Amy Adams and the National economic model

National Party finance spokesperson Amy Adams was interviewed on TVNZ’s Q&A programme on Sunday.   Amid the to-ing and fro-ing on aspects of the government’s Budget, there was an odd exchange about the underpinnings of economic growth in New Zealand.

AMY Can I just finish, though? Can I just finish? Even Treasury is saying that the GDP growth that they’re forecasting is only held up because of strong and, in fact, growing immigration numbers — something that Grant Robertson went on about for nine years in opposition. So it’s been driven by immigration, industrial law changes, foreign direct investment, new taxes. Those things will slow the economy.

CORIN Are you seriously criticising this government for relying on immigration to grow its economy when your government relied on immigration and housing?

AMY Am I going to get a chance to answer? Okay, so what I’m going to say, Corin, is that for nine years in opposition, Grant Robertson made a big deal about the fact that immigration and the net flow of migrants into New Zealand was what was holding up the economy. What I’m pointing out is that Treasury, in its own estimates in the Budget, has said it is continuing strong immigration that is going to continue to see GDP held up. We’ve always argued that you need a good inflow of skilled workers. We’ve never made any bones about that, but this is a government, again, that talked one game in opposition and is entirely going the other way in government.

CORIN Fair enough — that’s a fair point, but it’s a bit rich to criticise them for relying on immigration.

AMY I’m not criticising them for doing it; I’m saying I’m criticising them for breaking their promises about what they said. They said in the campaign they would slash immigration, and now it’s strong immigration numbers that they’re looking at, or at least, Treasury are looking at to support those figures.

If I’m reading Adams correctly she appears to be

  • criticising the government for not carrying through on what she describes as their promises to “slash migration”,
  • arguing that, on Treasury’s account, continued migration-led population growth is a key element in the GDP growth forecast over the next few years (Treasury having revised up its medium-term immigration assumptions), and
  • acknowledging that in National’s term in government, the numbers relied very heavily on large immigration inflows.

I’m mostly interested in that final point.  On my analysis of Labour’s manifesto, there was never a promise to “slash” migration, or even to take steps that would cut the net inflow for more than a year.  And those were policies put in place when Andrew Little was still leader; from her silence on the issue once she became leader it was pretty clear Jacinda Ardern didn’t really believe in those policies.  There was no change promised in the centrepiece of our immigration policy: the residence approvals target number of 45000 non-citizens per annum.    (There hasn’t yet been any sign of the modest changes Labour did promise –  some sensible, some not – although we are told they are coming.)

But what of National’s approach to economic policy.   A couple of weeks ago, the National Party leader was touting his party’s economic credentials

When I was Economic Development Minister, our plan for the economy was set out in the Business Growth Agenda.

The BGA comprised over 500 different initiatives all designed to make it easier to do business by investing in infrastructure, removing red tape, and helping Kiwis develop the skills needed in a modern economy.

Some of those were big, some were small. I’ll admit some weren’t as exciting spending a billion dollars every year.

But together they were effective.

New Zealand has one of the best performing economies in the developed world.

But, in fact, what it came down to mostly was a lot more people, and the activity that a lot more people generate.  At least Amy Adams seems to recognise that.

In the five years to the end of 2012, New Zealand’s population is estimated to have increased by 4.3 per cent, and in the five years to the end of 2017 the increase is estimated to have been 9.3 per cent.    More than all that increase resulted from changes in net migration (the natural increase was smaller in the second period than in the first).  Coping with a lot more people – especially when the increase is unexpected – generates a lot of economic activity (people need houses, schools, shops, offices etc), but not necessarily a lot more long-term economic opportunities to support the increased number of people.

Note that I deliberately used the words “not necessarily”.  At some times, and in some circumstances, migrants can help create or tap whole new opportunities, helping to lift economywide productivity, increase the outward-orientation of the economy (and the associated investment), and so on.  But it is an empirical question, that has to be reviewed in the light of experience.  Sadly, there is little or no sign that we’ve seen those sorts of gains here.

I’ve pointed out previously (perhaps ad nauseum) that total labour productivity growth in New Zealand in the last five years was only about 1.5 per cent.  Over that period, too, trade with the rest of the world (exports and imports) have been shrinking.

trade shares may 18

When National first came to office 10 years ago they recognised that sustainably successful economies tend to be ones that find more and better products and firms that successfully take on the world (in turn, enabling us to import and consume more from the rest of the world).  Perhaps unsurprisingly, foreign trade rated no mention from Amy Adams.

So we’ve had

  • little or no productivity growth in the wake of the population surge,
  • a shrinkage in the proportion of our economy traded with the rest of the world, and
  • increasingly ruinous house prices in much of the country.

Twenty years ago when people first started to worry a bit that there wasn’t much sign of New Zealand catching up again with the rest of the advanced world, one hypothesis that did the rounds for a while was that of ‘the cheque is in the mail” –  just be patient, and the gains would materialise soon.   They didn’t then, but perhaps this time is different?

One place we might look for signs of that is business investment.  But, as even the Reserve Bank Governor has been pointing out, that has been pretty muted.   Here is business investment (total gross fixed capital formation less government and residential investment spending) as a share of GDP.

bus investment may 18

That mightn’t look too bad to you –  after all, the line has been edging up over the last few years.  But even now the share of the economy devoted to business investment is lower than in every quarter from 1993 to 2008, and we’ve had much larger and more sustained total population increases this time round than in the previous couple of cycles.  More people need more capital.  It doesn’t look as if business has been planning for even better times ahead, more or less just meeting the domestic demands of the rising population itself.  (And as I illustrated on Friday, Treasury doesn’t expect any recovery in the export/import shares of GDP in the next few years.)

Consistent with that, here is a chart I’ve shown previously, using SNZ’s annual capital stock data.

cap stock growth may 18Growth in the per capita “productive” capital stock –  public and private, but excluding houses –  has been low and has been trending downwards.  I’ve also shown (orange line) a proxy for natural resources per capita: since natural resources themselves are fixed, this is just the inverse of the rate of population growth.  Per capita natural resources are falling.  That mightn’t be a problem –  it is, after all, true of every country with a growing population – if other resources were taking the place of the natural ones.  But there has been no sign –  in business investment, productivity, or the foreign trade data –  of that here.

Productivity growth here (real GDP per hour worked) in the last five years was 1.5 per cent in total.  The best-performing eight OECD economies averaged 11.3 per cent over the most recent five years (some to 2016, some to 2017).  Most of those countries are still a bit poorer and/or less productive than New Zealand –  but not all (the list includes Turkey, Slovakia, and Korea). And those gaps are now a greater deal smaller than they were even five years ago.  New Zealand GDP per capita is currently around $60000.  If we’d managed 10 per cent productivity growth over the last five years –  instead of 1.5 per cent – the economy would be around $5000 bigger per man, woman, and child.  Just think of the possibilities that would have opened up, individually and collectively.

Instead, pretty much all we had was the activity generated by a lot more people, and more working hours for those already here.  Probably inadvertently, the National Party finance spokesperson has finally acknowledged it.

Of course, the outlook under the current government is more of the same, or even worse.  The immigration policies of the two main parties are all but identical in substance (although the cyclical dimension does appear to be turning), but the new government throws into the mix the ban on oil and gas exploration, a determination to do more on water standards, and to do much more around emissions.  Perhaps each of those policies is individually worthy, but they are all likely to come at an economic cost, a cost exacerbated if policy keeps on trying to drive up the population –  in a location that hasn’t shown the (beneficial) economic fruits of such a policy for a long time now.  And should the government somehow manage an acceleration of the rate of housebuilding, that too will only squeeze out –  through higher interest and real exchange rates – more of the business opportunities that might otherwise have supported a growth in material living standards.

More people, at least in New Zealand, isn’t a path to higher productivity, and higher productivity is what aspirations for higher material living standards rely on.  More people is just a path to more activity to accommodate more people –  skewing the economy inwards again, and undermining our prospects of ever getting back towards that upper tier of advanced economies.  On this score, Amy Adams (and her leader) appear quite as blind as Grant Robertson (and his). It is only two years until the next election campaign will be getting underway: the Adams interview doesn’t suggest any sign of a rethink of policy, or even a recognition that activity is no substitute for productivity.  And the latter is sorely lacking in New Zealand.