including the period when many of Robertson’s colleagues were ministers and he was ensconced in the Prime Minister’s office.   Chopping and changing immigration policy on the basis of this year’s pressures, or last year’s, doesn’t seem a particularly sensible approach –  there are lags in the system, and such short-term policy  reversals would create huge uncertainty for all parties concerned (potential immigrants and people here). And they simply can’t deal with the long-term challenges.  There is a respectable case that New Zealand’s high target levels of non-citizen immigration are good for New Zealanders.  But is that the case Labour wants to make, or isn’t it?  There is a respectable alternative argument that our approach was a not-unreasonable policy experiment that has failed.  Is that the case Labour wants to make?  We just don’t know.

I’ve been keeping an eye on the Labour Party’s website for some months –  and even, on occasion, trawling through the tweets of senior Labour Party economic spokespeople  –  to see what issues they are engaging on in public.  Robertson is the finance spokesperson so one might reasonably expect the most from him.  But there just hasn’t been much all year.  The flagship event was the Future of Work conference which, whatever one might think of it in a longer-term context, didn’t really seem to be addressing today’s issue, where labour force participation rates have been quite high and total employment growth has been faster than in almost any advanced economy.  The challenge for New Zealand hasn’t been finding enough jobs, but generating sufficiently high returns to the inputs of labour and capital to provide first world incomes for New Zealanders.  Robertson hasn’t been offering anything of real substance there.

Labour also has spokespeople on immigration and economic development, both apparently ranked in the upper half of Labour’s caucus.  I assumed –  or at least hoped –  I would find something from those people on how Labour’s thinking was developing.  Iain Lees-Galloway is the spokesperson on immigration, and since his leaders have talked on several occasions about how something should be done about immigration, I hoped to find something from him.   He seems to have put out 15 press releases this year, but only two of them look to have been around immigration issues –  dodgy dealings around Indian students and something about seasonal horticulture work.    Even if Labour doesn’t yet want to release the details of its policies, one might have hoped for a scene-setting speech on how Labour is thinking about immigration policy, costs and benefits etc etc, looking to shift the ground where the debate is taking place.  But there is simply no sign of anything of the sort. Perhaps lots of intense thinking and deliberations are taking place in private, but it really isn’t that long until the election.

David Clark is Labour’s economic development (including regional development) spokesperson.  According to the Labour website, he hasn’t put out a press release at all since April, and there is no sign in any of his statements this year as to how he or Labour are thinking about reversing New Zealand’s economic decline.   Perhaps a whole new wave of serious policy thinking and efforts at reframing the narrative are just about to be launched.  But I’m not really that hopeful.

I find it pretty depressing –  as if people (bureaucrats and politicians) have simply given up and decided that it is all too hard.    It is we and our kids who will pay the price of that failure.