Productivity growth: how have we been doing?

A few weeks ago I ran this chart, showing quarterly real GDP per hour worked for New Zealand for the last decade or so.  I used an average of production and expenditure GDP, and HLFS hours worked data.  The rather dismal picture was of no productivity growth at all for the last few years

real-gdp-phw-oct-2015

Comparable quarterly data isn’t readily available for a wide range of other countries, so for such comparisons one is forced back onto annual data from international databases such as the OECD’s.    And the international agencies take a while to get a full set of annual data –  thus, New Zealand’s annual national accounts for the year to March 2016 (used as the basis for the OECD’s 2015 annual numbers) won’t be released until next month.  We aren’t the only laggard –  for a third of the OECD countries there are only 2014 annual numbers available.

So how has our (labour) productivity growth compared with that of other OECD countries over, say, the decade to 2014?  Taking a decade is (like all such comparisons) a little arbitrary, but it should be long enough to largely eliminate the effects of year-to-year volatility.  And a comparison starting in 2004 and ending in 2014 means starting before the peak of the last boom, and ending when the worst of the 08/09 recession and the euro crisis was over (well, perhaps with the exception of Greece).

gdp-phw-oecd-oct-2016

I’ve highlighted New Zealand (in red) and the other Anglo countries (in green).  The median growth rate for this set of countries is a couple of observations to the right of New Zealand.   Note that I am using (real) national currency measures here.  If one wants to compare income or productivity levels across countries, one has to use PPP-adjusted measures.  But in comparing growth rates, the OECD recommend (sensibly) using national currency measures.

New Zealand’s performance hasn’t been notably bad by any means –  just a little below the median.  But then the goal has supposedly been to grow a bit faster than the other advanced countries, to close the large gap between productivity and incomes in New Zealand and those elsewhere in the OECD.  And in fairness, most of the countries to the far-right of the chart have lower levels of productivity than New Zealand –  so they are also trying (and succeeding in their case) in catching up.  But New Zealand couldn’t even quite match the productivity growth rates of the other Anglo countries –  traditional comparators.

Sometimes one detects a sense among people writing about New Zealand that small countries face a particular disadvantage, and that small countries couldn’t be expected to sustain as rapid income or productivity growth as large countries.   Taking a longer span of data, I had a look at that proposition in a post last year. There didn’t seem to be much, if any, support for the idea that big countries get rich faster.

But what about the last decade?

Here is same chart

real-gdp-phw-oecd-oct-16-big-vs-small

I’ve drawn the line no doubt a bit arbitrarily.  Netherlands has a population of around 17 million and it and all larger countries are “big”.  Other countries, with populations of 11 million or less are “small”.  If anything, the small countries have done slightly better than the large countries over this particular period, but the difference is not enough that I’d want to make anything of it.  But the message is still the same: New Zealand hasn’t done particularly well, and plenty of small countries have done better.

The OECD’s database goes back to 1970, but they only have full data for 21 countries (including New Zealand for that period).  Over the full period, we had the second slowest productivity growth of those 21 countries.

real-gdp-phw-1907-to-2014

And once again, the small countries and large countries are scattered either side of the median.

Over the last decade, we have actually grown very slightly faster than the median of these particular 21 countries. It has been our least bad decade since 1970.  But I wouldn’t take much comfort from that: (a) the difference was slight, (b) we grew a bit less rapidly than the whole OECD median, and (c) on our own more recent data (see first chart) we’ve had no productivity growth at all in recent years

Wellington airport and the runway extension

Fairfax’s Hamish Rutherford had a substantial piece in Saturday’s Dominion-Post on the proposed Wellington airport runway extension, under the heading If we build it, will they come? (a rather similar title to my own first post on the airport last year).  It seemed like a fairly balanced article, covering many (but not all) of the key uncertainties about the project.   Most of them wouldn’t be a matter for public concern if this was to be a privately-funded project, but it isn’t –  and everyone agrees on that.

There was an interesting quote to that effect at the start of the article from airport company chair Tim Brown.

As Tim Brown tells it, the first time he discussed a “back of the envelope”-type analysis of the cost to extend Wellington runway with the airport’s chief executive, Steve Sanderson, the conversation was “completely negative”.

…..Brown had just been presented an outline of a $300 million project, aiming to enable non-stop long-haul flights to the capital.

However, the  potential gains to the airport (two-thirds owned by Infratil, the rest by Wellington City Council) were likely to see a boost in profits that would only justify it investing around $100m.

Whatever the final costs of the project might be (and the estimates are unmoved in the years since), Brown was clear about the chances.

“Literally within 10 seconds I said: ‘So what? What do I care? We’re not going to do that, are we?’,” Brown recalled this week.

This isn’t a project that might need the last 10 or 20 per cent of the cost picked up by the taxpayer/ratepayer to make it viable.  Instead it only works –  even on their own numbers –  if the Crown/WCC picks up two-thirds of the capital cost (and ratepayers have already paid millions of dollars to get the proposal this far).  This is a politically-driven project at least as much (and probably more) than it is a WIAL/Infratil one.

The whole process is getting underway again now, both because the airport company (WIAL) has restarted its resource consent application, and because now that the election is past the ability of citizens and ratepayers to hold in check the big spending “boosterish” tendencies of the mayor and councillors is diminished considerably.  It is difficult to tell quite what the balance of the council now is, but the new mayor has been at the forefront of the various “booster” projects the Council is spending money on, and one councillor who was vocally opposed to the extension in the previous term is no longer on the council.  WCC’s track record –  of wanting to “do something”, spend money on big ticket initiatives, often with little or no public scrutiny (sometimes not even with scrutiny from councilors) – is pretty disquieting.

Presumably under some pressure during the election campaign, the new mayor Justin Lester modified his stance somewhat in responding to pre-election candidate surveys.

I have committed to seeking the resource consent for the airport extension project. It’s too early to say whether the project will proceed because the following three caveats will need to be satisfied before it proceeds:

1. Resource consent approval

2. Financial support from Central Government

3. Commitment from airlines to fly direct routes to Asia.

This is a 50 year project and needs careful consideration before any decision is made.

On the face of it, that looks like a fairly insurmountable set of hurdles.  It is very unlikely that any airline is going to give a commitment to fly direct long-haul routes between Asia and Wellington in advance of (multi-year) construction even starting –  they couldn’t know what would happen to fuel prices, the world/regional economy or the like in the intervening period.    That is especially so given the expressed lack of interest in flying long-haul from Wellington from the one airline that always will be flying New Zealand routes, Air New Zealand.

And, to date, central government seems to have been commendably non-encouraging about any suggestion of central government financial support.

So what –  beyond the track record of poor quality secretive spending – makes me uneasy about the Lester-led Council?  First, Lester knows very well that he won’t get commitments from airlines before the Council has to make decisions on whether to fund the runway extension –  but he might get non-binding expression of interests, which could be politically spun to sound a bit like commitments.  Second, the government has a  track record of ending up funding uneconomic infrastructure projects, including ones it initially poured cold water over.  One could think of Transmission Gully, or KiwiRail, or Northland (by-election) bridges or –  perhaps most concerningly – the City Rail Link in Auckland.   With a modest budget surplus to be subject to an electoral auction next year, is it so inconceivable that the government could change tack (government built houses and immigration last week) and throw $100 million in the direction of the runway extension?  Compared to the spending on Transmission Gully, it would be chicken feed.

And while Lester is quoted extensively in the Fairfax article, neither of the conditions in the pre-election quote above (airline commitments, central government funding) is repeated.  [UPDATE: I gather they are still part of his set of pre-conditions]

So ratepayers beware.  Citizens beware.

In the Fairfax article, Lester tries to blunt possible ratepayer concerns by suggesting the bulk of any Council funding should be raised from business rates rather than from residential ratepayers, because “the majority of the benefit would go to the business sector”.  That might sound superficially plausible (if there were material benefits at all) but the mayor seems unaware of the notion of tax incidence: that the party who writes the cheque to pay a tax or rates bill isn’t typically the party that bears the economic cost.   Much of any company tax is actually borne, over time, by workers –  because less investment occurs than otherwise, and wages are lower as a result.  Just as renters bear some/much of the incidence of rates bills paid by landlords, we should expect that the wider pool of Wellington citizens would bear much of the economic cost of higher business rates to fund an airport extension, even if no non-business ratepayer ever has to increase their direct rates bill.  This is an issue that should bother all citizens, not just business ratepayers.

A lot of the decision-making should turn on a robust cost-benefit analysis of the proposal.  WIAL and the Council have commissioned their own analysis, which suggests large positive national benefits.  Not many people who have looked carefully at the numbers have found their numbers persuasive.  Justin Lester seems to suggest this is all about self-interest

“I’m not going to have people telling me and telling Wellington and telling our council what we should be doing because of their own interests.”

If one wanted to descend to a similar level, one could ask about the incentives on and interests of councillors –  spending other people’s money on big ticket projects.  But, perhaps more importantly, advocates like Lester would do better to front up and explain why they disagree with specific points raised by critics –  whether those critics are representatives of the airline industry, or other commentators and economists.

In the last few weeks, questions have begun to surface about the estimated cost of the runway extension itself.  In a private sector project, citizens wouldn’t need to worry too much.  After all, if the company proposing the development gets it wrong, its own shareholders will be the ones who lose money.  But this is a project where large amounts of ratepayers/taxpayers money will be at stake, and where it isn’t clear how well aligned incentives really are.  The construction estimates are being done for WIAL, which has already concluded that it would only be worth them putting in around $100 million.  If the project is to proceed central or local government will be on the hook for the rest.  Mightn’t the incentives at present be to keep the construction estimates to the low end of a possible range?  Doing so might (a) increase the chances of getting a resource consent (since, sadly, the Environment Court needs to do an economic appraisal) and (b) increase the chances of getting central and local government approval to proceed, with political commitment to the project, with any later cost-overruns perhaps largely falling on those parties.

My own unease has been around three main points; developed in earlier posts:

(a) the large assumed increase in long-haul visitors to New Zealand, simply because of an option to fly long-haul into Wellington (rather than Auckland or Christchurch.

(b) the very large assumed “wider economic benefits” assumed to flow from such increases in visitor numbers, even if the passenger projections were accurate, and

(c) the discount rate being used to evaluate such gains (many of them decades into the future).

I dealt with the visitor number points in this post late last year.   The WIAL cost-benefit analysis uses passenger projections which assume an increase of 200000 visitors to New Zealand (building up over time) simply because it becomes physically possible to fly long haul into Wellington.   That seems implausible.  In his own look at the passenger projections, Ian Harrison of Tailrisk Economics, noted that the numbers assumed that within 20 years 30000 more Americans a year will come to New Zealand simply because they can fly directly into Wellington.   One can imagine a few more might want to arrive via Wellington, but is it really credible that so many more will come to New Zealand as a whole?  Perhaps more startling were the assumptions for “other Asia” (ie other than China and Japan).  At present, only around 30000 people come from those countries to Wellington in a year.  The projections assume that putting in a runway allowing long-haul flights will provide a boost of an additional 105000 visitors annually within 20 years.  Were Wellington Florence, perhaps it would be a credible story.  As it is –  and even with some more marketing spending and a heavily subsidized new film museum – it just doesn’t ring true.  Long-haul passengers don’t come to New Zealand for its cities –  the cities are mostly gateways, and in the case of the lower North Island, Wellington isn’t the gateway to much.  (And yes, I can see the South Island as I type, so perhaps there is a small “gateway to the South, by slow ferry” market).

I touched on the “wider economic benefits” and the discount rates in this post. Here are some extracts from that post:

But much the biggest issues relate to the possibility of benefits to New Zealand from additional foreign tourists buying real goods and services in New Zealand.  Sapere appear to have estimated a total for the likely increase in tourist spending in New Zealand and then subtracted an estimate for the cost of providing those services.  For that they have assumed that 45.5 per cent of the expenditure is domestic value-added (ie returns to labour and capital).  That approach doesn’t seem right and generates highly implausible estimates.

The producer surplus is the gain to the provider of a good or service over and above what he or she would have been willing to provide that service at.   The cost of providing the service includes the cost of intermediate inputs (materials etc) but also the cost of the labour and the cost of capital (a normal rate of return).  If the producer sells product at that cost, there is no producer surplus. In this context, there is no net economic benefits –  economic costs have just been covered.

Over the long haul, in reasonably competitive markets, producer surpluses should be very small (in the limit zero).  For a hotel that budgeted on 80 per cent occupancy, a surprise influx of visitors for the weekend will generate a producer surplus –  the windfall arrivals add much more to revenue than they do to costs of supplying the service.  But over the long haul –  and the airport project is evaluated over the period out to 2060 –  it is fairly implausible that there will be any material producer surplus resulting from well-foreshadowed increases in visitor numbers.  Most of what tourists spend money on in New Zealand are items such as accommodation, domestic travel, and food and beverage.  In all those sectors, capacity is scalable.  One would expect new entrants just to the point where only normal costs of capital were covered.  In the long run, supply curves for most of these sorts of services/products should almost flat.

My proposition is that there are few or no producer surpluses likely to arise from a trend increase in foreign tourism as a result of extending Wellington airport.  But even if there were, any such gains would have to be offset against the loss of producer surplus for New Zealand producer (to foreign producers instead) from New Zealanders taking more holidays abroad.  It makes little difference to the hoteliers if I take my holiday in London instead of Queenstown, while at the some time someone in Manchester takes his in Queenstown instead of taking it in London.

Even if the consultants are right that there would be more additional inward visitors than outward, any producer surpluses from either set of numbers should be small.  And the net of two small offsetting numbers is even smaller.

The safest assumption, in evaluating the WIAL proposal, is to assume that the economic benefits of the proposal all accrue to users, and that there are no material net economic benefits (or costs) to the rest of the community.  Perhaps there is a small amount in the net GST flow, but it is hardly worth focusing on given the scale of the other uncertainties.

Perhaps this point will seem counterintuitive to lay readers and city councillors.  Surely “Wellington” or “New Zealand” is better off from having more foreign visitors (assuming the numbers outweigh the increased outflow of New Zealanders)?  And if so, shouldn’t we –  Councils, government –  be willing to spend money to get those benefits?   The short answer is no.    Good and services cost real resources to provide, and in a competitive market simply providing more goods and services won’t make the city or country better off –  you need to be able to sell stuff that generates more of a return than it costs to provide (including the cost of capital).  Vanilla products and services typically don’t do that.  After all, labour that is used to provide services to tourists is labour that can’t be used for something other activity.  And over a horizon of 45 years we can’t just assume there are spare resources sitting round unused.  Spending public money to generate this economic activity will come at a cost of some other economic activity being displaced (as well as the deadweight costs of taxation, which are allowed for in the cost-benefit analysis).

If, to a first approximation, there are no “net incremental economic benefits” for the “rest of the community” then even if the WIAL/Sapere passenger number estimates are totally robust, the net benefits of the project drop from $2090 million to $954 million.

It is not as if the new visitors – even if they eventuate –  are likely to be top-end exclusive customers.  Business and government travel –  a significant part of the Wellington market –  is unlikely to be much affected, and any boost to overall visitor numbers seems likely to be mostly tourists, consuming fairly vanilla, easily replicable, goods and services.

And what of the discount rate?

It is very unlikely that any private company (or shareholder) would evaluate such a risky project using anything as low as a 7 per cent real cost of capital.  On the WIAL/Sapere numbers, even raising the discount rate to 10 per cent –  a fairly typical cost of capital for Australian companies according to a relatively recent survey by the RBA –  roughly halves the value of any net benefits from the project (even if all the other assumptions about passengers numbers, and “wider economic benefits” are in fact well-founded).  But this runway extension seems much riskier than the typical investment project –  it is location-specific, not usable for anything else, and relies on assumptions that involve transforming the nature of the business (ie there is no long haul capacity at present, and no one can know with any confidence how much demand there might be for the service).  It would be enlightening if Infratil/WIAL told us what cost of capital/discount rate assumptions they would use in evaluating such a project if all the risk were on them?  I’m sure, for such a hard-nosed bunch of operators, if would prudently be more than 10 per cent real.

The Fairfax article picks up a number of other points, including some comments from me. In some of those comments, I probably wasn’t as clear as I might have been.

A few weeks ago, Singapore Airlines –  assisted by a non-transparent Wellington City Council subsidy –  began flying several times a week between Singapore and Wellington, with a stopover in (of all places) Canberra.  No one know whether those flights will succeed (SIA reportedly wants to move to daily), and become viable without ongoing Council subsidies.  That uncertainty is reflected in the article.  Tim Brown from WIAL seems to believe that if the route succeeds, and attracts a larger proportion of foreign passengers, it would tend to support the case for the runway extension.  Justin Lester seems a bit nervous

Like the airport company, Lester also appears to concede that if the Singapore Airlines flights do not show the demand its supporters hope, it would be bad news for the runway extension.

“People are getting on and off these planes four times a week and if the demand doesn’t go up to seven times a week, you know, we won’t need to do it,” he said, quickly adding that this would be a “strong indicator” rather than proof the runway extension was not worthwhile.

I was quoted along similar lines

Would strong success of Singapore Airlines’ new route, with a high proportion of visitors, help prove the case of the missing passengers?

For a man who freely admits he is naturally sceptical about most public infrastructure projects, Reddell is surprisingly open to the idea.

“If they can make that route viable without larger public subsidies than they’ve got then I think that would be interesting”, especially given that passengers face being “stuck in Canberra for a couple of hours”.

But with several caveats.  First, even if the Wellington-Canberra-Singapore route proves viable, it only offers any insight on the long-haul issue if a material proportion of the passengers in and out of Wellington are not just Wellington-Canberra passengers (although it seems unlikely that a daily 777 flight just Wellington/Canberra would be economic).

Second, if such flights prove viable with the current runway, that is great. All involved are likely to gain.  But that is different proposition than spending  (an irreversible) $300 million on a new runway.  As I noted

However, Reddell adds, this may only prove Brown is right about the problem being a lack of marketing, without proving the airport extension itself was needed.

“I would open up the argument, [of] let’s subsidise some more flights, and if they don’t work we can shut them down, whereas with the $300m runway extension, it’s a sunk cost,” Reddell said.

“The great thing about marketing is you can shut it off. You can’t do much with a runway extension” that doesn’t work out.

In the cost-benefit analysis, one of the options they looked at was a big increase in marketing expenditure.  It produced net benefits not that much smaller than those purportedly on offer from the runway extension, and could be re-evaluated constantly, rather than being irreversible.

If central and local government do go ahead and fund the extension, it wouldn’t surprise me if 10 years hence there were a few long haul flights in and out of Wellington.  But, of itself, that would prove nothing about the economics of the project.  The financial contribution of central or local government would, no doubt, be treated as a bygone –  with no direct financial returns, and arguable and uncertain indirect ones –  and with a runway in place, and only its own capital contribution to cover, perhaps WIAL could attract a few flights.  That might leave today’s councilors feeling better, as they show the extension to their grandchildren, but is no reason to think that Wellington citizens and ratepayers will have been made better off as a result.

I’ve not touched at all on issues like the possibility that future carbon charges make long haul travel less attractive than it is today, or that rising sea levels might raise questions about Wellington airport more generally.  But they all should bring us back to Justin Lester’s point

This is a 50 year project

and

His “gut instinct” was that the case would eventually be proven, but it could be soon, or it could be decades away.

The costs of waiting simply aren’t that large.  If the proponents are right, the case will look that much more compelling  –  and less risky –  10 years from now.  If they are wrong, (lots of) real resources will have been irreversibly wasted –  and that burden will be felt not just by Wellington businesses, but by all citizens and ratepayers of Wellington.   I’d urge the incoming Council to reflect on that choice, and to take seriously what decisionmaking under uncertainty should mean.

BusinessNZ argues for more immigration

BusinessNZ describes itself as “New Zealand’s largest business advocacy body”.  Its chief executive, the lobbyist Kirk Hope, seems to have easy access to the op-ed pages of the Dominion-Post newspaper, and I’ve critiqued a couple of his columns (here and here) earlier in the year.

Hope –  and presumably BusinessNZ – is a big fan of high levels of non-citizen immigration to New Zealand.  Business groups have been for decades –  as far as I can tell, through all the decades of New Zealand’s relative economic decline.  We’ve had some of the highest controlled immigration flows of any country, and one of the worst relative economic performances.  However large the inflow it is never seems to be enough for the Manufacturers’ Federation (in decades past) or BusinessNZ now.  I have in front of me, the memoirs of Fred Turnovsky, twice head of the Manufacturer’s Federation and one of the “great and the good” of an earlier generation, where he records a lecture he gave at Waikato University in 1971 calling for a doubling in the officially proposed immigration target.

Earlier this week, following the government’s migration policy changes, BusinessNZ had a press release out –  under the heading Migration rules a sign of progress –  which seemed to welcome the changes.  I was quite surprised, but on closer inspection it wasn’t the small drop in the residence approvals programme target they were welcoming, or the cutback in the family quota (mostly non-working older parents), but simply the increase in the points requirement.

“Increasing the points required by skilled migrants to gain residence from 140 to 160 will help sharpen the annual intake towards higher skilled people.”

But, of course, increasing the points requirement isn’t an independent policy adjustment, it is just the logical corollary of a likely increase in demand for residence (mostly because of the large inflow of foreign students in recent years), while the availability of skilled migrant places hasn’t changed.  When demand changes the “price” needs to adjust.

And thus far I agree with Hope.  If we are going to allow in lots of “skilled” migrants, the more skilled they are, the better.  Of course, it is always hard for officials to detect skills, which makes it too easy to fall back on paper qualifications.

In an op-ed earlier in the year, Hope made the case for high levels of immigration to New Zealand on the grounds that we needed lots of immigrants to pay for our superannuation.

Restricting immigration as proposed would harm the economy.

With a birth rate just above replacement level, an ageing population and baby boomers retiring, we need immigrants to sustain the economy and pay for our superannuation, just as in decades past.

In response I noted

And on the NZS side of things, if there are affordability challenges with the current system, we have it in our own hands to modify the system to make it more readily affordable.  We could raise the age of eligibility –  National knows it needs to happen, even if the Prime Minister has pledged not to, and Labour campaigned for a higher age at the last election.  Other countries have made these sorts of changes.  We could also age-index NZS eligibility.  We could modify the entitlements of those who haven’t spent most of their working lives in New Zealand.  And there are other options I don’t support, but which would also ease the fiscal pressures, such as income and asset testing, or linking NZS increases to prices rather than wages.  And we can keep the way open for more older people to stay in the labour force for longer –  on that count, we already have one of the least distortionary old age pensions systems anywhere.  We are quite capable of managing the pressures ourselves.

Large scale immigration might make a small difference to NZS affordability, but it is an awfully big intervention for a really quite small difference.  As it is, New Zealand’s birth rate is around replacement, unlike many European and Asian countries, so the ageing population issues are in any case less pressing here than in most places.

In the end, the best way to support the various social spending commitments society wants to make is to foster a highly productive economy.  We’ve kept on failing to do that, and while immigration policy almost certainly isn’t the whole story, there is no evidence whatever that high rates of immigration have improved the position.

Strangely, the affordability of NZS seemed then to be his main argument for large-scale immigration.

But I suspect that was just an attempt to try to frame the issue in a more generally acceptable way.  In fact, business lobby groups in New Zealand tend to make the case for high levels of immigration largely in terms of keeping the cost of labour down.  Of course, they don’t put it in quite those words.  Instead, the constant refrain is “skill shortages” is mostly just another way of saying “I can’t get enough workers at the wage I want to pay”.    Markets have ways of taking care of looming shortages, or surpluses: the price adjusts.  We don’t hear of shortages of foreign exchange –  the price adjusts. The availability of tomatoes varies with the seasons and storms, but almost always any consumer can buy as many tomatoes as he or she wants, at a price which adjusts (up and down) quite frequently.

When it comes to people, and labour markets, these mechanisms don’t work instantaneously.  But markets take care of structural shifts in the demand for labour, if they are allowed to work.  A commenter argued earlier this week that we need lots of immigration to provide the workers to care for a growing elderly population.  No.  Immigration is certainly one option – look at the staggering number of aged-care nurses we’ve granted visas to in the last decade –  but so are changes in relative prices.  If the demand for labour in that sector increases, then over time relative wages in that sector will tend to rise. In turn, that will draw more New Zealanders to the sector, and will also reward investing in some more labour-saving technologies.  The same goes for almost any sector.  The wages changes might be small, if labour moves easily into the new in-demand sector, or large, if there is some reluctance of people to move into those roles.  But that is how the labour market would deal with shifts in the patterns of labour demand, if allowed to do so.

But to return to BusinessNZ.  Kirk Hope has another op-ed in the Dominion-Post this morning.  It is a useful piece because it is so explicit about his –  and his organization’s (?) -views.  Here is what he has to say:

One in four people in New Zealand is foreign-born, and many New Zealanders routinely leave to live in other countries.

This is what New Zealand is like – it’s ‘migration central’, awash with people coming and going, and it has always been this way.

This is simply quite historically misleading.  Large short-term migration is a new phenomenon –  we saw nothing like it in earlier decades.  And while it is no doubt true that “many New Zealanders routinely leave to live in other countries” –  I’ve done it three times –  the net outflow (the loss of almost a million New Zealanders) dates from when the growing gap between living standards in New Zealand and those in other advanced countries (especially Australia) started to become more apparent.  In successful countries, not many people leave for long.  Compare the net outflow of Norwegians from Norway with the net outflow of New Zealanders from New Zealand and you’ll see what I mean.

Business has long asked for more immigration…

You can’t get clearer than that.  We have probably the second largest controlled immigration programme in the advanced world (behind that other economic laggard, Israel), a residence programme three times the size (per capita) of that in the United States, large and growing numbers of short-term work visas, and still it just isn’t enough for business.

He elaborates

….as in more access to more skilled migrants to do the jobs that New Zealanders aren’t available for.

But as even Hope recognizes, in this and his earlier article, New Zealand hasn’t done very well at attracting really skilled migrants in recent decades.  Which shouldn’t really surprise anyone; after all, New Zealand is an awfully long way from anywhere (ie home and family), and simply doesn’t offer as good material living standards as many other advanced countries (including such migration recipient countries as Australia and Canada) do.   We haven’t been doing well at getting the best people to date, so why should expect to do better if we aim for even more migrants?

And Hope never once refers to the OECD data, cited by Steven Joyce and MBIE, suggesting that New Zealand workers’ skill levels are already among the very highest in the OECD (and the average immigrant had, on those measures, slightly lower skills than the average native).  Perhaps he doesn’t believe the numbers, but if so perhaps he could lay out his specific concerns with the data.  As I noted in my earlier post on that OECD data

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.

But to revert to Hope

the points system will be able to deliver higher skills, but not necessarily the specific skills in most demand.

It might not answer the specific need for more engineers, construction managers, quantity surveyors, technologists, technicians and ICT workers – the actual skills needed today.

Fortunately, there is work underway to achieve more weighting in the points system to achieve specific skills such as these.

This is a sort of line he has run before and I commented then.

it is curious to see the leader of a business group reckon that he knows what skills and what industries will be the ones that will prosper in a future, more successful, New Zealand.  And it is puzzling to see so little faith placed in the workings of the labour market, or the skills and capabilities of New Zealand.  It is redolent of some sort of 1960s indicative planning mentality –  the sort of line of argument I have previously criticized MBIE for.

BusinessNZ tell us they believe in markets, private enterprise etc etc, but in fact they seem to want to shape our long-term migration policy around the ability of people like them – and MBIE bureacrats –  to work out quite what skills “the economy” needs right now.  Even though, in granting residence to a 25 year old, we are bringing in someone who might have 40 year plus of working life in New Zealand.  No one knows, or can know, what specific skills will be needed over that sort of horizon.    If we are going to bring in long-term migrants, with an economic focus, lets attract able, energetic, skilled people, with a realistic chance of adapting well to New Zealand, and not try central planning beyond that.

Hope goes on

Business will be hoping this work comes to fruition soon.

Without it, we face the danger of a breakdown in the political consensus around migration policy

If we are not able to import migrants with the specific skills needed, there will be little support for bringing in many migrants without them.

To the second sentence, I can only add “I hope so”. There is just no evidence –  from BusinessNZ, from the NZ Initiative, from MBIE, from Treasury, from National or Labour ministers – that the strong elite consensus in favour of high levels of non-citizen immigration has done anything, at all, to benefit the economic performance of the New Zealand economy as a whole. Perhaps it might produce such benefits in some times, some locations.  But our focus in on contemporary New Zealand –  this specific location.  Of course, the economy is bigger –  there are lots more people –  but there is no evidence, at all, that GDP per capita, or GDP per hour worked for New Zealanders are better as a result.  And that really should be the test, and especially in programme that is avowedly focused on the claimed economic benefits of the programme.   There is no more reason to simply assume that putting an extra million people in New Zealand –  roughly what our immigration policy has done in the last 25 years – would make any more sense than putting an extra million people in Wales, Scotland, Tasmania or Nebraska, if local territorial authorities in those places had control of their own immigration policy.

And what of that final sentence? For all I know, it might be descriptively accurate, but actually I suspect there is little support  now for “bringing in many migrants without them [skills]”.  Why would we, refugees aside?  There might be a case for attracting some really highly-skilled immigrants (not tied to specific current vacancies), but why would we want to bring in people with very limited skills.  At best, doing so could only drag down the relative returns to relatively lowly-skilled (absolutely or relatively) New Zealanders.  At worst, it could drag down our overall economic performance.

Hope goes on

These generalisations are not true. The fabric of New Zealand life, rather than being destroyed by immigration, is largely the result of ongoing immigration and is colourful, interesting and diverse as a result.

My focus in on the economic dimensions of the issue, but as a reminder –  and with no suggestion of causation – living standards in New Zealand (relative to those in other countries) were probably at their best in the 1950s, a period of a great deal of cultural homogeneity in New Zealand.  Large scale immigration –  particularly from different cultures than the native population –  changes societies, and there are likely to be both pros and cons from those changes.  If a country has meaning –  other than just a physical location –  it must involve something around shared identity and values.  If the economic gains from large scale immigration are slim or non-existent ( as I argue in the New Zealand case), one might want to examine more closely the other implications of large scale immigration –  whether that is about environmental pressures, or the declining relative place of Maori (the original native population).  But consciously or not, business lobby groups and their advocates tend to see little role for the nation state.

Having made his arguments about immigration, Hope attempts a pivot.  Never having succeeded in showing that there are widespread economic gains from our immigration programme –  let alone an even larger one – he turns paternalistic.  The problem apparently isn’t large scale immigration, it is the low level of skills of many New Zealanders.

For this group, upskilling is their most pressing need.

This is why the education system needs our focus as debate on immigration continues.

There needs to be more help for unskilled adults to get upskilled in basic areas of literacy, numeracy, communication and computing.

I’m not going to dispute that skills matter, or that the education system (or some families) could do better in equipping people for life and work.

But fundamentally this is a distraction.

The data show that New Zealanders on average have a fairly high level of skills. Not everyone of course –  here, or in any of those other countries.  And, in any case, much of the education system isn’t about adding skills, but about signaling and ranking.  We don’t have a high unemployment rate by international standards, or a low labour force participation rate (and here I agree entirely with BusinessNZ and the NZ Initiative that immigration does not raise local unemployment, or take jobs from natives).  So focus on skills and the best possible design of the tertiary education system all you like, but it really is a different issue from the appropriate immigration policy for New Zealand.

Towards the end of his article, Hope sums up

New Zealand’s shortage of in-demand skills is one of the most important and difficult problems we face, and changes in education should be a hot topic.

We are a nation of immigrants and descendants of immigrants, and our economy needs ongoing migration to cope with the skills gap we have at present.

It is quite staggering to find the leader of (ostensibly) market-oriented business lobby group discuss the labour market, access to skills etc, and never once mention wages (sectorally, or across the board).    His case might be more plausible if he stopped to engage with the counter-argument: why, over time, if there is a “shortage” of chefs (to take one of the leading skilled migrant categories) won’t relative wages for that set of skills rise, encouraging more people to (over time) shift towards those roles?  None of these adjustments happen overnight, but the market process usually works if it is allowed to.  But, of course, it is often just cheaper for firms to seek an overseas worker, than to lift returns to local labour across that set of skills.  Or if he stopped to think macroeconomically for a moment –  rather than simply at the level of the individual firm.

As for that final sentence, you have to wonder about which bit of the last 70 years of New Zealand economic history Hope missed.  We have had high (by international standards) non-citizen immigration for most of that period, and yet constant employer complaints down through the decades about “skills shortages”.  You’d almost suppose this was a really high-performing economy, with endless new outward-oriented opportunities and markets, crying out for people to tap those rapidly expanding markets.  Instead, our relative economic performance has been in decline for almost the whole post-war period, and our exports as a share of GDP has gone nowhere –  unlike almost every other advanced country –  for the last 30 years.    Perhaps BusinessNZ might like to reflect on the view – widespread among New Zealand economists in earlier decades (much to the dismay of Fred Turnovsky) –  that large scale inward immigration programmes add more to demand than they do to supply in the short-term, and thus –  at an economywide level – exacerbate rather than relieve “skill shortages”.  Individual firms don’t experience it that way, but that is the value of macroeconomics.

I could go on, but I’d really urge BusinessNZ to think again, and if they do want to continue to champion really large scale immigration programmes, to find some credible arguments and evidence for the programme (specific to New Zealand), and to engage with the track record of New Zealand’s immigration programme and economic performance over the last 70 years.  As they do, they might ponder the continued extremely high dependence of New Zealand on natural resource exports (perhaps 80 per cent on a broad definition), something that shows no sign of changing.  Our stock of natural resources isn’t increasing, and there is little obvious reason to think that we’ve needed a lot more people here to make the most of what we have.  Instead, we need to tap the smart and able people we do have, the strong institutions, and to get government out of the business of –  unintentionally –  persistently holding up the real exchange rate, and making it even harder than it should be to develop competitive firms based here. Markedly pulling back the immigration target –  not just playing at the edges as the government has done this week –  would be a big part of making that possible.

 

 

 

 

 

 

RIP timely mortgage approval statistics

The Reserve Bank has recently confirmed that it is going to kill one of the most useful statistical series it produces.

A decade or so ago, near the peak of the last house price boom, the Bank began collecting data on the number and value of housing mortgage loan approvals.  The data were never perfect, and the Bank’s statisticians always, slightly disdainfully, labelled them as “experimental”.

But they had a lot going for them nonetheless:

  • they were weekly data, whereas most Bank series are monthly or quarterly,
  • they were reported and released very quickly (data for last week is on the Bank’s website now), whereas most Bank series take the best part of a full month to collect and report,
  • they were about mortgage approvals, rather than drawdowns, so captured information at a materially earlier stage of the process (when one is close to agreeing to buy, rather than when settlement occurs), and
  • they told sensible stories that could be reconciled, then and later, with other things we knew about the housing and housing finance market.

Given that the Bank now puts much more weight on direct regulatory interventions in the housing finance market than it ever did before, you would think they would want all the data they could get –  and particularly very timely data.

But no.  The housing mortgage approvals series is to be discontinued next month.

The Bank would no doubt respond that they have, over the last few years, put in place a new set of data collections around housing finance.  They even have a new series of housing mortgage commitments, but (a) they have only three years of (monthly) data, and (b) the monthly data are available only with a considerable lag.    Check out the tables for the new series: today is 13 October, and the data for August are now there (and mid-August is now almost two months ago).  By contrast, as I noted above, last week’s new mortgage approvals are already on the website for the long-running “experimental” series.    It is significant step backwards, in terms of the public availability of timely data on what is, for the Bank, and rightly or wrongly, clearly a major market.

I made a brief submission on the proposal to discontinue this data, noting

The cumulative loss of information from the change could easily be 8 to 10 weeks of information (if, say, a mortgage approval is typically given perhaps a month before drawdown).  Even allowing for the fact that the mortgage approvals data is not a perfect predictor of actual drawdowns, the cycles in the approvals data have given good and consistently informative reads for a number of years now.  With the Bank varying LVR restrictions on average about once a year, losing 8 to 10 weeks of forward data seems cavalier –  even having regard to the inevitable compliance costs for banks (which must now be quite low for an established collection).

To which the Bank’s response last week was

We acknowledge that the housing approvals statistics provide more frequent and timely data, however, we do not believe that this a sufficient reason to continue with the collection.

I don’t think their heavy regulatory interventions, and repeated recalibrations of the restrictions, in the housing finance market are well-warranted –  in law or in economics.  But to intervene that heavily and then to simply abandon frequent timely data seems reckless.   Better more comprehensive later data can refine the insights from early takes –  as final GDP data several years on are better than the first cut estimates, but we don’t simply abandon publishing the first cuts – but in much of the business the Bank is in –  monetary policy and regulatory interventions –  preliminary insights are vital, and inform (heavily inadequately) the forecasts, and policy responses.  That is why, for example, the Bank does business visits, uses opinion surveys, and so on

Inside and outside the Bank, I’ve always found the mortgage approvals data useful and interesting.   Because it is weekly data, and not seasonally adjusted, I’ve taken to presenting the mortgage approvals numbers in a chart like this:

mortgage approvals oct 2016.png

The vertical access is the number (not value) of mortgage approvals per capita (using mid year population estimates).  The horizontal access is the week of the year.

There are data back to 2004.  The blue line is the average for the years 2004 to 2013, the decade prior to the use of LVR controls, and which encompasses both most of the last boom and the post-recession “bust”.   As you would expect, there is some seasonality apparent in mortgage approvals, but mostly around the Christmas/New Year period.

I’ve also shown the data for 2006 –  the year during the last boom when mortgage approvals per capita peaked –  and for 2015 and 2016.

There have been weaker years –  2010 and 2011 notably –  but the volume of mortgage approvals this year has simply not been very high.  It has averaged around the same as last year’s numbers –  but had looked as though it might be moving a bit higher before the Bank announced its latest set of LVR controls.  One of the great things about this high frequency timely data is that one can see approvals dropping off somewhat in the last couple of months, as one would expect given the new controls.

Taking a longer perspective, relative to the 2006 peak year, mortgage approvals per capita this year (and last) are only about two-thirds now of what they were a decade ago.   This is consistent with house sales per capita data, which are also running well below the peaks in the previous boom.

None of this is to suggest that high and rising house prices are not a problem. They are, and they are a disgraceful reflection on politicians and policymakers.  But it does help to illustrate that the issue is not primarily banks flooding the market with credit, or even a mania of buyers desperate for anything that moves.  The dollar value of credit is growing no faster (probably slower) than one would expect given the increases in prices –  higher-priced houses require more credit –  and the volume of mortgage approvals is actually quite low.

High and rapidly rising house prices are mostly a reflection of the severely distorted market in urban land –  distorted, that is, by central and local government –  exacerbated by policies that deliberately set out to rapidly boost New Zealand’s population, even when it is well-known that the housing and urban land supply markets simply can’t cope –  or at least not without seeing prices going sky-high, the market response to artificial, regulatorily-induced, shortages.

Direct interventions in the housing finance market are an inappropriate use of (too widely drawn) Reserve Bank powers.  But with their readiness to deploy those powers, and chop and change the rules, frequently, it is most unfortunate that they are dropping the most timely and frequent data on housing finance we have.

 

A modest start

The Minister of Immigration has today announced some changes in New Zealand’s immigration policy.

The centerpiece of New Zealand’s immigration policy has, for many years, under both National and Labour-led governments, been a target (“planning range” they like to call it) for the number of non-citizen residence approvals of 45000 to 50000 per annum.  For all the talk about the volatility in the net permanent and long-term migration numbers, much of that volatility simply results from choices of New Zealanders to go, or not.  That has little or nothing to do with immigration policy.   In terms of overall numbers, residence policy itself has been pretty stable.  Some years, actual approvals undershoot a bit, and sometimes they overshoot, but the target itself hasn’t changed for a long time.  Of course, New Zealand’s population has grown quite rapidly, so approvals as a share of the population have been trending down, while remaining high by international standards.

In today’s announcement, for the first time in a long time, the target has been cut.  The cut itself is small –  for the next two years, the annual target will be 42500 to 47500 non-citizen residence approvals.  In other words, the target has been cut by 5.5 per cent.

That is a small step in the right direction.  I’ve argued for some time that the residence approvals target should be lowered to something more like 10000 to 15000 per annum, and that to do so would, over time, offer a path towards a material improvement in New Zealand’s dismal long-term productivity and relative income performance. Now that the hitherto sacrosanct (although, as everyone accepts, initially rather arbitrary) 45000 to 50000 target has been cut, even if only modestly, I’d hope to see further reductions in the residence approvals target in years to come.

Perhaps as encouraging is the other change.  A large chunk of residence approvals have been going to people, often older parents, who would not qualify for New Zealand residence on their own merits, but get in simply because they have family already here.  Since our immigration programme is explicitly focused on the potential economic benefits to New Zealand, and New Zealanders, this large share of approvals going to  relatives undermined the (already slim) prospects that the immigration programme was ever going to benefit New Zealanders as a whole.

In today’s announcement, the government is

reducing the number of places for the capped family categories to 2,000 per year (down from 5,500)

In other words, all (and more) of the reduction in the targeted number of residence approvals will come from that group of migrants who never qualified to get here on their own merits.  If anything, there is a slight increase expected in the number of people who will gain residence based on their own skills etc.  All else equal, that is a step forward –  economically and fiscally.

As part of today’s announcement, the number of points required for residency has been increased.  That is really only a logical corollary of the likely increase in the number of applicants under the skilled migrant stream (as a result of the influx of foreign students in the last few years), but should mean that the people we do grant residence approvals to in the next couple of years will generally be of higher “quality” (in terms of the sort of characteristics the programme rewards) than those in the last few years.

Today’s announcement is a small step in the right direction, and thus welcome.  It helps illustrate what a useful and flexible tool the residence approvals target is.  Contrary to many naysayers, it is relatively straightforward to alter our residence approvals numbers.  Annual approvals will fluctuate, as will flows of New Zealanders, and flows of people on temporary visas, but, over time, it is the residence approvals programme target that largely determines the contribution of immigration policy to New Zealand’s population growth.   As a natural resource dependent country, in a very poor location from which to base other sorts of internationally-oriented businesses, we don’t need more people, which is why –  ideally –  today’s announcement will be the first of many over the coming decade.

As a reminder, the United States issues around 1 million green card a years: that is one green card per annum for each 319 people already in the United States.

Our new target, centred on 45000 residence approvals per annum, offers one new residence approval per annum per 105 people already in New Zealand.

The evidence base for running an immigration programme three times the size of that of the United States, to an extremely remote location with an underperforming economy, remains scant to non-existent, even after decades of the current policy.  A challenge for MBIE, and Treasury, and their respective Ministers, might be to show compellingly that New Zealanders as a whole are benefiting from the high immigration policy –  a policy that, slightly attenuated today, continues.

I’ve long argued that lowering the residence approvals target materially would, over time, lower the real exchange rate, and assist in shifting the economy towards a more international orientation (more exports, more imports, and less reliance on the non-tradables sector).  Media accounts suggest that the NZD actually fell on today’s announcement.  If so, that is welcome –  and consistent with the fact that asset markets tend to be forward-looking.  But, as everyone knows, exchange rates are volatile, and in the grand scheme of things, it is unlikely that a 5 per cent in the residence approvals numbers in isolation will make much discernible difference in the medium-term.  Now a 50 per cent fall, well….that really should make a difference.

 

 

Should the PTA be changed? Business leaders seem to think so

A couple of weeks ago, the Herald ran their annual Mood of the Boardroom survey, capturing the views of 101 (mostly) chief executives on a wide range of business, political and policy issues.  It is a slightly frustrating survey because, despite the heavy coverage the Herald gives it, they don’t report the exact questions, and as everyone surely recognizes, how one frames a question influences –  intentionally or otherwise –  the answers one gets.

Often enough the answers are pretty predictable.  Sometimes predictably depressing.  Daft and detached from reality as I’ve argued that the Prime Minister’s line about New Zealand as a haven for the rich, the “Switzerland of the South Pacific” is, the CEOs (79 per cent of them) seem to like it.

But the question that caught my eye was one about monetary policy.  Asked whether the government should “rewrite its agreement with the Reserve Bank”, so as to “consider wider economic factors beyond inflation” the answers reported were:

Yes                                    48 per cent

No                                      38 per cent

Unsure                              14 per cent

It is now less than 12 months until a new Policy Targets Agreement is required, and the Minister of Finance has poured cold water on the idea of major changes in the PTA.  But on this occasion, business leaders –  often important defenders of the status quo around monetary policy – seem to be calling for change.  As the Herald notes, it is “a marked change from previous surveys”.

It would be interesting to know quite what these CEOs had in mind, as there isn’t much hint in the supporting article.  One CEO is quoted as suggesting that the Reserve Bank needs to think about economic growth too, and that is about all.  There is no reference in the article to the exchange rate, unemployment, asset prices, credit or any of the considerations that people sometimes argue that the Bank should pay more attention to.  But since these respondents aren’t monetary policy experts, we can assume they don’t just have in mind minor technical rephrasing on some clause or other in the PTA.  There must be some genuine angst in CEO-land about how monetary policy is being run.

Without more follow-up questions, it is hard to know what the balance of thinking among respondents was.  Some will probably will favouring lowering the inflation target, to bring the target into closer alignment with actual inflation outcomes in recent years.  Perhaps some favour linking monetary policy and the Bank’s regulatory powers more closely.  Some might be channeling stuff they read from abroad suggesting a new approach to monetary policy is needed, with little real sense of what a different approach might look like (no other country having changed its framework).  But others might be reflecting more of a Labour/New Zealand First unease about the framework, emphasizing perhaps international competitiveness, or more of a focus on full employment.  Perhaps some are just reacting to the failings of the current Governor in conducting policy?

We don’t know what the balance is, but the survey result does feel rather like a straw in the wind, something for the powers that be to focus on as the negotiation of the new PTA next year approaches.  The latent unease among business leaders –  whatever motivates it –  reinforces the argument I’ve made here several times in the past that the process leading to negotiating a Policy Targets  Agreement really should be a much more open one.  The PTA is the principal guide to short-term macroeconomic management in New Zealand, for five years at a time, and yet it is a process shrouded in secrecy from beginning to (well after the) end.   There was no public consultation on the changes to the PTA in 2012 (or those in 2002), and even after the event the Reserve Bank has refused to release background papers relating to the PTA negotiation.

Perhaps none of this matters very much if there is a strong consensus in favour of the status quo –  although even then it is as well to have to articulate the case from time to time, and deal with the challenges, even if they come from only a small minority of voices.  But this time, according to this survey, a plurality of business leaders favours changing the PTA.  Regulatory agencies have to publish consultative documents on proposed changes. New legislation has to be worked through a select committee. The government publishes a Budget Policy Statement setting out in advance the key considerations that will shape its subsequent Budget.  But there is nothing remotely similar around the key policy guide to short-term macroeconomic management, the PTA.  Democratic deficits abound in matters relating to the Reserve Bank, but this is one that could be quite easily fixed.    As part of the lead-up to next year’s PTA, the Minister of Finance should announce that the Treasury will be hosting a workshop/conference, perhaps around six months from now, to consider papers on the appropriate content and structure of the Policy Targets Agreement.  Several background papers could be commissioned, the Reserve Bank and Treasury themselves might submit papers (with some caution about those from the Reserve Bank, given that it is the institution whose conduct the PTA is supposed to shape, and hold to account), and outside experts (academic and otherwise) and interested parties could be invited to contribute.

No doubt some would worry about “upsetting the markets” but (a) this is a democracy, and one that often espouses the importance of open government and (b), as importantly, markets can read too.  The Mood of the Boardroom results are no secret, and nor is the unease that most Opposition parties feel about the New Zealand monetary policy framework.  Nor, for that matter, is the ongoing international debate about how best ot run monetary policy in future a secret.

To be clear, I am not myself advocating material change.  If I were starting from scratch, I would rewrite the PTA at about half its current length, but would not change any of the central features of the current document.  That isn’t because the current system is perfect, or likely to be the end of monetary history (the system we still have 100 years hence), but because the case for any real-world alternative has not yet been made compellingly.  And because I think getting the forecasts more accurate, and reforming the governance of the Reserve Bank –  including getting the right people running the place – are more important than tweaking the target.

I was, however, interested in one of the Herald survey’s advocates of changing the PTA.  Don Brash, former Governor of the Reserve Bank, was included in the survey as chair of ICBC, one of the Chinese banks operating in New Zealand.  Don is quite clear in his view that

over the longer term monetary policy can’t significantly effect an improvement in real economic growth or employment.

But, he argues,

And the Government should probably either reduce or widen the inflation target band. It’s not obvious to me that an average movement in the price of goods and services (as measured by the CPI) of say 0.5 per cent a year should be regarded as a serious problem to be solved.

“There’s not much evidence of people holding off spending because the CPI is at current levels,” said Brash

I think Don Brash is just wrong on this one.

First, he ignores the extent to which the unemployment rate (just over 5 per cent) is still above the natural or sustainable rate in New Zealand –  estimated by Treasury at around 4 per cent.  Very low inflation is not necessarily a problem in itself, but it can point to an extent of unused capacity in the economy.  That is most obvious in the unemployment numbers, but is also reflected in just how weak per capita GDP growth has been in the current upswing.  We simply could have done better.

But my bigger concern is about what lowering the inflation target would do to our capacity to cope with future severe economic downturns.  I’d be happy, in an ideal world, to lower the inflation target, back to perhaps 0 to 2 per cent per annum (there are some modest upwards biases in the CPI measure of inflation).  Apart from anything else, the closer to price stability the economy averages the less distortionary the tax system is.

But…the rest of the advanced world has spent the last decade discovering the limitations of conventional monetary policy.  With current technologies, laws, and central bank practices, no one thinks that nominal policy interest rates can be cut much below zero (something around -0.75 per cent seems to be accepted as near a practical floor).  Fortunately, New Zealand hasn’t faced those constraints yet.  We had to cut the OCR as much as almost anyone in the advanced world, but since our interest rates have averaged so much higher than those in other countries, the OCR hasn’t yet fallen below 2 per cent (and even the doves don’t think it needs to go below 1 per cent).

As the Reserve Bank has noted, weak inflation over recent years has been accompanied by falling inflation expectations.  But those inflation expectations have typically fallen quite sluggishly, partly because people still seem to think that eventually inflation will get back to something around 2 per cent.  If the target was changed, to say 0 to 2 per cent, they would have no reason to expect inflation to average anywhere near 2 per cent, and their expectations (explicit and subconscious) would be revised down towards 1 per cent.  All else equal, that would amount to an increase in real interest rates –  and to prevent inflation falling further, nominal interest rates would have to be cut even more.

In typical downturns in New Zealand, the OCR (or the 90 day bill rate pre 1999) have been cut by hundreds of basis points (500 basis point falls haven’t been unusual).  Even with an inflation target centred on 2 per cent, we don’t have anything like that sort of leeway when next a recession hits New Zealand.  We would simply be foolish to give away any of the capacity we do have by cutting the inflation target now.  Of course, if the government, the Treasury and the Reserve Bank were finally going to get serious about taking the sort of steps that would largely remove the near-zero bound on nominal interest rates it would be a quite different matter.  But this issue need to be taken seriously in any discussion of future PTA options.

 

 

 

 

 

 

Labour and housing supply liberalisation

In a post the other day, I noted in passing that the political Opposition parties seemed to be as lacking as the government in any serious ideas or analysis as to how New Zealand’s dismal post-war economic performance might begin to be reversed.

That prompted a commenter to suggest that the Labour party did seem to be offering fresh ideas for dealing with the housing market, drawing my attention to a recent substantial post by Labour’s highly-regarded housing spokesperson Phil Twyford.  Twyford’s post is written with a left-wing audience in mind, but for anyone interested in housing policy issues it is worth reading.

There have been some encouraging words, at times, from Twyford on getting at the root cause of the housing problems –  the pervasive land use restrictions imposed or facilitated by central and local governments of both parties that have driven what should be quite a cheap product (suburban land) into one of the most expensive around.  It isn’t just a New Zealand phenomenon, but one seen in the United Kingdom, Australia, Canada, large chunks of the United States, and no doubt plenty of other non-Anglo parts of the advanced world.  Deal to those restrictions and houses will be as affordable as they still are in many other parts of the United States, or as they used to be here before the planners (bureaucratic and political) got control.

Twyford goes as far as to say that

The next Labour Government, led by Andrew Little, will be defined by how we respond to the housing crisis.

Of course, the current housing “crisis” got underway under the last Labour government  –  and neither that government, nor the current National-led government, have done anything much structural about it.

I’ve been a bit skeptical about quite how serious Labour is about structural reforms to make the housing market work better over the longer-term.  Unfortunately, Twyford’s latest piece doesn’t give me any reason for greater optimism.

He outlines a five point plan, as follows:

  1. “Bring back active government again” –  which means having the state building lots of houses for first-home buyers
  2. Tax changes

    (“We are going to tax speculators who sell a rental property within five years

    We are going to shut down the tax breaks that allow speculators to write off their losses.”)

  3. Restrict foreign buyers  (“We will ban non-resident foreign buyers from buying existing homes. And we will review the immigration settings to find a better balance between the country’s need for skilled workers and the impact on housing and the labour market”).
  4. Free up the planning system
  5. Build lots more state houses

     

Sure enough, doing something about the planning system is on his list, but (a) it is a long way down the list, and (b) it is the shortest section of any of those in his post.  Here is the total of what he had to say on the topic

4. We should be pragmatic about finding solutions and willing to adjust our policies when the facts change.

The right have constantly blamed Councils and planning laws for expensive housing. The left has always reflexively defended planning. But it’s a fact that restrictive land use controls have stifled building, and choked off the supply of land driving up prices.

We will reform the planning system so it can both protect the environment, while allowing us to build more and build better.

Which is fine, I guess, but says almost nothing of substance at all.  It has the feel of a ritual incantation –  feeling the need to acknowledge the point –  rather than being any sort of centrepiece of a housing reform programme.

Some of the other things on Twyford’s list may, arguably, be useful, or not harmful, in a transition (I’ve argued myself that if governments won’t/can’t reform the planning system they should pull back on immigration targets to give young New Zealanders more of a chance), but none get to the heart of the issue: allowing individuals and firms, and private markets, to much much more easily build houses in locations, and of densities, that suit them.

I hope I’m wrong.  Perhaps Twyford just felt the need to play down the market-oriented reforms because of his left-wing audience, but even if so that hardly fills one with confidence that his party has grasped where the fundamental problem is.

So I’m skeptical.  And for a number of reasons.  First, and a point I’ve made often before, there has been no case anywhere –  here or abroad – that I’m aware of where once the planning mentality has taken hold it has been enduringly unwound.  Perhaps the debate is a little further advanced in New Zealand than in some places –  although even the Obama Administration has made good, and sophisticated, noises on the importance of the issue –  but I see little reason to hope that New Zealand is about to lead the reforms.  At other times, and on other issues, New Zealand has been a reform leader, but there is no sign of any such appetite this decade.  Bad ideas and bad policies usually get discarded eventually, but it can take a very long time.

And for all the talk about the housing crisis, the National Party remains pretty popular.  It could well lose the election next year –  lots can happen in a year – but right now there is little evidence of a popular groundswell demanding far-reaching change.  For all the talk, bread and circuses –  and a few small measures to temporarily paper over specific cracks – seems to be enough to distract the populace.

And whatever the Labour Party genuinely thinks, if it should lead a government after the next election, it seems most unlikely that Labour will overwhelmingly dominate the government.  Perhaps they will have two-thirds or even three-quarters of the seats, but the Greens, and/or New Zealand First would have the rest.  In such an arrangement, each party has to decide what really matters to it, and what they can trade.  Perhaps far-reaching liberalization of planning law will be one of those things for Labour, but Twyford’s speech content doesn’t give one much confidence of that.  And the Greens aren’t known for supporting the physical expansion of our cities, or allowing markets to make such choices.  The other items on Twyford’s list look much more like the sort of stuff Labour and the Greens could happily agree on as a common housing policy: suppress demand, further mess up the tax system, and fall back on government as a chief provider of new housing.

And lest anyone think this is just an anti-Labour piece, it is also worth remembering that Opposition parties have talked a good talk on fixing the housing market before.     The National Party used a parliamentary select committee to run an inquiry into housing affordability in 2007 –  over the objections of the then Labour government –  and went into the 2008 election suggesting that it would fix the system.  Despite dominating all three governments since then, almost nothing has happened –  just more first home buyer subsidies, various demand suppression tools, and now talk of large government house-building programmes.

Labour and National are almost equally to blame for the mess we are in –  although of course, any incumbent government has to take a bit more of the blame.  But, no doubt, neither has done any far-reaching reform because there just isn’t the public demand for it –  and because neither really believes it enough to (a) properly prepare the ground, and (b) take some political risks and expend some political capital in a cause they think would genuinely advance the long-term well-being of New Zealanders.

I’d like to think I was wrong, and that Phil Twyford’s words really do foreshadow a Labour-led government that would lead a process of substantially freeing-up the housing supply market.

But if Labour is serious, perhaps they should think about the leadership opportunities they now have in local government.  Of our three largest cities, two now have Labour mayors, and the third has a mayor who was a former Labour Cabinet minister.  Central government might be an enabler of the land use restrictions, but it is local governments that put, and keep, the specific rules in place.  And local governments could lead the charge in removing those rules, freeing up land use restrictions in ways that could make a real difference.  Those three mayors can’t do everything in just a year, but if Labour is serious about liberalizing land use restrictions, Justin Lester, Phil Goff, and Lianne Dalziel could surely go quite some way before next year’s General Election to show us that Labour is serious about this stuff.  Sure, mayors don’t control councils, and only have one vote, but they have a  fresh mandate, and a bully pulpit (media cover mayors), and they lead our three largest cities.

Sadly I don’t expect much.  Here is the housing policy of the new Labour Party mayor of Wellington.

For starters, I’ll be sending a bill through to parliament to make rental WoF a reality in Wellington. If you’re paying rental for a house it’s only fair that house meets basic standards. Living in a warm, dry house that’s free of mould should be a right for every Wellingtonian.

I’ll also invest in social housing, so there’s more available for the people who need it most. This means a long term building program, partnering with third sector housing providers to increase the number of live-to-own dwellings. It also means improving the 2500 existing Wellington council owned social housing units, making them safer and better to live in. 

But that’s not enough. It’s vital that we look after those in need, but we also want Wellington to grow and prosper. That’s why I’m offering a $5000 rates rebate for anyone building their first home in Wellington. Newer homes means better quality homes, and Wellington needs to encourage fresh young talent and new families to move here if we want to keep thriving. 

Plus, I’m committed to establishing Build Wellington, an urban development agency that will utilise existing green-field land holdings for affordable, good quality residential development in the tradition of state and Council housing in years gone by.

Nothing, at all, about freeing-up land supply, just more statist “solutions”, and a local version of the sort of first home buyer grant central government offers –  the sort of tool that has been proved, time and time again, to do precisely nothing to improve housing affordability.

For those interested in housing policy and urban planning issues, I’ve been meaning to draw attention to the  stimulating new website/blog Making New Zealand

 

 

 

 

 

Not a recommended way to raise the export share of GDP

Flicking through the World Bank data for the previous post, I noticed Greece.

greece-exports-to-gdp

A very substantial –  10 percentage point –  increase in the export share of GDP in just a few years.

Unfortunately, of course, almost all the action is in the denominator.

Here is real GDP for Greece –  not per capita.

greece-gdp

And here are real exports.

greece-exports

Domestic demand collapsed, and there just hasn’t been much real improvement in competitiveness (or probably policy certainty, of the sort that might encourage much new investment).

Boosting exports: the exchange rate really matters

I noticed the other day a short piece on Treasury’s blog, written by one of their very able analysts, Mario di Maio, headed “How to get an export take-off“.  It appeared to be prompted by the government’s now long-standing target to raise the export share of GDP by 10 to 15 percentage points by 2025.  As I’ve noted before, the general sentiment behind the goal is probably broadly sensible –  successful economics typically trade more (imports and exports) with the rest of the world.  After all, the rest of the world is where the bulk of potential customers/suppliers are.  Of course, the problem with this particular goal is that (a) it doesn’t look as though it is going to achieve itself (good bureaucratic technique can include setting goals for things that were likely to happen anyway, and then claim the credit when they do), and (b) the government is doing absolutely nothing to bring about the sort of transformation of the economy that might reasonably be expected to lift the export (and import) share of GDP.  It is an old line, but no less true, that it is pretty crazy to keep on doing the same old thing, and expecting a different result.   So perhaps they don’t really expect a different result….and perhaps they don’t even care greatly, as by 2025 no doubt the government will have changed, perhaps more than once, and Key, Joyce and English will be doing something else (as Clark and Cullen –  who had similar vague aspirations –  are now).

The Treasury note is worth reading. It takes a quick look at some countries (all now advanced) that have achieved a 10 percentage point increase  in 10 years in the export share of GDP over the last 50 years or so.  The author finds 14 such countries, and has a quick look for any common factors.  Perhaps not surprisingly –  in a note of three pages of text – he doesn’t find many.  Indeed, he goes so far as to conclude

The diversity of the case studies cautions against drawing simple policy lessons from other countries for any New Zealand strategy to lift trade intensity. The diversity of approaches and circumstances means any single policy (or policy mix) would be misleading.

Personally, without a lot more background analysis –  and perhaps Treasury has done the analysis but just not published it – that seems too strong a conclusion.  If one were uncharitable, it could be seen as tending to avoid the real issues that specifically help explain New Zealand’s underperformance.  But perhaps that wasn’t the intention at all, and all they really mean is that we have to think hard about the specifics of New Zealand, and not simply latch onto one or other favoured overseas country as an example. If so, I agree.

I’m not going to use this post to pick at specific points in the Treasury note, but wanted to come at a similar issue in a slightly different way.

But first, lets remember quite how underwhelming New Zealand’s international trade performance has been.  This is a chart I ran a few months ago, comparing New Zealand and other small OECD countries since 1970.

exports small countries

The foreign trade share of GDP has gone basically sideways for almost 40 years.  It is hard –  but not impossible –  to get ahead with a performance like that.

I usually use OECD data –  as in the chart above –  but the Treasury piece used the World Bank data, which has some advantages in capturing a wider range of countries.  For some countries, and aggregates, they also have data going a bit further back.

Here is the World Bank’s estimate of exports as a share of GDP, for the whole world and for the OECD, back to 1960.

exports-as-share-ofg-gdp-world

Over the 40 or so years when the export share of New Zealand’s GDP has barely changed, that for the OECD and the world as a whole has increased by between 10 and 15 percentage points.  The trend –  world, and advanced countries –  has been strongly upwards, and somehow we’ve managed to defy that trend.    Not all of that growth has been in export value-added, some has been the rise of global supply chains and the increased cross-border trade in componentry –  something that is never likely to be a feature of remote countries’ trade –  but that isn’t the bulk of the story by any means.

From the World Bank’s data, I picked out the advanced countries (OECD plus a few others), the emerging Asian countries, and Latin American countries (the latter mostly because they fascinate me, but also because they add a large number of countries that have underperformed for long periods).  The official New Zealand export data start in 1971, so I had a look at how the export shares of the countries I had data for had changed from 1971 to 1975 to 2011 to 2015.  Using five-yearly averages gets rid of some of the noise that arises from short-term exchange rate or commodity price fluctuations.  Data don’t go back that far for most of the former Communist countries of Eastern Europe, but I was still left with a sample of around 45 countries.

Over that period, New Zealand’s export share of GDP had increased by 5.9 percentage points.  Nine countries had had less growth in their export share than New Zealand.

Change in export share of GDP : 1971-75 to 2011-15  (percentage points)
Costa Rica 5.70
South Africa 5.00
Japan 4.80
Brazil 4.30
Guatemala 3.70
Israel 2.90
Norway 2.80
Colombia 2.50
El Salvador -3.50

Of those countries, only Norway could be counted as am unambiguous economic success story over that period.  All the others –  like New Zealand –  were underperformers at best.  One might make an exception for Japan –  until the late 1980s its economic performance was very strong – but then it is also worth remembering that at the start of the period exports as a share of GDP in Japan were only around 10 per cent of GDP (less than half of the export share in a small country like New Zealand).  Over the period since the early 1970s, Japan has increased the export share of GDP by almost 50 per cent (from around 10 per cent to around 15 per cent) while the increase from New Zealand has been only around 25 per cent.

The Norway experience is a reminder that a large export (and import) share of GDP is not a necessary conditions for a sustained acceleration in economic (and income) growth.  Then again, countries can’t count on discovering a huge new extremely valuable natural resource as a basis for improved prosperity.  Typically the path to prosperity involves firms finding products and services they can sell successfully to the rest of the world. We’ve failed on that count, and that shows no sign of changing.

Although Treasury seems to want to play down the importance of the real exchange rate, I think that in the New Zealand context it is much more important than they suggest.   One can never sensibly think of the real exchange rate is isolation from what else is going on in the economy.  A country with fast productivity growth might find that its export share of GDP is growing even as the real exchange rate is high or rising –  such is, say, the quality of the products or services firms in that country are selling.

But as everyone knows, New Zealand’s productivity performance over decades has been lousy, among the very worst in the advanced world.  Sure we have a few years from time to time when things don’t look too bad, but the multi-decade pattern of underperformance is clear and shows no sign of reversing.  Against that backdrop, it seems not just plausible –  but entirely reasonable –  to suggest that a real exchange rate that has been high or rising (rather than weak and falling) will, in the specific context of New Zealand, have been the main proximate contributor to the weak foreign trade performance (exports and imports).

I ran this chart recently.  It only goes back 20 years, but over longer periods the picture is much the same.  Our relative productivity performance deteriorated, but our exchange rate didn’t sustainably fall.

real exch rate

That sort of pattern typically happens only when some sort of domestic demand pressures keep holding up the real exchange rate (and domestic real interest rates).  In a country with a modest national savings rate, government policies that result in rapid population growth are an example of just such a pressure.   It is hard to foster an environment in which exporting is profitable/attractive when so much resource constantly needs to be devoted to meeting the (individually entirely reasonable) needs of a rapidly growing population.

Of course, “the exchange rate” can’t be fixed in isolation.  It is a symptom of what else has gone wrong with the policies of successive governments.  But like the old canary in a coal mine, the persistently strong exchange rate –  in a country of such persistently weak productivity growth –  is supposed to be a warning signal that something about economic policy is very wrong.

But why would we be surprised that nothing changes?  The Opposition appears to have no compelling analysis or ideas, and we have a government run by a Prime Minister who in a recent interview declared that

Where would chairing the UN Security Council rank in your career highlights?

Right up near the top

I guess when there have been eight years of no substantive economic reform, no progress in improving the relative performance of the New Zealand economy, no progress in reversing decades of relative economic decline –  just the pretence that somehow we are a global economic success story –  we shouldn’t be surprised that chairing an ineffective meeting of foreign officials and ministers, dealing with an intractable problem in a far-away land, counts as some sort of career highlight.

Young New Zealanders, facing unaffordable houses, and  the prospect of growing up in a country slowly drifting ever further behind, might perhaps have hoped for something rather more tangible rather closer to home.

 

 

 

 

 

Envy of the world, or middling at best?

Over the last couple of months I’ve lost track of the number of comments I’ve seen, from outlets that really should know better, suggesting that New Zealand’s economy at present is the envy of the world.  Radio New Zealand’s Checkpoint seems a particularly egregious offender, but that might just be because I often have it on while I’m making dinner.  But I’ve seen similar lines in the Herald, from Business New Zealand and a variety of other outlets.

The people running this line, when they aren’t just running propaganda, seem constantly to lose sight of just how much of our real GDP growth –  itself not that impressive by the standards of previous growth phases –  is accounted for by our very rapid population growth, in turn the result of our large (but fairly stable) inward immigration programme, and the reduction in the net outflow of New Zealanders.

Quarterly real per capita GDP data isn’t easily available for many countries, but the other day the IMF released its latest World Economic Outlook.  I had a look at how New Zealand is estimated to have performed over 2013 to 2016 relative to the IMF’s set of advanced countries.  Over this period, only two of these countries –  Israel and Luxembourg –  are estimated to have had faster population growth than New Zealand.

real-pc-gdp-growth-2013-to-2016-weo

Of course, we only have hard data to mid 2016, and even that will be subject to revision for some time.  But that is so for all these countries too.  Take the last three years together and New Zealand just doesn’t stand out.  It isn’t necessarily a bad performance (relative to other advanced countries over this period), but nothing much to write home about, absolutely or relatively.  And recall that we don’t exactly have the highest level of GDP per capita among these countries –  the aim, for decades, has been to catch up with the rest of the advanced world.  Over this three year period, we’ve made no progress at all.

We’ve had things working for and against us over that period.  The terms of trade have been high, but fell back quite a way from the peak, especially dairy.  We’ve had a significant boost to demand and activity from the Christchurch repair and rebuild process.  We’ve had a big (largely exogenous) boost to tourism, and a significant boost to export education.  We’ve had no constraints (other than self-imposed ones) on our ability to use monetary policy flexibly.  And we’ve had a massive boost to demand from the unexpected rapid growth in the population.  And yet, once again, we’ve made no progress in closing the gaps.

And, of course, our productivity performance in  recent years has been even worse.

real-gdp-phw-oct-2015No productivity growth at all in the last four years or so (even ignoring the last observation, where there is an unfortunate discontinuity in the HLFS hours worked series).

New Zealand the economic envy of the world?  I think not.