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.

 

22 thoughts on “Amy Adams and the National economic model

  1. Andrew Little did say very clearly that he would cut Foreign Workers by 30,000 during his election campaign which Jacinda Ardern on becoming Labour Party leader reversed that by saying that she would need more police officers and more foreign workers for the Kiwibuild and therefore said very clearly on her election campaign, instead to cut 30,000 out of International students. Amy Adams is correctly referring to Labour’s carefree and negligent promises during their election campaign.

    After the election, Lees Galloway, the new Labour Government Immigration minister quickly changed labour’s stand on immigration to “Immigration policy is not about the numbers, it is intended to have the right people for the right jobs in the right place at the right time”

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    • I think we will find when the data is next released that the int’l student numbers to PTEs account for most of the current slow down. The increased emphasis on auditing (i.e., cleaning up) that sector (and the immigration consultants) has had a big impact in the right direction.

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    • I disagree with your interpretation. The policy going into the election was exactly the same as LIttle announced (which included an extra Kiwibuild visa), and even those policies forecast a slowdown, not targeted one. If they ever implement their promises, the extent of the slowdown they forecast looks reasonable to me (but it will be for one year only) – it is just that so far, they have done nothing, and are no doubt under huge pressures from business and the export education sector.

      Lees-Galloway’s line was also a pre-election one: he is very keen on linking access to work visas to region-specific skill shortage lists (which is in their manifesto).

      What changed after Ardern took over wasn’t the specifics, it was just that they said almost nothing more about the issue. One can only assume that had she been leader a few months earlier, the promises would never have been made.

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      • Labour announced they will cut immigration by 20,000 to 30,000 a year to reduce the pressure on cities, especially Auckland. Mr Little says there are industries which need to be staffed but with 90,000 young New Zealanders aged 16 to 24 who are out of work they should be filling these roles over foreign workers.
        TVNZ Newsnow June 2017.

        This election presents the clearest divide on immigration policy between the two major parties in recent history. Labour is sticking with its promise to slash net immigration numbers by about 20 to 30,000, partly by reducing the number of international students studying low-level courses. Winston Peters wants an even bigger drop, to a net number of 10,000. Labour leader Jacinda Ardern has confirmed she remains committed to their policy, likely to reduce net migration by 20,000 to 30,000 a year. NZHerald August 2017

        Not too sure why you would disagree with my interpretation when it is plastered all over the news media at the time that Andrew Little would target to bring down immigration numbers by 20,000 to 30,000. They have not and therefore they have lied.

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      • Read the document they released, It sees that these are estimated effects, not targets (the same tone in Ardern’s comment in your second extract). I was as keen as anyone to believe they were targeting a reduction, but in the explicit words they used – and in the specific policy promises- there was nothing to suggest they were going to do so. Of course, it probably suited them for a time to have people believe they were setting out to bring about a reduction, but even then I think they were genuinely caught by the change of leadership.

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  2. Yes, I thought much the same when I watched that interview.

    Where this coalition government might be a ‘bit’ different in thinking and in action on productivity to me rests on the shoulders of Shane Jones and his administration of the Provincial Growth Fund.

    It is also good to see the coalition’s decision on R&D tax credits and the setting up of the IFI, both of which have the potential to improve productivity over time.

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      • Mark, I agree. You are definitely not going to get any productivity hiring a bunch of out of work extended family members in the regions to plant a billion trees. The long lunch breaks and smoking tea breaks will mean that we get half a days work for a days pay.

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  3. When Grant Robertson first pushed back on the idea that govt should run a big deficit to fund infrastructure, I (over)interpreted that to mean he had thought deeply about macroeconomic imbalances and did not want to put any more pressure on the exchange rate. That was mistaken.

    I doubt productivity is going to take off until the dollar falls to a reasonable level, and the best way for that to happen (or to enable a managed float) would be to stop importing capital and start exporting it. The CAD at the moment is about 3%, and the desirable level of investment is at least 5% higher than we have today (to close the gap with OECD). So there would need to be a movement in S-I imbalance by 8% or more. The government budget balance by itself is not going to do that. There would need to be significant changes affecting the household and business sector. In that case I can’t see anything Labour doing will increase productivity.

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  4. Dr Wayne Mapp formerly a Minister of Science and Innovation under the National Government did mention that there was a need to do much more than provide a tax credit for research and development. Too bad what he said was not clearly understood by the reporter or the rest of the panel. It seems like subsidising innovative companies in NZ is a huge taboo subject. NZ does not have the depth of capital for incubation companies and therefore the government must be prepared to invest if you want a productivity answer.

    You can’t solve a productivity puzzle when the industry focus is mainly in the services sector. The primary industries are already at peak 10 million cows, there is no further GDP export growth from this sector. Restricting immigration just constrains GDP growth and no one wants a recession especially with a aging baby boomer generation and 400,000 kiwis on Special Category Visas in Australia about to be kicked out of Australia at any time as they start to age and become non productive.

    Shamubeel Eaqub was keen on borrowing $20 to $30 billion to fund infrastructure but all the Labour Government wants to do is to build monorail along Dominion road and to the airport which is effectively subsidising the tourism industry in the billions in moving the 19 million inbound and outbound passengers in and out of the Auckland Airport.

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  5. Newstalk ZB reporting on the coalition agreement on 24 October said: “On immigration, Ardern confirmed that the plan was to reduce the number of immigrants to 20,000 – 30,000. Peters says his party wanted bigger drops, but negotiations meant not everything was possible.” I could see that in previous interviews Ardern looked unenthusiastic about the policy she had inherited but she nevertheless she gave the impression she was sticking with it. The Labour Party manifesto may have been different but most people don’t read the original documents… they rely on press coverage. Most people I know who support Labour believed it would cut immigration substantially and regard the fact it hasn’t as a serious breach of trust.

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  6. That’s interesting thanks. I would be interested to see a transcript of her 24 Oct comments to check the precise words, because in my observation they have usually been very careful about the forecast vs target words (perhaps so picky that most people overlooked the difference), and the coalition agreement itself says that the govt will go with Labour’s policy.

    The PM did say recently that they are working on Cabinet papers at present to give effect to party policy. I’ll believe it – and that it aligns with the manifesto – when i see it though.

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    • from the coalition agreement press conference https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11936339

      Asked why the agreement didn’t include any estimates for how much immigration would be cut, Ardern said Labour’s policy stood – estimated by the party to cut net immigration numbers by 20,000 to 30,000.

      and from an Ardern interview a couple of days earlier
      https://www.stuff.co.nz/national/politics/98119199/jacina-ardern-labour-hasnt-budged-on-its-immigration-policy
      Labour’s immigration policy is unchanged following negotiations with NZ First, Jacinda Ardern has revealed.
      In an interview with The Nation on Saturday morning, when asked where the “sweet spot” was in the contentious issue, the Prime Minister-elect said: “You’ll see Labour’s policy remains absolutely unchanged as a result of these negotiations.”
      Under that policy, Labour estimates net migration will fall by 20,000 to 30,000 a year, mostly by limiting the number of people granted student and work visas. (In the year to June 2017, net migration was 72,305.)

      Of course, some of their voters may be feeling let down, but I doubt much of the left-liberal base is.

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      • An intent to deceive is still a lie. I have to admit she is very good at telling lies. I think it is ridiculous that the public has to read her exact wording to get her meaning and her headline rhethoric is not what she actually meant to say.. Its like saying “No new taxes in the first term of labour” and then we get $2.5 billion of new taxes and trying to fob the NZ public by saying it is not new taxes.

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      • Amy Adams is therefore correct in saying that Labour has so far not delivered on its promises.

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

    Corin is absolutely wrong in that statement. He really should do a little more research in this area. The National government did not rely on immigration and housing to grow its economy. It relied on Tourism and international students driven largely by the Minister of Tourism, John Key. The fastest way out of a recession engineered by the RBNZ was the tourist and International student dollar. The government subsidised tourism through the Hobbit and Lord of the Rings movies amounting to $200 million plus another $135 million for the NZ tourism marketing campaign which has resulted in a $15 billion export GDP annual windfall. The government also invested $2 billion in upgrading all the various University and polytechnic facilities which also amounts to a $2 billion subsidy towards International students. As a result that drove the need for immigration and as a consequence housing.

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  8. Media power is scary. Guyon Espiner has a conversation in Maori (on air) and claims most of the feedback was positive (no astroturfing mind you). Therefore the boy can just sail on. Brian Edwards was critical, then apologized (“he hadn’t listened to the program”). Mathew Hooten is all for it (and access to RNZ?). Even Whale Oil seems for it. A bit of an oligopoly?
    On The Panel Josie Pagani (open borders), today Michelle d’Arcorte (doesn’t believe in the state?).These people are necessary for their partners that “room full of big business minds” John Key assured would see migration stay the same.

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  9. Thanks you for the informative but depressing graphs for productivity, business investment, etc; I hope Amy Adams, Jacinda Ardern and their colleagues are viewing them.

    The parties need to be asked ‘what is an immigrant?’. These stats are based on foreigners who stay more than a year. So I have a French friend who arrived for a years working holiday to be an au pair; she liked her employers and chose to extend her visa to 23 months so transfers over the 1 year limit but probably was not detected by these stats until she had a short holiday break in Australia.
    Student and working visas are an interesting topic but it is best to concentrate on permanent residency.

    Permanent residents are the ones who (usually) are committed to NZ and remain here even if their skill set becomes redundant. It is too easy for politicians to change the debate to immediate needs such as fruit picking and avoid the important issue of permanent immigrants and their long term contribution and needs. We need to ask our politicians down about the success and failure of past permanent residency approvals. For example anecdotally we hear of immigrants with high level qualifications who are working as Uber drivers; this may be a rarity or may be common but we have no statistics so it remains anecdotal. This is not good for the social acceptance of immigrants. Nor is it good for INZ immigration policy.

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