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.
croaking cassandra 
Labour seem a bit lost in the wilderness, dominated by the trade union Left. They still don’t seem to understand that its the people in the middle that decide who Governs. We only ever hear from Little. They don’t present as a capable team, everyone knows that the Leader is not the popular choice of the elected MPS, rather a forced on leader. The agreement with Greens was smart, it will bring them a few seats off National.
I really believe that Winston will spout an anti migration, pro regional campaign, and many will see him as a counter weight to John Key and the harder right. People are not ready to vote Labour in yet.
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The agreement with Greens? Nah just put Labour right into the lefty party which puts them in minor party contention. Smacks of desperation rather than a smart move.
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Good analysis, Michael.
How about doing a similar analysis of the NZ First party performance?
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Well its clear that Labour is rather lost… not quite staring into the oncoming headlights, but not really sure even if they are on a road… Most of their policy announcements, if you can call them that, are half arsed, poorly thought through and are capable of being slapped down quickly..
A lof their their policies have been nicked by the Govt, but then that is what Govts do… I don’t think you will ever see a reforming National Government… such things can never exist… the status quo and muddling through are the by lines of National
Anyone who thinks National are ‘hard right’ really have no idea… National are firmly ensconced in the centre and seeking to push Labour further to the left… which given its union masters is quite easy to do…
Labour are dead set useless at the moment…
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The hard right is the ACT party.
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I think we can usefully unpick this post a little to gain greater clarity, taking as the overriding subject of this analysis to be New Zealand’s long term growth prospects.
Long term growth is a different beast to short term growth, and is where the usual party politics arguments simply don’t apply. But short term growth, including solutions to short term problems, is well within the purview of politicians.
Take housing: the shortage of housing stock is comprised of a shortage in general terms, and a shortage of social (state) houses. I conducted some research a little while ago and in the modern era it is simple empirically evident that National governments run down state housing stock, both in terms of actual stock and per capita provision. This difference between the parties is ideologically driven, and the consequences of National’s state housing policies are clear to see. Fortunately, the solution is simple – just vote National/Act/United Future out of power and build many more state houses.
The weekend’s current affairs interviews saw even David Seymour referring to the 1974 record house build, although he is perhaps unaware that that record building activity was government driven: cheap State Advances loans and the building contracts issued to private providers (I remember that year well, since I purchased one of those houses!).
Long term growth, on the other hand, requires consistent government action over many, many successive governments. The academic solution is to invest heavily in education, especially at the lower socio-economic deciles, and research and development. According to the Solow model, only two things drive long term economic growth: population growth and technological change. Per capita growth, Romer’s endogenous growth contribution notwithstanding, depends on the latter i.e technological progress through intensive investment in R & D, not just roads and buildings.
I think we can usefully push Labour in this direction, and make inroads, but I can’t see any traction available from National or Act to this end. And when National gets back in, they will set about destroying long term growth strategies, again.
A multi-party, long term growth strategy accord would be a wonderful thing for New Zealand, but maybe not so much for political parties who gain votes by creating, or at least exacerbating, divisions.
Apologies for the length…
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It is clear, Michael does not support the Solow model, because he believes population decline would drive long term economic growth and since we are agriculturul based and too far away neither would technological change.
It is clear, National party is John Key. John key’s pet project is tourism. He is afterall the self appointed tourism minister. I suspect this pet project would have been formulated in his time as head of the asia Merryl Lynch merchant bankers up in Singapore where tourism is Singapores largest export industry.
Nothing wrong with tourist dollars and to some extent the whole Sky City convention centre is a reflection of what Singapore has done with casino dollars. The difference is Singapore was able to get investors to invest to the tune to $6 to $10 billion into the tourist industry infrastructure built around a casino industry. In NZ and particularly in Auckland, tourists are spilling into residential rental accomodation in huge numbers as we have not built any new hotels.
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I can’t agree with your first paragraph. Is it tongue in cheek?
Anyway, I think Michael advocates decreasing the inflow of immigrants, not setting a net outflow as a target. Short term, in our small, open economy, mass immigration constrains or reduces per capita income and creates supply bottlenecks (in the absence of sufficient government intervention). In the long term, I think it’s a wash, or even slightly net positive, but we all know how the long term ends…
Also, if distance negates technological change, then how come I was once buying cellphones made in Finland? What we really lack is the kind of long term, consistent R & D investment that we see in, say, the US (often disguised as military spending!). And even the much derided ‘picking winners’ strategy pays off for some counties (South Korea, Taiwan) indicating that it’s the degree of skill applied in that exercise, not the exercise itself.
On education, I take the point on the OECD analysis, but I’m not aware of any serious policy proposal around the world suggesting, as Michael does, to reduce education spend. Instead, I would put more into low income education, especially up to about age 15, while perhaps making STEM subjects more financially attractive at tertiary level. But we have to remember that even in the UK, which has trebled tertiary fees under the current government, student numbers held up, including in the arts. This indicates a pretty resilient demand for the product! And I would seek out well performing countries, in terms of returns on education, to benchmark against and to get to the root cause of the low returns before taking what would appear to be a retrograde step.
Pity the policy makers!
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Michael wants the government’s policy target to drop from 50k per annum to around 10k per annum. A 50k target per annum may seem large but if we consider that NZ population grows mainly from the natural birth numbers, immigration is mainly a replacement policy. When you aim for 50k you do not get to keep 50k. Real migrant arrivals total 14k a year consistently each for the last 10 to 15 years. Therefore reaming 36k comes from a selection of international students and foreign workers already here. The churn rate is high, ie we lose international students offered residency within 3 to 5 years due to the lack of career growth opportunities of our small economy.
Aim for 50k and keep population growing at the rate of natural birth. Aim for 10k and population declines. THEREFORE Michael advocates for a smaller population base for higher productivity gains.
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That isn’t a fully accurate description, but yes for the time being at least my preferred immigration policy would be consistent with a slightly falling population. That is what one should expect when the birth rate is quite close to replacement and (most years) a lot of our own people are leaving for better opportunities abroad. If NZers chose to have more children, or find that the opportunities in NZ are better than those in Aus, I’d have no problem – in fact I’d be delighted if the opportunities here were better than those in Aus. I strongly oppose population policies – such as National and Labour have been running for decades.
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It has been very clear from the onset when Helen Clarke and Michael Cullen departed, Labour was devoid of any real talent. David Cunliffe, David Shearer an David Parker more than capable individuals but stubbornly caught up in a Capital Gains Tax ground hog day. No one gets any traction with voters by saying, Vote for me and I will tax you to death.
David Cunliffe as the Finance spokesman for Labour was always very responsive to email queries but when i told him he is nuts to pursue a CGT he went bonkers. There seems to be some kind of idiotic ideology that rich folk have investment properties and should share that wealth. That same ideology was with David Shearer and David Parker and I can see it also with Grant Robertson.
Andrew Little was very clear initially unfront that Labour would not pursue this ideology but now he has also gone wishy washy on that subject and I suspect that Grant Robertson would have strong armed him to some extent. Unfortunately for labour it is your average mum and dad that owns investment properties and also holiday baches. This is middle NZ. Middle NZ like investment property and they like holiday homes. Both of which is targetted in Labour’s CGT.
It is very easy to influence the middle NZ vote. All Labour needs to do is.
1. Drop the Greens.
2. Drop CGT completely. None of Grant Robertson stupidity, ie “will set up a stupid tax working committee”
3. Put back building depreciation of 2.5%(equal to Australia) which National dropped to zero.
4. Drop GST back to 12.5%. 15% is killing retailers.
5. Take back control of the RBNZ independence because RB governors are nut case academics with zero practical experience and extremely damaging to the economy
6. Recognise the Land Wars and give us workers another public holiday and make Maori happy
7. Increase Employer kiwisaver to 5% as envisioned by Michael Cullen.
8. Build 50 level tower blocks in Mt Eden, Mt Albert, One tree Hill, Epsom and Mt Roskill.
9. Allow depreciation and expenses on boats and holiday homes
10. Subsidise solar power into every household.
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So what would you do Michael?
Is it simply having less of us riding the cows back.
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mostly (at least in terms of the big change of policy from here), altho I touched on how I think about these issues, and some policies I’ve supported in this post from a few weeks ago
https://croakingcassandra.com/2016/06/24/17690/
Less pressure from a rapidly rising population would free resources, and shift pricing (esp the real exchange rate) to enable NZ and NZers to make the most of their skills, talents, energies, resources etc. It isn’t a counsel of despair, but of optimism – we can do a great deal better than we have been.
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There is a world of difference between a falling population and a rapidly rising population. I agree the latter is problematic, but so is the former, although I note your caveat, “for the time being”.
But in an advanced economy, rising population pretty much guarantees positive economic growth, even if per capita income remains constant. That means immigration isn’t taking away income from the native population, and the economy is still growing. A slightly falling population in NZ would be, I think, akin to slight deflation: fine at first, almost beneficial, then, in the longer term, more like a cancer. We would become less attractive for overseas capital, for a start.
If we remove population and foreign investment (exogenous K) growth from the Solow model, we are left mainly with technological growth as the driver of growth (both overall and per capita growth). I think you agree that we haven’t been too good at technological growth thus far, so if we give up on immigration who or what will change that for us? Especially as you now advocate reducing our education spend?
You mention above “NZers”. Well, once immigrants reproduce in NZ the offspring become NZers. And we put them through a pretty successful education system, so I think the Romer endogenous growth model as applies to R & D can equally apply to immigration. In fact, I think it’s empirically provable that it does – our long tail relates to policy prejudice against Maori and Polynesians, not to immigrants.
By the way, your list of policy recommendations in the link you posted seems to me to be a doubling down on the economic failures of recent decades – a race to the bottom, on legalised steroids.
On the other hand, I could be wrong… 🙂
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I won’t try to defend today all the items on that 2025 list – as I noted then, I am (a) wary of double-down strategies, (b) not arguing that many of them might make much economic difference (economics isn’t all there is), and (c) I included the list just to help illustrate to one or two particularly vocal commentators that I’m not just favouring changes to immigration policy.
On the rest, I think we do disagree. Per capita growth is what matters, not total GDP growth, and recall that average per capita incomes could be flat while those for some groups are falling while those for others are rising.
I am staunchly opposed to a population policy, but if NZ runs itself well then I would expect that despite our distance etc we could sustain first world incomes for a modestly growing population. But we won’t solve our problems by putting the outcome first – using policy to keep population growing, and hope the incomes follow.
I didn’t respond to your earlier comment but I haven’t advocated cutting education spending (and don’t advocate doing so), just highlighted some questions about how sensible further increases might be in econ terms.
On innovation, it flows from good institutions, able people, and relative prices that aren’t badly distorted by govts. I have every faith in our own people – be they Maori, Anglo NZers or descendants of other immigrants to develop smart products and services that they can sell globally. Plenty of other first world countries do, with much less immigration than we have had. What we lack, on my telling, is a sensible real exchange rate, and my argument is that rapidly immigration (policy bits) keeps skewing the real exchange rate away from where it would otherwise be (much lower).
I might try a separate post on these issues one day soon – I know these comments have been a bit abbreviated (other commitments)/
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Hi Michael, thanks for your thoughtful reply.
My comment on education spending was based on your comment, “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.”
I agree that it is a bit of a stretch to extend that to advocating cutting eduction spending, but your comment does hint in that general direction for future spending.
With regard to population policy (and I’m not fixed in my view on this), textbooks universally say that countries with higher populations grow faster than those with lower populations, ceteris paribus, of course. And we are definitely one of the less densely populated countries in the “First World” (archaic term, Michael!). On the other hand, it is also pointed out that for a small (i.e. price taking) economy, in the short term, immigration may impact negatively on per capita income growth.
But surely we should be governed with the longer term in mind? Today’s immigrant chef could beget the Steve Jobs of tomorrow. We just can’t tell. That’s the endogenous growth premise.
As for the exchange rate, it is evident that our problem is not the OCR. That has been cut significantly in recent years, yet our exchange rate remains ‘high’. I suggest this reflects a premium for (and putting aside policy differences I may have with this and the previous government) for competent governance within a stable (i.e. compliant population) local political environment and an uncertain global political environment.
And of course, a lower exchange rate skews income from the importing (urban) sector to the exporting (rural) sector. Under MMP, perhaps not a good strategy for any New Zealand government.
But, overall, I’m not quite sure what a ‘sensible’ exchange rate is, given that we have seen huge disasters from attempts to manipulate that rate in the past.
Of course, that’s not a problem for a country as big as China…
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I’m a bit surprised by your observation that “textbooks universally say that countries with higher populations grow faster than those with lower populations”. Total GDP perhaps, but there is no convincing evidence I’ve seen that suggest larger population countries manage larger per capita growth rates consequently, I did a post last year with some rough bivariate stuff that also illustrated that point. https://croakingcassandra.com/2015/08/21/big-countries-dont-seem-to-have-got-richer-faster/
Even the evidence on population growth (as distinct from levels) is mixed at best. Successful countries will tend to draw in more people, so there is some reason to expect some short-term correlations between faster per capita growth and faster population growth, but even there is some empirical evidence (that even managed publication in the AER) that faster population growth is at some cost in terms of per capita growth (which also shouldn’t be surprising: having another child boosts demand but does nothing positive to labour supply/potential output for perhaps 20 years, so may well dampen per capita GDP (even though having the child is presumably the utility maximizing choice of the couple concerned).
I entirely agree with you then on “But surely we should be governed with the longer term in mind?” – indeed, that is my point about NZ’s immigration policy. In the short-term higher immigration does tend to give the economy a lift, in the long-term in NZ’s specific circumstances it looks to have been a drag.
You note that “Today’s immigrant chef could beget the Steve Jobs of tomorrow. We just can’t tell.” And I agree on both counts. If we can’t tell there is no point trying to use immigration policy to supercharge next generation’s human capital – most likely we’ll just get a pool that generates much the same (extremely small) number of exceptional entrepreneurs etc as we have in the existing native population (and hence not expect to be better off in real per capita terms). And if countries could cherry-pick, others countries would be well ahead of us in picking the best (seeing as we are poorish, small, and distant, even cf other Anglo countries).
I’m not suggesting manipulating or trying to set the real exchange rate. I am suggesting that our immigration policy is tending to systematically skew it away (above) where it would otherwise be. But if we cut back immigration and the real exchange rate just fluctuated around where it has for the last decade then, cet par, I’d just have to say I was wrong – not advocate eg direct interventions to try to manage the exch rate.
Yes, we are lightly populated in some absolute sense…….but there is probably reason for that, as there was reason why NZ was the last significant land mass to be inhabited at all. Distance/remoteness has always impinged on prospects for people here, and until distance dies – which it doesn’t seem to yet – I suspect it will be welfare-improving for, say, the Uk and Belgium to be densely populated and NZ to be rather lightly populated.
Anyway, enjoying the exchange. For me, a big part of the value of the blog is engaging with people’s alternative perspectives.
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