A visiting Australian politician

A fairly prominent Australian politician was in town last week.   Andrew Leigh was previously a professor of economics at ANU, and for the last eight years has been a Federal Labor MP.  He is the Shadow Assistant Treasurer, Shadow Minister for Competition and Productivity (and spokesman on various other minor portfolios), and so presumably fairly likely to become a Federal government minister if the next election result follows the polls and Labor is elected.

Leigh was here to give a couple of lectures in the series being sponsored by the NGO Presbyterian Support Northern on topics related to child poverty and wellbeing.  As it happens, next month I’m also giving one of the lectures in this series –  on the role productivity growth plays in ending poverty – and if anyone is interested you can book  one of the (free) sessions here   (there is one in Auckland and one in Wellington).

I didn’t get to hear Andrew Leigh while he was here, but both his Auckland text  and his Wellington text are available on line.   The substance of both addresses is well worth reading –  he is a widely-published researcher on inequality (the Auckland address) and has just published a book about the use of randomised control trials as a tool in better evaluating which policy interventions might work and which don’t (the focus of the Wellington address).   I don’t claim to be a fan of the Australian Labor Party, but politics is likely to be better for having at least a few people, preferably on both sides of politics, able to address serious issues this seriously.

Having said that, I was mildly amused by the introduction to his Wellington speech.   I guess it is standard advice to butter up, and flatter just a bit, your audience.

New Zealand has turned out to be a pretty good predictor of what’s likely to happen next in Australia.

New Zealand women won the right to vote nine years earlier than Australian women.

Your country enacted same sex marriage four years before we did.

You even gave Barnaby Joyce citizenship before we did.

So to be in New Zealand isn’t just a chance to see the sun rise a couple of hours earlier – it’s also an opportunity to get a sneak peak into some of the things that might shape Australia’s future.

And I have to say that as a member of the Labor opposition in Australia, I’m keenly hoping that this year or next will see Australia’s voters follow your lead in electing a progressive government.

I’m pretty sure that, even if it got a good laugh, he is wrong about Barnaby Joyce –  a citizen by birth of both countries, and there was only a single birth.

But no mention at all –  none, as far as I could see across two speeches –  of the most striking area of New Zealand/Australia comparisons where Leigh must surely hope that New Zealand doesn’t offer a “sneak peak” into Australia’s future.  And that is the, not trivial, matter of relative productivity and prosperity.

As I noted yesterday, for 100 years or so (from the time of our gold rushes onward) New Zealand and Australia are estimated to have had average real per capita incomes that were much the same.   Each country had specific idiosyncratic events and influences, so that at times we did better, and then for a time they did better.  Those differences were reflected in the trans-Tasman migration data –  at times the (significant) net flow was one way, and at times the other way.

The standard collection of such data is that by former OECD researcher Angus Maddison  Here is the chart of the data he judged best (no doubt far from ideal in both cases), starting from 1870 when he first reports annual numbers for New Zealand.  (Maddison died a few years ago so the data aren’t updated to the present.)

aus vs nz real gdp pc

The red line is the average of the series for the full period 1870 to 1970: on average, on these measures, New Zealand had very very slightly higher average incomes than Australia.  On different measures you might get a slightly different picture, but the overall story won’t change much.  The performance of our two economies was pretty similar.  But it is no longer.   The IMF’s current estimate is that New Zealand real GDP per capita, converted at purchasing power parity exchange rates, is about 76 per cent of that of Australia.

We don’t have a time series of productivity data for the historical period, and although Australia has an official series of real GDP per hour worked back to 1959, here official data can only take us back to the late 1980s.    In this chart, I’ve shown the relative performance of labour productivity (real GDP per hour worked) in the two countries since 1989 (for New Zealand, using the average of production and expenditure GDP measures, and the average of the QES and HLFS hours series, as in earlier posts).

real GDp per hour aus vs nz

In 29 years, we’ve lost a lot more ground –  15 percentage points-  relative to Australia.  It isn’t a particularly steady process (at least as represented in these data) but the trend decline shows no sign of ending, let alone reversing.

And thus when, as in one of his speeches, Andrew Leigh notes that

It is not as though the child poverty rate is noticeably different in our two countries. According to the OECD, the child poverty rate – measured as the share of children living in households with disposable incomes of less than half the median – is 13 percent in Australia and 14 percent in New Zealand.

what he is omitting is that incomes in Australia are a lot higher, and thus so too is the relative poverty line measure he is using.  Australia’s poor should be less badly off than our poor, because Australia’s relative economic performance is so much better.

For Australia’s sake, I hope New Zealand’s path doesn’t foreshadow their own.  Then again, in some respects it already has.    On the Maddison numbers, back in 1870 both New Zealand and Australia were more prosperous than the United States.  As recently as 1938, we were about equal with the US.  And now, we do particularly poorly, but Australia’s relative performance is nothing to write home about.

rel to US

Interestingly, Leigh touches on one possible aspect of the story.

Third is to recognise the role that foreign investment plays in sustaining employment. As you know, the antipodes enjoyed among the highest wages in the world at the end of the nineteenth century. One reason for this was the high amount of land per person. While Europeans lived cheek-by-jowl, there was plenty of room to swing a sheep in Australia and New Zealand. In economic terms, one reason that wages were high was that the capital to labour ratio was high.

Today, both Australia and New Zealand have strong immigration programs. Migrants can fill skill gaps and start businesses, boost innovation and encourage exports. But they also have the inevitable impact of lowering the capital to labour ratio. To the extent that migrants are adding to the number of workers available to do a given job, this may put downward pressure on wages.

It was former Treasury Secretary Ken Henry who pointed out to me that foreign investment has the opposite effect. By increasing the available capital, it pushes up the capital to labour ratio. So by accepting foreign investment as well as migrants, a country can keep its capital to labour ratio constant, and therefore its wage rates.

I think that is partly true and partly not.  As he notes, in the 19th century what marked out both countries was abundant land – which in turn attracted both migrants and foreign investment.  These days, foreign direct investment can help improve prospects –  and I’m strongly supportive of us being open to FDI –  but FDI doesn’t add to the stock of land and natural resources (even if it can help exploit those resources more fully), and even when regulatory restrictions are out of the way, it flows in the direction of opportunity.  Neither country has been particularly successful in seeing internationally competitive industries not based on our natural resources develop.  Attractive opportunities in either location don’t seem thick on the ground,

It is, nonetheless, good to see a left-wing politician openly addressing these issues.  Would that it were happening here.

Leigh’s other speech was devoted to the merits of randomised trials of proposed or actual policy interventions or welfare programmes.  In many areas, they are the single best way of identifying what works and what doesn’t.  Here are a couple of examples from his text (in this case, of programmes that proved not to work).

In some cases, the Education Endowment Foundation trialled programs that sounded promising, but failed to deliver. The Chatterbooks program was created for chil­dren who were falling behind in English. Hosted by libraries on a Saturday morning and led by trained reading instructors the program gave primary school students a chance to read and discuss a new chil­dren’s book. Chatterbooks is the kind of program that warms the cockles of your heart. Alas, a randomised trial found that it produced zero improvement in reading abilities.

Another Education Endowment Foundation trial tested the claim that learning music makes you smarter. Students were randomly assigned either to music or drama classes, and then tested for literacy and numeracy. The researchers found no difference between the two groups; suggesting either that learning music isn’t as good for your brain as we’d thought, or that drama les­sons are equally beneficial.

In a similar vein, a recent randomised trial of free school breakfast programs in New Zealand schools found that it reduced hunger rates (by 8.6 units on the ‘Freddy satiety scale’, in case you’re curious). However, free breakfasts did not improve school attendance or academic achievement for low-income children.

Unfortunately, attractive as this approach is, it isn’t really an option for most of the sorts of policy interventions I write about here, which are economywide by construction.  One can’t split the country into 100 different monetary regions, and apply different OCRs to each (chosen randomly) –  and nor, frankly, should one want to.   Even if some global dictator could do it across countries, there are far too few countries (and so many differences across them) for the results to be anything as valid as those from an evaluation of (say) a school music programme with (say) 500 kids split randomly into groups participating and not participating in the programme.  The same goes for aggregate fiscal policies, or immigration policies.  One might, perhaps, be able to do randomised trials around small aspects of, say, the Essential Skills visa programme, but not about overall approaches to immigration.  I

Instead, we are forced back onto looking what is really a small range of countries (say 40 advanced countries), over relatively short periods of history (the last couple of hundred years), and –  given that and all the other individually confounding factors –  it is perhaps less surprising that people of goodwill still differ on quite what role some of these policy interventions have to play, and what their overall effects are.  Of course, many other areas of policy are much the same –  think foreign affairs and defence –  and the difficulty of reaching of conclusive results doesn’t change the importance of ongoing analysis, research and debate, testing and evaluating the relevant comparisons and insights that history (our own and others), theory, and current experience appear to be offering.

11 thoughts on “A visiting Australian politician

  1. “”attracted both migrants and foreign investment””. It all depends on how sticky the attraction is.

    Using foreign money to build say a meatworks would only allow the invested money to return as a trickle of profit dividends over many years. Buying a house or a fast food outlet in Auckland to qualify for residency as an investor allows the foreigner to export his money back to place of origin fairly easily.

    Similarly an immigrant surgeon or professor of economics can turn around and leave NZ at the drop of a hat whereas the two employees of a BP service station in Hastings working in slavery conditions were told by their employer that “he would cancel their visas and they’d be forced to leave New Zealand if they spoke up about the mistreatment”.
    https://www.tvnz.co.nz/one-news/new-zealand/hastings-bp-owner-fined-252-000-keeping-two-immigrant-workers-in-conditions-verging-slavery

    Conclusion: think carefully about both foreign investment and immigration otherwise when a recession occurs the money will run away leaving both Kiwis and recent immigrants unemployed which can be a recipe for social unrest.

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    • It usually does not get too bad as there is an easy backdoor to Australia for jobs. Australia’s economy tends to be countercyclical to NZ.

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      • GGS: Good point. How much true freedom does NZ have to make economic and immigration policy when Australians and their money can come and go as they please? From their side of the Tasman the issue is smaller – rather like employment and investment in NZ never being drastically affected by the Cook Islands.

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      • Actually, I think it is the other way round. There is only a very small flow of Australians here at the best of times, while fluctuations in the flow of NZers to Aus is quite a big influence of the cyclical variance in their own net migration numbers

        It is certainly true that at times Aus can act as a bit of buffer for NZ, but actually in the big cycles the two countries are pretty correlated, and thus when both economies are hit (as in 08 or 91) the net outflow of NZers to Aus suddenly dries up, even as the unemployment situation here might be worsening quite considerably.

        We have a great deal of practical policy autonomy. Contrast us with an Australian state – which has no monetary policy, little fiscal policy, no foreign investment policy, and no immigration policy.

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      • Australia hardly registered a slowdown in ’08 if you look at your pictorial graphs. A small dip and they were off again. Over that period our immigration net outflow was hitting huge net losses of -20k to -40k per annum.

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      • They had a big loss in national income (fall in terms of trade) and a big rise in the unemployment rate. Both were fairly shortlived – the Chinese stimulus, iron ore demand and the associated investment boom cut in – but by the end of 2008 it was not a good time to look for a job in Aus, so fewer NZers did for a while.

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  2. Surely part of the story is the fact that Australia never had such an extreme attack on labour as NZ did – as I understand it.

    We went full throttle in NZ, decimating unions and cutting benefits as well as Brash’s high interest rates. We chose recession for a long time and made labour very cheap.

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  3. Personally I doubt there is much to that story, in explaining the decline in productivity relative to Australia. That is partly because the decline was well-established before the Richardson/Birch era, but also because even if there were a significant story there you’d expect firms to have responded to the cheap labour by opening more businesses, investing more etc. And we didn’t see that either.

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    • Without the government being involved in funding large incubation type businesses in future manufacturing, NZ business investment has flowed into the services sector. We have certainly seen a massive proliferation of small business activity in restaurants, in cafes, cleaning franchises, fast food outlets. Billions of dollars of subsidies from the government has flowed into bases for the Americas Cup, World Cup rugby, bicycle lanes for tourists, free public toilets, roads of national significance and airports for tourists to drive camper vans and to visit rural attractions like Kaikōura, Hokitika, Queenstown etc and into the various Universities and education centres for international students creating a mega $15 billion export GDP where every export dollar immediately and easily converts 100% to domestic GDP.

      Consumption volume has increased even though consumption dollars appears static mainly because the cost of consumables continue to fall due to global overproductive capacity. Yesterday I was shocked by the dramatic fall in flat or curved screen LED ultra high and 4K resolution TV of all the top brands, 55 inch costing around $1300 when just last year they were priced at $4000 plus which results in declining investment dollars in fixtures and fittings in the face of increasing volume numbers.

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    • Not sure why you complain about immigration and the increase in population and yet try and give credence to the lack of business investment? Surely you must see that the fall in unemployment does suggest that businesses are investing by opening more businesses and are investing more etc in order to employ the increasing numbers of immigrant labour?

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  4. Reference using music or drama classes, and then testing literacy and numeracy, and finding it didn’t work

    Surprising – they couldn’t possibly be doing wrong – could they? – If they had asked 20 years ago I could have told them it has long been known that using baroque music as background environment leads to enhanced memory retention of what we see – they both have to be done together

    quote:- Baroque music is used to accelerate learning, information processing, enhance memory retention. Georgi Lozanov (MD, PhD) Bulgarian doctor, psychologist and neurologist “discovered” accelerated learning, memory retention, and memory enhancement. see baroque music and fibonacci sequence connect. \

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