I went along yesterday to a Treasury guest lecture, to hear from one of great figures in the history of New Zealand economic policymaking, Sir Roger Douglas, and his co-author Auckland University economics professor Robert MacCulloch.   Their presentation was based on a recent paper proposing a wholesale reshaping of New Zealand’s tax and welfare system.  I’ll get back to that.

Roger Douglas is 79 now, and if his voice is weaker than it was once way, his passion for a better New Zealand is as clear as ever.   In his brief remarks, there was more evidence of a passionate desire to do stuff that would make for a more prosperous, and fairer, New Zealand than one is likely to hear from our current crop of political leaders in an entire election campaign.

I very much liked the fact that they started their lecture with a chart of real GDP per hour worked (my favourite productivity indicator) for New Zealand and other OECD countries.   Things are, very much, not okay economically was the intended message.   Music to my ears.

Unfortunately, given that they made quite a bit of the graph, they got the wrong chart.

What they showed was something very like this.

Both speakers made something of it, telling of a large gap that opened up in the Muldoon years, but which then closed substantially again following the reforms of the 1980s and early 1990s, only to resume widening again in the last 15 years or so (when, as they noted, no politician has been willing to do any significant reforms).

But the chart looked a bit odd to me, and I wondered about all the new –  mostly poorer –  countries that had entered the OECD in the last couple of decades.

Sure enough, when I got home and dug out the data myself, it became clear that what they (or whoever prepared the chart for them –  I think they mentioned the Reserve Bank) had done, was simply to average the real GDP per hour worked of whichever countries the OECD happened to have data for in any particular year.  That is how I produced the chart above.

Unfortunately, in 1970 when the chart starts. the OECD had this data for only 23 countries.  By 2015 it had data for 35.    The odd rich country (Austria) was missing in 1970, but so were almost all the emerging markets and former communist eastern European countries now in the OECD (several weren’t even separate countries then).   It is only since 1995 that the OECD has had data for all 35.

So here is another way of looking at the chart.  The extra line is the average real GDP per hour worked for the 23 countries the OECD did have data for in 1970 –  a fixed panel of countries throughout the whole period.

And here is how New Zealand productivity (on this measure) has performed relative to the OECD.  I’ve shown both the measure relative to the average of the OECD countries with data for the whole period, and relative to the full sample of countries for the period since 1995 when data are available for all of them.  Remember that most of the new-joiners are poorer than us, so the orange line is above the blue line.

There has been the odd good year here and there – and a few phases (including, actually, the Muldoon years, and the last decade) when we’ve gone sideways – but over the entire period since 1970 there has never been a phase when, on this measure, we’ve done consistently better than the group of other OECD countries.  The pretty clear trend has been downwards.

I really wish it had been otherwise – not just because it is my country too, and I care about its fortunes, but because I supported a great deal of the reforms that were done (and which I still consider were mostly to the good).    But even if the reformers expected, and hoped for, something better –  some closing of the gaps –  it just hasn’t happened.

I probably wouldn’t make much of it on this occasion, except that (a) Sir Roger is an eminent figure, and (b) the presentation yesterday, and the (no doubt unintentionally)  misleading slide, was being presented to quite a large crowd of past and present econocrats.

However, the main focus of the Douglas/MacCulloch presentation was a proposal for a radical reshaping of the tax and welfare system.  There is a nice accessible summary here (which includes a link to fuller versions).   The gist of the proposal is as follows:

• much lower income tax rates,
• a lower company tax rate (and eliminated “corporate welfare”), and
• higher GST

But, “in exchange”, people have to contribute a set proportion of their income  (and there is an employer contribution too) to dedicated private accounts for:

• health
• risk events (unemployment, disability etc)
• superannuation

There are lots of details, but on health everyone would have to buy an insurance policy against catastrophic events (anything more than $20000 per annum) and would have to meet other expenses either from their own health account, or if that was exhausted from direct government funding.  Something similar applies to unemployment: your risk account is your first line of support, but if that is exhausted the government remains provider of last resort.

For retirement income, if I understand the scheme correctly, in many ways it isn’t much different than what we have now:  a universal basic state pension, on top of which is private savings (including through Kiwisaver, although as they note Kiwisaver isn’t compulsory and their retirement accounts would be).  The difference is that the age of eligibility would be gradually raised from the current 65 to 70.

It would represent a massive rejigging of the system.  They argue that, in respect of health, it is largely the Singaporean model, and in Singapore health outcomes are very good and health expenditure (public and private) as a share of GDP is remarkably low. I don’t know enough about the Singaporean system to comment further, including whether it is likely to be replicable elsewhere.

There are all sorts of potential practical and philisophical problems.  I wouldn’t rule out the possibility of some real benefits, for some people in time, or even more generally.  But Douglas and MacCulloch argue that it is a politically feasible way to get necessary reform going again.  And on that –  fairly critical – count I’m sceptical.

In a fuller version of their paper they state

Most of the long-term reduction in government spending under the “Savings-not-Taxes” regime comes from the following sources. First, pension spending drops from $28.1b (under the existing system) to $17.4b (under the new regime) due mainly to the rise in the retirement age from 65 to 70 years old between 2015 and 2035. Second, there are the cuts in ‘corporate welfare’ and interest-free loans and grants to students from high-income, high-capital families.

In other words, huge changes to the entire tax and welfare system, to get the NZS age up from 65 to 70, to get rid of what they describe as (and I agree with them) as “corporate welfare” (film subsidies, Callaghan funding and so), and to eliminate interest-free student loans and related support to high income earners.

In the question time, I asked why they regarded the sweeping change as more politically feasible than simply focusing on those three items.   I guess I sort of knew how Douglas would reply –  it was a variant of a line he has used for many years, about doing lots of changes which can (a) distract people,  but (b) provide an opportunity for everyone to benefit in some area.  But I wasn’t really persuaded.  They argue, for example, that people from high income families currently getting interest-free student loans would benefit from the lower tax rates in the Douglas-MacCulloch plan.  Fair enough I suppose.

But the big money is in NZS cutbacks.  It isn’t clear how the people who are most uneasy about raising the NZS age –  the current middle-aged –  are likely to benefit systematically very much from anything in the Douglas-MacCulloch package.  Any gains/savings would be probabilistic at best (especially as health expenditures rise with age), and the potential personal losses (five extra years without NZS) certain and specific.     I think change can and will be made –  governments in the 1990s did raise the NZS age by five years, and got re-elected –  but I don’t see how the huge “throw everything in the air” approach really helps.  Grey Power, and Winston Peters, will be quite capable of seeing through to the bottom line.

Similarly, corporate welfare is a real scourge.   But how does reforming the tax and welfare system on a large scale make it easier to, first, scrap those provisions, and then later resist the endless pressures that will come from various loquacious vested interests to put them back in place?  I just don’t see it.    It looks like an approach that, rather than making major savings more feasible, would simple multiply the number of enemies the reformers would make.

All that said, and sceptical as I am, it was good to see a serious plan outlined by people who really care.  And credit goes to The Treasury for hosting the event.

(In passing I’d also add that one thing I really like about the package is that it would put sickness, disability and accidents all on the same footing).  

In many respects, the saddest line of the day was one made almost in passing by Professor MacCulloch.  He told us that he administers a fairly generously-funded visiting professorship at the University of Auckland, which aims to bring in distinguished or innovative, leading international thinkers to contribute to policy debate and development in New Zealand.    But the last three people who had been invited had declined the invitation to come.  There was, so far as they could tell, nothing bold or interesting on the table here, no real prospect of significant reform, or interest in it from our political leaders.

Things were very different, in that regard, 20 or 30 years ago.  It is not as if, sadly, we have in the interim solved all our problems, and re-establishing a position as a world-leading economy,  or a world-leader in dealing with the various social dysfunctions.  We just drift, and allow our elites to tell themselves (and us) tales about how everything is really just fine.

Last week I’d been discussing house prices etc with a couple of friends whose kids are a bit older than mine, of an age where they might in years gone by (not that long ago) have been thinking of buying a house.   As one noted, they didn’t know what to advise their kids.  Another talked of the seeming inevitability of parental assistance –  which, in many families, isn’t much of an option.  I know of another friend who decided that parental assistance was probably inevitable, so bought another house himself so that at least his position was hedged –  if house prices went down, so would the needs of his kids, and if they stayed high or rose further, there would be some additional wealth in the inflated value of the additional house.   When this week’s Listener reports yet another poll suggesting housing is the most important issue going into this year’s election, we can’t be the only one having these sorts of conversations.

And then I found a Labour Party election pamphlet in my letterbox.  There was a lot of text, but on only two issues –  health and housing.

Jacinda says everywhere she goes, one topic keeps coming up: the housing crisis.  “National has failed on housing.  People are worried that they or their kids won’t ever be able to get on the property ladder.

Andrew can relate –  he’s concerned about what the future holds for his 16-year-old son, Cam. “I want Cam and his generation to have the same opportunities I had, and more.  But it’s getting so much harder for young people to buy a house. I worry that Cam and other young New Zealanders won’t ever be able to afford their own homes.”

That struck a chord with me.  Partly because my (slightly younger) son knows his son.  But also because my own first house was about 50 metres from Little’s current house which, according to a recent Herald article, is approximately valued at $920,000.  I walk past both houses most days.   It isn’t a fancy neighbourhood by any means –  pleasant, but not fancy.

I bought my own first house in December 1988 –  which I guess is almost thirty years ago, although in many ways it seems just yesterday.   I paid $152000 for it, which at the time was less than twice my income.  The Reserve Bank’s inflation calculator says that is roughly $287000 in today’s money.  I looked up the same website the Herald used to get a value for Little’s house.  It estimates –  who knows how accurately –  that my old house is now worth around $800000.        The current owners have extended it a bit, but it is still a three bedroom house, and the bottom outside walls of the garage have rusted a bit more than they had in 1988.    But then productivity has risen since then –  real GDP per hour worked is up around 35 per cent –  and with it earnings across the economy.

I’m not sure what the Reserve Bank now pays people who’ve been managers in their economics areas for just over a year (that was me in December 1988), but I’m quite sure it isn’t anything like $400000 a year –  recall that I paid less than twice my then income for the house.  In fact, in the Reserve Bank’s Annual Report last year, only four people were getting paid at least that much –  the Chief Economist looked to be receiving just over $400000 per annum.  It brings back memories of a training course I did at the Swiss National Bank in 1990, where they told us that house prices in Berne were so high that only the most senior managers could afford to purchase their own house.  I still recall the astonishment I felt, and never imagined it would be like that in New Zealand.

On Monday the Herald ran their regular supplement of QVNZ house values across all the different suburbs and localities in the North Island.    Island Bay median prices have now, apparently gone just over $800000.  No doubt that still seems quite cheap to Aucklanders –  although I did find one North Shore suburb (Birkdale) that was cheaper –  no one much else in likely to find them so.  In the whole of fast-growing Hamilton and Tauranga, only one suburb is that expensive.

Which brings me back to Andrew Little and the Labour Party.  I’m quite happy to take him at his word on his concern for his own son.   But what does it amount to?  It isn’t that long since Little told us (and here) he didn’t want house prices to fall.

But asked if he welcomed signs Auckland house prices were falling, Little said no.

and

“Having the right number of houses, or closer to it, stabilises prices, it doesn’t collapse prices.”

Labour has a list of policies on housing (I’ll come to them in a minute) but are they simply supposed to stop already unaffordable houses getting ever-more unaffordable?

As I’ve noted before, if nominal house prices stayed flat from here, then even if productivity growth picks up quite a bit, it would still be 20 years before house price to income ratios halved from here. It isn’t much of an answer for today’s generation of twenty-somethings, let alone 16 year old Cam.

Flat house prices –  while better than what we’ve had –  just shouldn’t be regarded as an acceptable outcome after the house price inflation of the last 25 years.  I know people who have bought recently, taking on lots of debt to do so, get very uneasy about house prices falling but (a) that is a minority, (b) an increasing number of those buying recently have been quite tightly constrained by LVR limits, and (c) perhaps most importantly, there has never been an economic reform where there were no losers.   Yes, the more people who have entered the market on prices that assume the continuance of regulatory restrictions, the harder it is to undo those restrictions, but the restrictions themselves are pretty morally indefensible in the first place (just like those that had us assembling TVs or cars, or making kids clothes, in New Zealand at vast expense to consumers).

I suspect there is an element of the concern is a worry –  derived from, say, the US and Irish experience last decade – that any significant fall in house prices is somehow economically disastrous.   When a sharp fall in house prices results from massive over-building, and a serious misallocation of credit, that is probably a quite reasonable concern, especially when (as in Ireland) the authorities have no monetary policy leeway to offset the fall in demand associated with the housing slump.    It is a quite different prospect if the falls in house and land prices arise because regulatory restrictions are unwound –  if anything that would be likely to stimulate building activity –  in a country which has its own monetary policy and exchange rate.   That is what could, and should, be done in New Zealand.  We certainly don’t have a problem of an oversupply of new houses.

But what is Labour proposing?  After the Labour Party conference last month, I expressed concern that in a speech largely devoted to housing, Andrew Little had not mentioned at all freeing up the urban land market.  Labour’s housing spokesperson, Phil Twyford has been good on this stuff (and there is still reference to it in the policy documents on the website)

But in the entire speech –  and recall that most of it was devoted to housing –  there was not a single mention of freeing up the market in urban land, reforming the planning system etc.  Not even a hint.    I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause.   But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence.     Planning reform isn’t going to be easy.  Few big reforms are under MMP.  It probably isn’t something the Greens are keen on.  And if the putative Prime Minister isn’t on-board, hasn’t yet internalised (or even been willing to simply state it openly) that this is where the biggest problems lie, it is hard to believe that a new government would really be willing to spend much political capital in reforming and freeing up the system, no matter how capable, hardworking and insightful a portfolio minister might be.

So when the Labour pamphlet landed in the letterbox, I looked to see what Labour was going to do about housing.   The four point plan from Little’s speech, was now reduced to a two point plan (ok, so it is a pamphlet and there is less space)

• building more houses themselves (“affordable” ones)
• crack down on foreign speculators

There was also a pledge on “healthy rentals” but, whatever the merits of that, it isn’t going to make housig more affordable.

Perhaps I just don’t get out much, but I’ve seen very little talk of “foreign speculators” playing much of a role –  any in fact –  in the Island Bay market.  They explain, almost certainly, precisely nothing about why my humble first house is valued at roughly three times (in real terms) what I paid for it.

But more importantly there is nothing, not a hint, in the entire pamphlet of freeing up the urban land market.   Sure, one could mount an argument that it might be hard to put that sort of promise into catchy phrases that attract the attention of potential voters.  But that is why you employ marketing people isn’t it?  And successful political leaders find ways of putting their vision into language that resonates with ordinary people.

It all leaves me deeply discouraged about the prospects for meaningful change.  No one else seems to have managed it, and now Labour –  after toying with ideas of reform –  seems to be getting cold feet, and won’t campaign on freeing up the land market.   The outlook for 16 year old Cam isn’t great, and neither it seems is that for my kids.  As I reflected on the friend who wasn’t sure what to advise his kids, I noticed in the Herald house prices supplement that median prices in my old childhood home, Kawerau, were still only $181000.   My younger daughter wants to be a primary school teacher.   She has been hanging around me too long because when we were in the Bay of Plenty on holiday over Christmas I was reading out Kawerau house prices, and her immediate reaction was “Daddy, I want to live there when I grow up”.    Perhaps in time that’s what I’ll have to advise her –  after all, there are national salary scales for teachers.  Kawerau, for all its problems, isn’t all bad as a town, but New Zealand kids surely deserve better than that.