What does The Treasury want to know? Not about productivity apparently

Last week I joined 80 or 90 other economists and people from related disciplines, drawn from the public sector, universities, consultancies, and think tanks, together with a few commentators, at an event organised by The Treasury.  It was billed as “Wealth and wellbeing: High quality economics in the twenty-first century”.  They were looking for input.

The symposium began with a presentation by The Treasury’s chief economist, Tim Ng, based around a paper he and a couple of colleagues had written, “Improving economic policy advice”.  That paper, in turn, built on the Living Standards Framework that Treasury has devoted a lot of effort to building and promoting over the last half dozen years or so (and which you can read all about here).

The Living Standards Framework has troubled me from the first, and despite the numerous refinements, and attempts to articulate how it is used, and how government policymaking benefits, I remain sceptical.   I’m not the only one: the New Zealand Initiative’s Bryce Wilkinson published a critique last year (pages 7 and 8).  Bryce made a number of good points, including the merits of a traditional cost-benefit analysis approach, and the tendency of the Living Standards Framework to assume the benevolence (and knowledge) of officials and politicians, in a way that simply ignores much of the economic literature around incentives, information, and the possibilities of the sort of government failure we see all the time.

The Treasury has for some years now proclaimed a vision for itself

Driving what we do is our vision to be a world-class Treasury working toward higher living standards for New Zealanders.

Like Bryce, I’m also uneasy about that

Personally, I am not a fan of vision statements for government agencies. Public servants are paid to serve their elected ministers in the wider public interest and perform their delegated authorities impartially.

Either Treasury’s vision has content –  in which case it has no more legitimacy than the personal preferences of a group of senior officials –  or it is little more than vacuous waffle (“we want to do well”).

There is much the same lack of clarity around the Living Standards Framework, the  centrepiece of which now appears to be this smart new picture.

Higher Living Standards - The Four Capitals - Natural, social, human and financial/physical

Good things flow from these “four capitals”.

There is an accessible, relatively recent, guide to using the Living Standards Framework(LSF).  But it is still not clear whether there is very much substance to it at all, or whether it ever means anything more than “when you do policy advice, there are lots of dimensions it can be important to think about”.  As if anyone ever doubted it.    Treasury talk about a list of six ways they have used the framework.  The first was for brainstorming, but then surely the whole point of brainstorming is not to be tied into an artificial organising framework?   They also show an example of analysing defence policy using the LSF, but (despite the pretty picture, page 10) it is not clear at all how analysing defence policy as a contribution to “social cohesion: abroad” is particularly helpful to anyone.   And their final use is “to measure progress”, featuring a heroic attempt to illustrate change across each of the dimensions since 1870.  An exercise of that sort might be useful for economic and social historians –  with all the inevitable caveats –  but it isn’t clear how it helps today’s ministers.  In fact, it would still be interesting to know whether any major decisions during the term of the previous goverment were made differently because of the advent of the LSF.

Perhaps it will be different under the new government? My observation at the time Treasury first came up with the LSF was that they seemed to be preparing for a Labour/Greens government.

There is also still the tone of a “grab bag” of the latest trendy ideas to it.   This line appeared in the paper presented to the Symposium

To be relevant, wellbeing measurement and cost-benefit analysis need to be sensitive to changing technological, ecological and social trends, such as digitalisation, globalisation, the rise of China, environmental limits, and an increasing policy focus on inequality.

And anything else ministers, citizens, or bureaucrats happen to find “relevant” at the time?  It doesn’t sound like much of a basis for rigorous, detached, free and frank advice.

One of the many problems is that there is little robust basis for aggregating all these issues, concerns and indicators.   But that doesn’t stop The Treasury, who have apparently decided to use the OECD’s Better Life Index, another theory-free ad hoc summary measure (on which New Zealand happens to score well).

Conveniently perhaps, the OECD index doesn’t even include either GDP per capita or related productivity measures (although there are some other income measures).   For some of the variables, it isn’t even clear whether, or why, something counts as good or bad.  The employment rate is in the index, but employment is mostly an input (inputs are costly), not an output –  and yet I presume the OECD counts a high employment rate as “a good thing”.   New Zealand score on ‘years of education’ will presumably lift now that we are going to have free tertiary education, but there is no assurance that the policy will lift average national wellbeing (as distinct from transfering it from one group to another).   Labour market insecurity appears in the index, in a measure in which a country is penalised for having low unemployment benefits relative to market wages –  but what basis is there for the OECD’s implicit judgement that one system is better than the other in the longer-term?  The share of expenditure devoted to housing also appears in the index: it will tend to be higher in a country with larger houses, but what basis is there for any sort of welfare interpretation of the numbers.   (And, on the other hand, the share of the native-born population living abroad –  a reasonable relative-welfare indicator, taken from revealed preferences – doesn’t appear in the index at all.)

These indices, and the Treasury’s Living Standards Framework, often seem to be developed in reaction to some sort of caricatured view that GDP (even per capita GDP) is everything.   But the problem with the caricature is that it is view that no one has ever held.  Every economic policy adviser recognises (for example) that GDP includes the spending/activity to replace depreciated physical capital.  A measure of net domestic product is a little more useful for welfare purposes, and a measure of net national income (distinguishing the income generated that accrues to residents) better still.   Measures of consumption per capita might be better again, if the purpose of economic activity is conceived as supporting consumption over time.   And it is not as if the concepts of externalities, or the depletion or degradation of natural resources, are exactly new phenomena.   And if some government were crazy enough (and powerful enough) to simply set out to maximise GDP per capita, they’d conscript us all, prohibiting retirement, individualised childcare, or even any leisure beyond what the maintenance of productive capacity might require.   It doesn’t happen in free societies (although it came close in wartime).   It is a straw man.  (As incidentally would a similar articulation about GDP per hour worked: if a government were crazy enough to seek to unconditionally maximise that variable they would simply ban all but the most productive people from working at all.)

So the issue about productivity, or GDP per capita, isn’t that the goal of policy has ever been to maximise either.  After almost 70 years of underperformance (productivity growth less than in other countries), one doesn’t have to get into debates about “maximising productivity” to want Treasury to be able to offer good answers about why we are in this situation, and how we might out of it.   Officials and advisers might concentrate on identifying roadblocks –  government policies that impede firms and households making choices they would otherwise take –  the removal of which might result in GDP/productivity outcomes more in line with those in other, apparently more successful, countries.  Of course, each of those interventions needs to be evaluated on its own merits.    There are good reasons to make schooling compulsory, or not have lump sum taxes or whatever, but many regulatory interventions won’t pass any sort of decent test (as, in its day, rules that led to the assembly of TVs didn’t).  I’d argue that our immigration policy doesn’t.

And if I can’t fully put my finger on what I don’t like about the “four capitals approach” it is a sense –  not stated, perhaps not even believed, but implicit nonetheless –  that these are resources of the government, to be marshalled and managed by governments in what they judge to be some sort of “national interest”.   And all too little of a sense that governments more often corrode these so-called capitals than foster them.

And in the New Zealand specific context, a focus on the Living Standards Framework can come to provide cover for the failure to grapple with New Zealand’s long-term economic underperformance and (in this specific context) the failure of The Treasury –  the government’s principal economic advisers –  to be able to offer compelling advice, built on compelling analysis and narrative, for what has gone wrong, and what might be done to fix it.   Perhaps we’ll see some startling new insight on that problem when the Treasury’s Briefing for the Incoming Minister is finally released, but I’m not expecting it – there have been no new ideas tested in working papers or speeches or anything of the sort.  In the paper presented at last week’s Symposium there was more on macroeconomic stabilisation issues (which New Zealand does relatively well) than on productivity, and no obvious policy ideas (on productivity) beyond changing the tax treatment of housing and land use laws (there might be elements of use in that, but no one seriously believes those changes alone would close the 60 per cent gap between, say, productivity levels in New Zealand and those in places like France, Germany, the Netherlands or the United States).

Much of the focus on the Symposium seemed to be on building links between Treasury and the academics.  I’m not sure they got far on the day, although the forum did provide a good opportunity for the academics to remind Treasury that (a) research costs money, (b) research takes time, and (c) the PBRF university ranking and funding scheme strongly discourages academics from doing any research, however well-remunerated, that doesn’t lead to publication to international journals or books published by university presses.

Treasury also used the occasion to launch something called the Community for Policy Research as part of strengthening relationships with researchers working on New Zealand issues.    As part of that, they have released a Research Interests document, a list of research interests which is

“our assessment of where additional research with a New Zealand focus could be useful.  It reflects a number of judgements, including our sense of gaps in the evidence base, where we believe polciy development is being hampered by lack of evidence and emerging medium to long term issues. Often we are looking for research that will help us make a step change, where wider debate will be necessary over the medium to long term”.

Which sounds fine, until one actually turns to the list.

On fiscal policy, for example, there is an item

“Should New Zealand have an Independent Fiscal Council?”

Perhaps it should, perhaps it shouldn’t, but it is explicit Labour and Greens policy that we should.   Presumably the outstanding issues are around the form, and responsibilities, that Council should take?

There are 13 macroeconomic topics –  many of them rather technical (output gap estimation, time-varying NAIRU estimation –  and not a single one of those topics relates to any sort of timeframe beyond the cyclical.    Thus, they are interested in “different approaches to population/immigration projections (eg Bayesian)” but apparently there are no outstanding issues around the longer-term term impact of immigration policy (whether on productivity, or those social and environmental capitals).

In fact, the word “productivity” doesn’t appear at all (or any cognates).  Does Treasury have all the answers already, or have they more or less given up?    The productivity issues seem like classic New Zealand-specific longer-term issues that The Treasury –  principal economic advisers to the government –  really should be looking for answers to, and associated research on.  But, apparently, topics like “What is the relationship between volunteer work, social and human capital?” count as more pressing.

Several people at the symposium took the opportunity to push back in reaction to Treasury’s recent boast that this year it had hired no one with just a straight economics degree.   As one public servant put it, they wouldn’t want to go to a mechanic for brain surgery, and as another former public servant noted, Treasury needs to be really excellent in its economic advice –  and tacking a few short day-release economics courses on to a degree in a quite different subject isn’t really likely to be enough.  One might be less bothered if there was a sense that Treasury’s analysis and advice was consistently excellent, and the only obstacle to first-rate policy was the politicians (of whatever stripe).  That just isn’t so these days.

Finally, it was interesting to observe the numbers of Treasury speakers and of panellists attempting to use Maori phrases, or introductions, or talking about the need to incorporate Maori perspectives into thinking about wellbeing.  As it went on, I started looking round the room trying to spot anyone who might themselves be Maori (noting that there were at least four adult migrants at my table –  of 10  –  alone).  Finally, my curiosity was satisfied when one of the panellists, clearly with the same sort of reaction, asked for a show of hands.  In a room of at least 80 people,  two responded that they identified as Maori. I hope it left the organisers just a little uncomfortable.

I’ve been reasonably critical of Treasury’s work in this (excessively long) post.  But I would commend them on the aspiration behind the occasion, and on going to the effort of openly engaging with a wider group of policy and research people, openly articulating issues they are interested in seeing research on.  There is a place for confidential policy advice and for the free and frank exchange of views between ministers and officials, but our understanding of the issues is only likely to be advanced by open, two way, dialogue and debate at earlier stages of the process.  Some of the challenges New Zealand faces are substantial, and the pool of able, interested and available people isn’t large, or necessarily restricted only to the public service.