Like many, I watched the major party leaders’ debate last night. It was civil and courteous, playing the issues rather than the person. So far, so good. But sadly neither leader seemed to offer anything very substantial on fixing our pressing economic challenges, or even show any real sign of understanding the issues. At a time when the unemployment is still well above what it was a decade ago, when the underutilisation rate for women is still almost 15 per cent…..
…when there has been no productivity growth for five years, and when the export share of GDP has been shrinking, the Leader of the Opposition seemed content to concede that the economy was in good shape. “Relentlessly positive” I suppose.
Not that the Prime Minister was having a bar of any concerns about productivity. As Newsroom put it
English dismissed outright a report from sharebroker J B Were which concluded the country had a productivity recession. They were wrong. “They are way over-stating the case. Productivity in New Zealand has been growing pretty well….
Well, you can read the J B Were piece for yourself. I did when it came out, and did again this morning. It made many of the points I’ve been making here for some time. There isn’t anything in the economic side of the report I’d materially disagree with. The data – as officially reported by Statistics New Zealand – speak for themselves on the productivity underperformance, particularly over the last five years.
I’ve run this chart numerous times before.
Not only have we had no labour productivity growth for five years, but our near-neighbour Australia – which the government was once willing to talk about catching up to – has gone on generating continuing labour productivity gains. Yes, there has been a productivity growth slowdown in much of the advanced world, dating back to around 2005. But our additional and more recent slowdown – well, dead stop really – looks like something different, and probably directly attributable to New Zealand specific factors. Things New Zealand governments have responsibility for responding to.
I’ve also shown this chart before – labour productivity for the better-measured parts of the economy, with SNZ’s attempt to adjust for changing labour quality. It is annual data, and only available with a bit of lag.
Again, no labour productivity growth at all in the last few years.
And what about multi-factor productivity growth? It doesn’t get as much attention, partly because the data are only annual, and the construction of these estimates involves quite a few assumptions. Nonetheless, here is the SNZ estimate for the (better) measured bulk of the economy.
The series is cyclical – if machines are idle in a recesson estimated MFP falls and then recovers as utilisation picks up – but looking through the recession, the estimated index level of MFP is the same now as it was 10 years previously. No growth.
But somehow the Prime Minister thinks “productivity in New Zealand has been growing pretty well”. One for the Tui billboards I’d have thought.
And all that is without even getting into the lamentable failure of governments led by both main parties to do anything about reversing the precipitous decline in levels of productivity in New Zealand relative to those in other advanced economies. Lifts in the terms of trade – experienced under both this government and its predecessor – are of course welcome, but they can’t be a credible medium-term substitute for productivity growth.
From the other side, the Leader of the Opposition’s suggestion that data on real wage growth didn’t matter, and what really mattered was how people felt, seemed almost equally risible. In terms of attracting votes, perhaps she is right. But when the Prime Minister pointed out that real wages have been rising, he was of course correct. I’m not sure why people put so much weight on the QES measure of hourly wage inflation. It has well-known problems (for these purposes) and is hugely volatile. Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.
No economic analyst thinks wage inflation is anything like as volatile as the blue line – in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.
And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.
Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it). From here, lifting productivity growth is the only way real wage inflation is going to increase, and such increases in economywide productivity really should be recognised for what they are – a well overdue imperative.
Sadly, the Prime Minister seems to want to bluff his way through, simply pretending there isn’t an issue, with no real answers as to how to (for example) lift the outward-orientation (exports and imports) of the New Zealand economy, and refusing to face the fact that productivity growth has vanished since the latest new large net migration inflow began in 2013. It won’t be the only reason why productivity growth has been vanished, but it is unlikely that there is no connection at all (and certainly the much-vaunted official and political claims that high non-citizen immigration flows are helping lift productivity look emptier than ever).
And the Opposition leader is no better. When Ardern was asked last night who was going to build the houses if immigration was cut back, my 14 year old son turned to me and asked “why doesn’t she just say that if there are fewer migrants fewer houses would need to be built”. Sadly, I could only point out that Labour’s approach to immigration actually isn’t materially different to the National Party’s. The net inflow might be a lower in the first year, but in the essentials they are two sides of the same coin. Here is what I wrote when Labour released their policy in June.
Overall, some interesting steps, some of which are genuinely in the right direction. But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy – like the government’s – remain this generation’s version of Think Big. And it is just as damaging. The policy doesn’t face up to the symptoms of our longer-term economic underperformance – the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance. None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.
And what is Labour’s solution to the economic challenges? There is lots of talk about more skills training, even though the OECD surveys suggest that our people are already among the most skilled in any OECD country. Beyond that, Jacinda Ardern was invoking the OECD – “they’ve told us what we need to do” to lift productivity and economic performance.
Well, this table is from the latest OECD Economic Survey of New Zealand, released a few months ago. On the left hand side are the “main findings” and on the right the “key recommendations”
I don’t wildly disagree with most of those recommendations – sceptical as I am of R&D subsidies. But (a) with the exception of R&D subsidies, does this look at all like Labour Party economic policy (has there been talk of the tax working group possibly proposing lower capital taxes?), and (b) more importantly, does anyone really think that these items, even taken together, are remotely enough to materially reverse the decades long decline in our relative productivity performance, that the OECD themselves highlighted?
Sadly, there was all too much of “let’s pretend” to the debate, and nothing to suggest that either side is really serious about engaging with, and delivering solutions to, the decades of underperformance, presenting now in five years of no productivity growth at all, and an economy increasingly skewed inwards rather than outwards.