Wasteful and ill-disciplined councils

May 23, 2018May 23, 2018 Michael Reddell Wellington

Mostly this blog is focused on national policy issues and national economic developments. But local government matters too. Often the choices local government make affect us at least as much as questionable central government choices do, and – so it seems – they are typically based on less-robust analysis, and with less transparency and serious accountability. The cavalier approach towards the use of our money – from people who would not be so rash in their private lives, with their own money – would almost beggar belief. “Almost” except that public choice literature has been analysing for decades the incentives, and absence of constraints, that lead to such behaviour.

In the headlines this week have been the efforts of the Auckland Council. The Mayor, it appears, commissioned a $1 million report on a possible new ($1.5 billion) sports stadium, which his own fellow councillors have not been allowed copies of. The Mayor and his office – again – defy for months the provisions of the Local Government Official Information and Meetings Act (the local government equivalent of the OIA). The first element of the purpose statement in the LGOIMA is

The purposes of this Act are—

(a) to increase progressively the availability to the public of official information held by local authorities, and to promote the open and public transaction of business at meetings of local authorities, in order—

(i) to enable more effective participation by the public in the actions and decisions of local authorities; and

(ii)to promote the accountability of local authority members and officials,—

and thereby to enhance respect for the law and to promote good local government in New Zealand:

Something that too many mayors, councillors, and local government bureaucrats seem to treat with contempt.

The Wellington City Council is at least as bad as any of them. On the LGOIMA, I gather that requesters have still not been able to get from the council documents relating to the subsidy the residents of Wellington are paying to Singapore Airlines (now to provide additional flights between Wellington and Melbourne). It is as if councillors – and their staff – believe we work for them, not the other way round.

On spending, we don’t have anything quite as expensive as a $1.5 billion stadium – not happening for now, but presumably only a matter of time. But that is about $1000 per Aucklander. Here, we’ve had the desperate desire of councillors to kick in $100 million or so to extend (privately-owned) Wellington airport’s runway (a project fortunately stymied, at least for now, by the courts), $90 million to refurbish and strengthen the Wellington Town Hall, $165 million for a convention centre and film museum. Not one of those projects would be likely to survive the scrutiny of a proper cost-benefit analysis, but that, of course, doesn’t deter our council.

And the waste – and the arrogance – flows all the way down to individual neighbourhoods. I live in Island Bay, a pleasant seaside community of about 8000, where the residents as a group tend to vote for big-government parties (around 60 per cent of the party vote in last year’s election went to Labour and the Greens). We had the misfortune to be the test-bed for the Council’s cycleway policy (which I wrote about here).

The plan was for a cheap cycleway all the way from Island Bay to the city. Never mind that the supporting analysis never stacked up, or that hilly Wellington is one of the least propitious places for cycleways anywhere. Years later, we have a deeply unpopular cycleway to nowhere (running a couple of kilometres along one of the safer wider roads in Wellington, before petering out just as things start to get tricky for the few potential cyclists). The Council spent $1.7 million putting the thing in – originally they thought to spend less than that getting the whole way into the city – and is about to spend another $4 million to change the scheme, and in doing so they still avoid responding to the clearly expressed preferences of residents in a fairly well-designed and run “vote” organised by the residents’ association. $700 per resident – almost as bad as a sports stadium on Auckland’s waterfront, and a great deal of aggravation later – all to impose something that local residents simply don’t want, and wouldn’t choose to spend their money on. But councillors have a dream……while we have a nightmare (expensive, unattractive, and dangerous). One might suppose that on an issue that affects no one outside the local neighbourhood, majority local preferences should be an absolute basis for not proceeding, not wasting public money. As it is, there is next to no effective accountability, since Island Bay is subsumed in a larger ward and of the local councillors who voted for the scheme, one resigned shortly afterwards to become an MP in rock-solid Labour seat, and the other has announced he is moving to Christchurch and will be standing down at the next election. The Residents’ Association is reduced to taking costly and risky legal action against their own council.

But today I wanted to highlight another small Wellington City Council excess. It is of no wider interest, except as symptomatic of the way our money is wasted by councillors up and down the country. As I said, Island Bay is a pleasant seaside place. Just to the left of the photo, fishing boats lie at rest, and the eponymous island guards the entrance. There is a pleasant sandy beach, good for swimming (if somewhat bracing). There weren’t a lot of people around when I took this photo on a cool late-autumn morning, but on summer afternoons the beach is often crowded and finding somewhere to park can be a challenge.

island bay

And so what is the Wellington City Council in the process of doing? Why, removing probably half a dozen carparks on the main road (you can see where the dark new seal is by the van) – and others on the side street – as part of putting in a new roundabout. This little project is said to be costing $400000. There was, it appears, no consultation with either residents or beach users.

Both roads are wide, and neither is particularly busy (I walk down there most days). There is no obvious problem, no apparent record of accidents, but that doesn’t stop the Council frittering away public money. I guess we should be grateful for small mercies: a few years ago when the sea wall was damaged in a storm, some councillors wanted to rip up the road (past the new roundabout) altogether and let the sea “take back its own”. Fortunately, they lost that battle.

Each individual project like this doesn’t sound like much. But they add up, and before you know where you are, hundreds of millions of hard-pressed ratepayer’s money is being lavished on the big stuff with little rigour, less transparency, and not much accountability. It is a shame there is no way to have councillors put rather more of their own money on the line: perhaps for each new initiative they vote for councillors could consider making a personal contribution equal to, say, ten times the average per capita cost of the project in question. When the mayor, Justin Lester writes a personal cheque for $4000 as a contribution to the convention centre, and another for $2500 for the town hall refurbishment or the runway extension, I’d start taking the views that underpin his wastefulness (with other people’s money) a little more seriously. Of course, even then it might just be considered a campaign expense on a journey towards Parliament. Instead, we go on with citizens being plundered to pursue the whims of councillors and specific vested interests.

Amy Adams and the National economic model

May 22, 2018 Michael Reddell National Party, Productivity

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 18 Growth 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.

Orr defends himself

May 21, 2018May 21, 2018 Michael Reddell Adrian Orr, Uncategorized

There seems to have been almost no media coverage of an extraordinary statement put out late on Wednesday by the going-rogue Governor of the Reserve Bank, Adrian Orr. Perhaps he was fortunate that all eyes were already on Thursday’s Budget.

I’ve been drawing attention to the way in which Orr has been speaking out on all and sundry issues – often contentious political issues – for which neither he nor the Bank has been assigned responsibility by Parliament. We’ve had climate change issues, infrastructure spending, both sides of the bank conduct issue (where he was defending the banks only to flip sides and start poking a stick at them), sustainable agriculture, and capital gains taxes. (Various posts touching on the Governor’s comments are here.)

Last week he was at it again, giving an interview to Stuff’s Hamish Rutherford in which he took the opportunity to attack the way the Christchurch rebuild had been done, including in particular the lack of opportunities for his former employer, the New Zealand Superannuation Fund. And a couple of days out from the Budget, he took another opportunity to call for more government infrastructure spending, more government borrowing, and to offer his thoughts on public procurement processes. Anyone would think he was a party leader at election time.

There were two separate classes of issues arising out of the interview with Hamish Rutherford. The first was around the details of what Orr was saying about the Christchurch rebuild and the substance of NZSF’s involvement or lack of it. The former minister, Gerry Brownlee, understandably took umbrage at the substance of Orr’s remarks, but the details of that particular spat weren’t my concern (although a commenter in detail here suggests Brownlee was on the stronger ground).

The second class of issues – and the focus of my concern – is around the appropriateness of the Governor speaking out at all on these (and the other) issues. As I summed it up the other day, the Governor’s comments are very unwise and quite inappropriate – and would be so regardless of any substantive merits in his views. The Governor holds an important public office, in which he wields (singlehandedly at present) enormous power in a limited range of areas. It really matters – if we care at all about avoiding the politicisation of all our institutions – that officials like the Governor (or the Police Commissioner, the Chief Justice, the Ombudsman or whoever) are regarded as trustworthy, and not believed to be using the specific platform they’ve been afforded to advance personal agendas in areas miles outside the mandate Parliament has given them. We don’t want a climate in which only partisan hacks have any confidence in officeholders, and only then when their side got to appoint the particular officeholder. And that is the path Adrian Orr seems – no doubt unintentionally – to be taking us down. As I’ve noted previously, as his time in office lengthened, Don Brash made something of the same mistake. That was unfortunate and inappropriate, but in 14 years in office I’d be surprised if Don managed as many overtly political comments as Adrian Orr has delivered in less than two months.

I’ve had conversations with people, including journalists, who can’t really see a problem. I guess Orr is still in his honeymoon phase, and the journalists are still just grateful they no longer face a Governor who wouldn’t even communicate properly on issues that were his clear and specific responsibility. Perhaps it helps to see the problem by supposing that a new Governor had come to office and was giving interviews calling for, say,:

doing nothing about climate change,
cutting capital taxes,
lamenting that the government had not just stayed out of central Christchurch and had just landowners get on with it,
suggesting that the state stay out of housebuilding,
promoting irrigation schemes, and (for the sake of argument)
attacking light rail

That new Governor might be perfectly technically capable of doing monetary policy and financial regulatory tasks. But nonetheless, there would almost certainly be an outcry – people from the left attacking the Governor for his attacks on policies of the government of the day, and people on the right using the Governor’s comments to buttress their anti-government rhetoric. It would be unwise, and should be quite unacceptable for a Governor to be making such comments. And it is no more wise, or acceptable/appropriate, for him to be making comments on the other side of such issues.

I’m not suggesting that the Governor is an active Labour/Greens partisan, making the comments he does to try to advance the interests of the governing parties. Probably he believes he is better than them anyway. But clearly his personal views on all manner of issues seem to align with those of Labour (in particular), and since he has lots of turf battles to win (around the reform of the Reserve Bank) he probably judges that it doesn’t hurt his personal cause to be speaking as he has. But even if that works out for him in the short-term it isn’t desirable. His interests aren’t the national interest. It is conceivable that the second half of his term could see him working with a National government, and he’ll have made that more difficult with these overtly political comments, ranging well beyond his brief. And he will have increased the risk that future Reserve Bank Governor appointments will be made on an overtly partisan basis – “if the Governor feels free to speak on absolutely anything, we want someone who’ll be championing our particular causes”. That would be highly undesirable.

After Orr’s comments last week, there was an outraged response from Gerry Brownlee (on the specifics) but there was also a response from the Opposition leader, Simon Bridges. That upped the ante quite a bit, even though Bridges’ statement was pretty moderate.

Bridges did not directly answer questions about whether he believed Orr comments were a sign he had sided with the new Government, or on the tone of Brownlee’s comments, but said Orr would have taken a lesson from the episode.

“I am sure he [Orr] will have seen what Mr Brownlee has said, and you know, there’ll just be a lesson there in terms of sticking to the knitting in terms of what his remit is.

“I’m sure he’ll want to be very careful about not wanting to step into legitimate political debates, rather than his mandate as Reserve Bank governor.”

Bridges said National had supported Orr being appointed governor.

“He’s a good guy, he’s a clever economist, he’s a great communicator, so he’s got the skills to be governor.”

That “stick to his knitting” line was particular welcome, but it was still a pretty emollient statement. Opposition leaders don’t wade in every day criticising the Governor – in fact, memory suggests (perhaps incorrectly) it is really quite unusual – but it was clearly a statement that was seeking a de-escalation. There was no criticism of Orr’s appointment or his basic skills and qualities, and really just a quite moderate call for a minor course correction. When I saw the Bridges comments, I assumed that would be the end of the matter: the Opposition would take it no further, Orr would retire to lick his wounds and reflect, and perhaps in time emissaries might be dispatched to make clear that the Bank recognised where its core responsibilities did and didn’t lie. Others at the Reserve Bank, meanwhile, (better schooled in the responsibilities and limits of a central bank) would breath a sigh of relief

But no. Instead late on Wednesday the Governor put out a full page statement under the Reserve Bank name defending himself, and if anything taking the offensive, claiming the freedom (nay, responsibility) to speak out on almost anything. “Doubling down” was my quick summary.

The Governor began

I greatly respect and appreciate the operational independence of the Reserve Bank.

Maybe, but talking so freely on all manner of contentious political issues does nothing to foster long-term public support for that operational independence.

My comments about infrastructure investment reported in the recent Stuff article of 15 May related not only to my previous role as CEO of the NZ Super Fund, but also to my current role as Governor of the Reserve Bank.

There are two points here. First, as Governor he shouldn’t be giving interviews about his previous job – we didn’t hear Don Brash giving interviews about Trustbank or Alan Bollard about Treasury once they were Governor. It is all the more important to maintain that clear separation given that in this case the Governor had previously had another government job. But, second, this is where he begins to double-down, claiming that it is right and appropriate, as Governor, to be talking openly about these contentious political issues, for which he has no direct policy responsibility.

He disagrees

I spoke openly and frankly because that is a desired feature of the role of Reserve Bank Governor.

Yes, we would welcome a Governor who spoke clearly, and accessibly, on the issues Parliament has assigned to him. His immediate predecessor didn’t do that bit of the job well at all. But that is very different from a Governor sounding off, without nuance, on all manner of highly contentious issues. The Governor himself may “desire” to do so – and no doubt it makes good copy so journalists won’t say no – but perhaps the Governor could point to any other indication that the public interest is being served by the approach he is taking?

There follow a couple of paragraphs about the specifics of NZSF and Christchurch rebuild issues, including

Any lack of investment by the NZ Super Fund was not caused by lack of commitment from either Mr Brownlee or the NZ Super Fund. Rather it was due to no access for third-party capital into the core infrastructure space, for example, ports (air and sea), transport, electricity distribution and so on. These were decisions made by the appropriate authorities at the time.

It still isn’t clear why NZSF involvement (or any third-party capital) would have been appropriate in any of the major public aspects of the rebuild process, most of which were (as my commenter points out) well below the size threshold NZSF itself says it is looking for (and bigger ones, notably the convention centre and the stadium remain of questionable economic value). But, even setting that to one side, there is something extraordinary about this issue being fought on the website of the operationally-independent Reserve Bank. It is, quite simply, none of the Bank’s responsibility.

But here the Governor pivots to try to claim that this is all very much part of his new responsibilities.

That challenge is not unique to Christchurch or New Zealand. It is a global financial challenge and one that leads to financial instability at times, especially stressed balance sheets.

This is a stretch, to say the very least. Even if we were to allow that it was a “global financial challenge”, it wasn’t one in Christchurch, and certainly posed (and poses) no threat to financial stability in New Zealand. One might, as well, worry about pots of government money, and the way they can be used to subvert good decisionmaking, robust allocation of capital, and so on – perhaps especially if the Governor of a central bank starts championing the causes of such government funds.

The Governor attempts to generalise

The Reserve Bank Act requires us to promote a sound and efficient financial system. The Policy Targets Agreement that I have signed with the Minister of Finance also requires that, along with maintaining low and stable inflation, the Reserve Bank must contribute to maximising sustainable employment.

But even here he, no doubt deliberately, skates over some important language in the Act and the Policy Targets Agreement. For example, the Act does not require the Reserve Bank to “promote a sound and efficient financial system” . Here is the key provision of the Reserve Bank Act

68 Exercise of powers under this Part

The powers conferred on the Governor-General, the Minister, and the Bank by this Part shall be exercised for the purposes of—

(a) promoting the maintenance of a sound and efficient financial system; or

(b) avoiding significant damage to the financial system that could result from the failure of a registered bank.

In other words, it isn’t a general obligation, but a constraint on how the Bank’s statutory powers are used. The specific statutory powers to regulate banks must be used in a way that promotes the maintenance of a sound and efficient financial system. There is quite a difference from weighing in championing PPPs, more government debt, or specific solutions to particular Christchurch rebuild issues.

Similarly, in the Policy Targets Agreement – a provision governing the conduct of monetary policy – there is just this descriptive statement

The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

and a requirement to explain in each MPS

The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

No one thinks that offering interviews on PPPs, sustainable agriculture, or the Christchurch rebuild is what is meant by “the conduct of monetary policy”.

Well, no one other than the Governor that is. Because he goes on

I have spoken about specific issues recently because increased infrastructure investment opportunities provide sound investment choices, risk diversification for financing goods and services, and improves maximum sustainable employment by relieving capacity constraints. These are all core components of the Reserve Bank’s role and something we often speak about in our Financial Stability Reports.

I almost fell off my chair laughing when I read that line. When I was young at the Bank we used to occasionally argue that we were free to talk about absolutely anything because almost anything could be argued to affect price stability, in some form or another (resource usage and all that). There was even a statutory provision.

10 Formulation and implementation of monetary policy

In formulating and implementing monetary policy the Bank shall—

(a) have regard to the efficiency and soundness of the financial system:

(b) consult with, and give advice to, the Government and such persons or organisations as the Bank considers can assist it to achieve and maintain the economic objective of monetary policy.

But no one took that sort of ambitious – rather silly – argument very seriously. At least, it appears, until the Governor came along. Now, it seems, the Governor wants to openly argue that absolutely anything if within his purview.

Even then he seems confused. For example, he claims that

…..increased infrastructure investment opportunities………improves maximum sustainable employment by relieving capacity constraints.

Well, maybe eventually if the infrastructure investment itself is robust and cost-effective (a test much infrastructure spending in New Zealand fails). But, as no doubt his economists could point out to him, in the short to medium increased infrastructure spending puts more pressure on resources, and exacerbates capacity constraints and inflationary pressure (all that additional spending before the capacity comes on line). And then he goes on to assert that these are “core components” of what the Reserve Bank does. and are “something we often speak about in the our Financial Stability Reports”. Which is an odd claim, since issues about relieving capacity constraints would appear more naturally to belong in Monetary Policy Statements. And doubly odd in that when I checked the most recent Financial Stability Report, there was a but one reference to “infrastructure” in the entire document, and that a reference to something they call the “retirement saving infrastructure”. But there is a new FSR out next week, so I guess the Governor will be ensuring it does touch on infrastructure issues?

It all smacks of a statement pulled together in a rush, under pressure. He clearly hasn’t stopped to think of the total non-viability of a Governor addressing such issues in ways the government of the day doesn’t like (and thus the inappropriateness of only addressing it in ways they do like) or of the implications of his position – at future press conferences or FEC hearings he’d have no grounds to refuse comments on almost any aspect of policy some mischevious questioner wanted to ask about. Immigration policy Governor? Welfare policy Governor? And so on. It is a reckless path.

It isn’t unlawful, of course, for the Governor to speak on these issues. Perhaps, over time, a Governor could develop a sufficient reputation in office for his stewardship of his core responsibilities that people look to him or her to comment occasionally on a slightly wider range of issues. But to wade in, on so many contentious issues, in an utterly non-nuanced way, so early in his term seems extremely unwise and quite inappropriate. The Minister of Finance and the chair of the Bank’s Board should be making that point forcefully to the Governor, as often as is necessary until his behaviour changes.

Back when the Reserve Bank Board advertised the job last year, two of the qualities they claimed to be looking for were:

Personal style will be consistent with the national importance and gravitas of the role.
The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

Orr’s approach at present isn’t consistent with either of those.

And he appears to be carrying on as he started. In the Sunday Star-Times yesterday, Orr was again being quoted on things that are little or none of his responsibility.

Last year, New Zealand banks reported a combined $5.19b in profits, up just over $355 million year-on-year.

New Reserve Bank governor Adrian Orr said he was perplexed by the ongoing strength in bank profits.

Perhaps he might be “perplexed” but it really isn’t anything to do with a prudential regulator. If there are competition issues, we have a Commerce Act and government ministers. He went on

Checks on whether bank profits were sustainable would form a significant part of the “culture check” being undertaken by the Reserve Bank and Financial Markets Authority, Orr said.

A Royal Commission of Inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia revealed serious misconduct by New Zealand banks’ parent companies.

That prompted New Zealand regulators to demand more information from New Zealand banks, which they had until May 18 to deliver.

“I think you’ve always got to be sure that they are competing properly and they are behaving responsibly,” Orr said.

“If they’re making profits, good on them, but let’s make sure they’re long-term sustainable profits and there’s true competition in the markets.”

To repeat, almost none of this is anything to do with the Reserve Bank’s statutory areas of responsibility. Perhaps it plays to a populist mood, but it fails to respect boundaries, including the reasons why we assign different functions to different agencies. And the public mood is a fickle mistress.

Perhaps comments on bank profits are slightly less egregious, in some circumstances, than those on climate change, sustainable agriculture, capital gains taxes, PPPs or whatever, but none of its suggests a Governor with the sort of self-discipline and recognition of limits that the role demands. Much of it seems more attuned to grabbing headlines, than to offering the sort of nuanced reflection that might occasionally provide a useful contribution to a thoughtful debate on some important issues.

It is still early days in the Governor’s term, but a change of approach is already well overdue. It is not as if there aren’t plenty of issues that the Governor is most definitely responsible for – and accountable for – that he could be getting quietly on with.

A wager for the Minister of Finance to consider

May 19, 2018May 19, 2018 Michael Reddell New Zealand economic performance, Productivity, Uncategorized

In the speech I linked to in yesterday’s post, I noted that

…from all appearances, our leaders (political especially, but also bureaucratic) have largely given up, perhaps idly hoping that something will turn up. And occasionally inserting “higher productivity” into a speech isn’t evidence of serious intent – if anything, it seems more like a substitute.

and

Judging by the inaction of our leaders in tackling the persistent productivity failure it seems that when it comes to crunch ours (regardless of party) care much less about the kids – of this generation and the next – than the cheap rhetoric of election campaigns might suggest. Giving up on productivity – in practice, and whatever the rhetoric – is a betrayal of our kids (and their kids). And most especially it betrays the children towards the bottom of the socioeconomic scales, those who typically end up paying the most severe price of economic and social failure.

I’d written that a few days ago, but if anything events of the last few days just confirm my concern.

I gave the speech the first time over breakfast on Thursday morning. I’d just read Amy Adams’ pre-Budget op-ed on Stuff. There was nothing in that at all about productivity (word or idea), only self-satisfied comments about the allegedly wonderful economy National had bequeathed labour. That, you’ll recall, was the one with 1.5 per cent productivity growth in total over the past five years.

I didn’t listen to her boss’s speech in Parliament, but I get Simon Bridges’ emails and this was his post-Budget line

This Government was gifted an incredible legacy by hard working New Zealanders and by National. They inherited a strong, growing economy improving the lives of New Zealand families. They inherited a much more prosperous and outward looking country.

Yet today they’ve delivered a Budget that is strewn with broken promises. No universal cheaper doctor’s visits, 1800 extra cops that aren’t coming anytime soon, no money to build Dunedin Hospital, not to mention a raft of new taxes from a Government that promised ‘no new taxes’ in its first term.

Again, nothing at all about productivity, or the possibilities that it can offer all of us. This was, after all, the man of whose first economics speech as leader, I noted

500 initiatives [something he’d boasted of in the speech] and we still had barely any productivity growth in the last five years. And, as I recall, one of the BGA goals was a big increase in the export (and, presumably, import) share of GDP: those shares have actually been shrinking. Productivity levels languish miles behind the better advanced economies, and the gaps showed no sign of closing.

But what of the current government?

Sure enough, there were quite a few references to productivity, and lifting it, in the Minister’s material. Eight (to “productive” or “productivity”) in the speech alone. In the Minister’s Fiscal Strategy Report (with the subheading “Foundations for the future”) there were 17 references to productivity (quite a few of them mentions of the Productivity Commission) and another fifteeen uses of “productive” (often prefaced by the aspiration “more”).

Which is fine and good as far as it goes. But what backed it up? Not much.

On the very first page of the Fiscal Strategy Report, the government’s priorities are described

The Government’s priorities were set out in the Budget Policy Statement in December 2017. They are:

• Building quality public services for all New Zealanders and improving access to core services, such as health and education.
• Taking action on child poverty and homelessness.
• Supporting families to get ahead and sharing the wealth generated by our economy with a wide range of New Zealanders.
• Sustainable economic development and supporting the regions.
• Managing our natural resources and taking action against environmental challenges, such as climate change.

That document outlined the Government’s ambitious plan to reduce child poverty, protect the environment, create decent jobs, and build more affordable houses.

And not a word, not even an allusion, to beginning to close those productivity gaps. The Budget material as a whole looks as if referring quite often to lifting productivity was a substitute for actually doing anything serious about it creating a better climate for it.

If I recall correctly, there were a couple of references to things that might help. For example, there was mention of tax reform flowing out of the Tax Working Group’s recommendation. We all assume a limited capital gains tax will emerge at the end of the process, and not much more (land taxes, for example, became infeasible once the land under the family home was ruled out). There might be a decent case for a limited capital gains tax, at least on grounds of (apparent) equity, but no one thinks a CGT is going to make any material difference to New Zealand’s productivity performance. If the Minister really did, he’d be making the case, documenting the evidence etc.

There was also mention of the new R&D tax credit. I guess reasonable people can differ on how much impact that will have – my doubts are here and here – but I don’t know anyone who thinks it is a big part of changing the overall picture of productivity performance in New Zealand.

And then, of course, there is the Provincial Growth Fund. I guess the Minister’s party is in a coalition with New Zealand First, so he has to talk up the benefits of spending all that money. Everyone else recognises that it is no part of a serious growth (in productivity) strategy.

And, on the other hand, there is not a mention of the (real) exchange rate, one of the more pressing imbalances in the New Zealand economy.

But don’t just take it from me. The Treasury does the economic forecasts. They do expect a bit more productivity growth in the next few years than in the last few years, but (a) mostly that looks like an assumption that things just get back to less-bad “normal”, and (b) the assumed rates of productivity growth aren’t going to make any inroads at all on the huge gaps to the rest of the advanced world. And although an increasingly open economy – trading more with the rest of the world – is usually part of any successful catch-up strategy, as I showed yesterday the Treasury forecasts suggest no reversal in the decline in the export/GDP share that took place over the last few years.

Treasury does its forecasts on the basis on government policy, but that doesn’t take account of things that are still just political promises (even if quite likely to be), like the capital gains tax.

So perhaps the Minister of Finance – like his colleague the Minister of Housing – thinks The Treasury has it all wrong, and is far too pessimistic. Perhaps he’s really convinced that his government will successfully turn round our productivity performance, and get us on the track for catching the OECD top-tier. As I noted in my speech, with the sorts of productivity growth rates various catch-up OECD economies have managed over the last 15 years (crisis, recession, and all) we could halve that gap in fifteen years, and close it altogether by 2050.

US economist Bryan Caplan encourages people who really believe an argument to express it in the form of a wager (typically for reasonably modest amounts, of around $100). Doing so forces the parties to identify clearly what they do and don’t believe, and think carefully about the probabilities. In that spirit, I’d be happy to offer a wager to the Minister of Finance (and/or his colleagues, the Prime Minister, or the Minister for Trade and Export Growth).

Conditional on them remaining in government, I’d expect that, if they are really serious about productivity – lifting the possibilities for our kids – and believe they have the strategy to do it (even if not all the bits are yet on the statute books), they would be willing to wager that New Zealand will average annual labour productivity growth over the next six years of at least 2 per cent. I’d be only too happy to take the other side of such a bet, because I see no sign in government policy of anything that will substantially turn around our productivity performance. No doubt, there will be the odd good year – some of which might just be measurement – but I’d be very surprised if we manage total labour productivity growth of anything close to even 5 per cent in the next five years. Of itself, that wouldn’t be disastrous – it would be quite a bit better than the last five years – but, once again, it would mean no progress in closing those gaps. (Of course, if I were to lose such a bet, I’d mostly be delighted – better prospects for all of us and our kids.)

In fact, I’m sure the Minister of Finance knows his strategy won’t make any material difference to New Zealand’s dismal productivity performance. If so, the words are just a substitute for action, and the betrayal of our kids stretches on through yet another government.

This is what productivity means

May 18, 2018May 18, 2018 Michael Reddell Productivity

Presbyterian Support Northern is hosting a series of lectures on different aspects relevant to the wellbeing of children. The first lectures were given by Australian Labor MP, and former economics professor, Andrew Leigh. I wrote about his lectures here.

I was asked to speak on something around productivity and the wellbeing of children (thus there are huge areas highly relevant to child wellbeing that I simply don’t touch on). This was how my talk opened.

Imagine a country in which the average age at death was only about 45, 6 per cent of children died before their first birthday, and another 1.5 per cent before they turned five. Not many children are vaccinated.

Most kids get to primary school – in fact it is compulsory – but only a minority attend secondary school. By age 15 not much more than 15 per cent of young people are still at school.   Only a handful do any post-secondary education (total university numbers are about 1 per cent of those in primary school).   Houses are typically small – not much dedicated space for doing homework – even though families are bigger than we are used to.   Perhaps one in ten households has a telephone and despite the street lights in the central cities most people don’t have electricity at home.

Tuberculosis is a significant risk (accounting for seven per cent of all deaths). Coal fires – the main means of heating and of fuel for cooking – mean that air quality in the cities is pretty dreadful, perhaps especially on still winter days. Deaths from bronchitis far exceed what we now see in advanced countries. There isn’t much traffic-related pollution though – few cars, so people mostly walk or take the tram. The biggest city is finally about to get a proper sewerage system, but most people outside the cities have nothing of the sort.      And washing clothes is done largely by hand – imagine coping with those larger families.

Maternal mortality rates have fallen a lot but are still ten times those in 2018 in advanced countries. One in every 50 female deaths is from childbirth-related conditions – which leaves some kids without mothers almost from the start.

Welfare assistance against the vagaries of life is patchy. Most people don’t live long enough to be eligible for a mean-tested age pension. Orphans aren’t in a great position either, and there is nothing systematic for those who are seriously disabled. There is a semi-public hospital system, but most medical costs fall on individuals and families, and there just isn’t much that can be done about many conditions.

There are public holidays, and school holidays, but no annual leave entitlements. No doubt the comfortably-off take the occasional holiday away from home, but most don’t, because most can’t (afford it). Only recently has a rail route between the two largest cities been opened – but it takes 20 hours for cities only 400 miles apart.

I wouldn’t choose to live in that country. Would you?

And yet my grandparents did live there – they were all kids then. This was New Zealand 100 years or so ago, just prior to World War One. I took most of that data from the 1913 New Zealand Official Yearbook.

And if it all sounds pretty bleak, New Zealand was probably the wealthiest place, with best material living standards, of any country on earth.   In the decade leading up to World War One, New Zealand’s per capita income was (on average) the highest in the world (jostling with Australia and the US, with the UK a bit further behind).    The historical GDP estimates are inevitably a bit imprecise, but on statistic after statistic in that 1913 Yearbook, New Zealand showed up better than the other rich countries the compilers had data for.

The difference in material living standards between then and now is productivity – the new ideas, new products, new ways of doing old stuff, making more from what we have. Of other influences on material wellbeing, the terms of trade haven’t changed much taken over 100 years as a whole, and people work a shorter proportion of their lives now (whether in the market or in the home) than they did in 1913. Then, most (who survived infancy) were in work by 14, and dead by 65. Productivity is that enormous difference between what we enjoy today, and what my grandparent had as kids in middle-class New Zealand families on the eve of World War One.

And yet, by international standards we’ve done badly. We’ve gone from top of class to perhaps 30th today. It would take a two-thirds lift in average productivity for us to match today’s top-tier (a bunch of – small and large – northern European countries, and the United States).

That’s bad. On the other hand, think of the possibilities it leaves open. We don’t need to blaze trails at the productivity frontiers: making significant inroads on the gap between us and the top-tier would make a big difference to us, and to our kids. And economic failure tends to fall most heavily on those at the bottom, so getting a significant lift in productivity opens up possibilities for everyone, including the disadvantaged.

In this address I’m not focused on the how – the specific policies that might make a real difference. My focus is on highlighting the difference that could be made, and calling for our leaders – political and bureaucratic – to start acting as if they believe things can be better, getting in train processes that might identify what is really important for productivity here in New Zealand, and then getting on with it. Despite occasional references in speeches, our political leaders seem to have more or less given up, focusing on other stuff.

There is a (valuable) place for redistribution and policies that address immediate needs now – it isn’t an either/or – but just as no possible redistributive policies in 1913 could possibly have given people today’s material living standards, so any new redistributive policies now will inevitably make much less difference than markedly lifting our productivity performace would. I’ve banged on here about how dismal productivity growth in New Zealand has been in the last five years in particular (a total of 1.5 per cent). The best-performing OECD countries over the most recent five years were averaging more than 2 per cent productivity growth per annum – and all of them were countries catching up with the most productive economies, just as we once aspired to do. If we’d managed 2 per cent productivity growth per annum in the last five years, per capita GDP would be around $5000 per head higher (per man, woman, and child) today.

Catching up to the top tier will, in a phrase from Nietzche, take a “long obedience in the same direction” – setting a course and sticking to it. But here is a scenario in which the top tier countries achieve 1 per cent average annual productivity growth, and we manage 2.5 per cent average annual productivity growth. Here’s what that scenario looks like:

scenario

I’ve marked the point, 15 years or so hence, where the gap would have closed by half.

Could it be done? Well, on OECD numbers the G7 countries as a group have managed average productivity growth in the last 15 years of about 1.1 per cent per annum, and plenty of OECD countries – each in catch-up mode (Korea, Turkey, and various eastern and central European countries) – have matched or exceeded 2.5 per cent annual productivity growth over that period as a whole. Mine is just a scenario, but it doesn’t look like one that should be beyond New Zealand – and unlike any of those other countries, we were the richest and most productive country in the world barely more than a century ago.

The full text of my address is here. It includes a plug for fixing the manifest evil – by outcome if not by intent – that is our housing and urban land market, which systematically skews away from those at the margins, where (inter alia) our particularly disadvantaged children are typically found.

I end this way:

Judging by the inaction of our leaders in tackling the persistent productivity failure, it suggests that when it comes to crunch ours (regardless of party) care much less about the kids – of this generation and the next – than the cheap rhetoric of election campaigns might suggest. Giving up on productivity – in practice, and whatever the rhetoric – is a betrayal of our kids (and their kids). And most especially it betrays the children towards the bottom of the socioeconomic scales, those who typically end up paying the most severe price of economic and social failure.

Productivity isn’t just some abstract plaything of economists. It makes a real and tangible difference, opening up whole new possibilities and options. We need, and should able to achieve, a whole lot more of it. Our kids deserve no less.

Scattered thoughts on Budget 2018

May 18, 2018May 18, 2018 Michael Reddell Fiscal policy, labour party, Treasury

The possible new fiscal institution first, and them some comments on some of the numbers.

It was interesting to see the joint statement from James Shaw and Grant Robertson that the government is looking to move ahead with some sort of independent fiscal institution. This had been a Greens cause more than a Labour one – former leader Metiria Turei had openly called for a new body – and although the pledge had formed part of the pre-election Budget Responsibility Rules, I’d been beginning to wonder whether the government would follow through. After all, Treasury has never been keen on a potential alternative source of fiscal advice/analysis, even though the independent review of their fiscal advice and analysis a few years ago by the former head of the IMF Fiscal Affairs Department had been positive on the idea that New Zealand establish a Fiscal Council (and the OECD had also recommended it).

There were few specifics in yesterday’s statement

Public consultation will be launched in August on establishing an independent body to better inform public debate in our democracy, Associate Finance Minister James Shaw announced today.

“We are pleased to take forward a Green Party idea developed before the last election to see a body formed which could provide all political parties with independent, non-partisan costings on their policies,” says James Shaw.

“That way we can reduce political point-scoring and attempts to create unreasonable doubt about a party’s policy figures. That will mean better debate about the ideas being put forward.

“We are proposing a new institution independent of Ministers that would provide the public with an assessment of government forecasts and cost political parties’ policies,” says Grant Robertson.

“This independent fiscal institution (IFI) would crunch the numbers on political parties’ election policies in a credible and consistent way,” says James Shaw.

Indeed, the statement is a reminder that there are two very different roles being discussed here:

costing political parties’ election promises, and
monitoring and assessing government (Treasury surely?) fiscal forecasts, and perhaps government fiscal strategy.

As I’ve written previously, I am generally positive on the second of those roles, but am sceptical of the former. Notwithstanding last year’s debates about “fiscal holes”, I don’t see a gap in the market (after all, surely “pointscoring” is part of the point of election campaigns?), and I suspect any such costings office would tend to become an additional research service for small parties (the Australian office seems to have been used mainly by the Greens), and not much used either by the main parties (with more resources, including in the form of supporters’ own expertise), or by any right-wing parties (given the social democratic leanings of those likely to be doing this sort of work, probably on rotation or secondment from The Treasury).

Of the second leg, these were some of my earlier comments

A Fiscal Council seems more likely to add value if it is positioned (normally) at one remove from the detailed forecasting business, offering advice and analysis on the fiscal rules themselves (design and implementation) and how best to think about the appropriate fiscal policy rules. The Council might also, for example, be able to provide some useful advice on what material might usefully be included in the PREFU (before the election, I noted that routine publication of a baseline scenario that projected expenditure using the inflation and population pressures used in the Treasury economic forecasts would be a helpful step forward).

There is unlikely to be a simple-to-replicate off-the-shelf model that can quickly be adopted here, and some work will be needed on devising a cost-effective sustainable model, relevant to New Zealand’s specific circumstances. That is partly about the details of the legislation (mandate, resourcing etc), but also partly about identifying the right sort of mix of people – some mix of specific professional expertise, an independent cast of mind, communications skills, and so on. A useful Fiscal Council won’t be constantly disagreeing with Treasury or the Minister of Finance (but won’t be afraid to do so when required), but will be bringing different perspectives to bear on the issues, to inform a better quality independent debate on fiscal issues.

I hope to offer some more-detailed thoughts when the public consultation phase of the policy development occurs. In the meantime, I’d continue to urge ministers (and Treasury) to think about broadening the ambit of any new council, to include external monitoring analysis of monetary policy and perhaps the other responsibilities of the Reserve Bank.

…it wouldn’t be about second-guessing individual OCR decisions or specific sets of forecasts, but offering perspectives on the framework and rules, and some periodic ex-post assessment. In a small country, it would also have the appeal of offering some critical mass to any new Council.

What of this year’s numbers?

I’m not someone who champions big government. In fact, I think we could do the things the state should be doing, and do them well – better than they are being done now – with a smaller share of GDP devoted to government spending.

But as outside observer of left-wing politics in government, I continue to find charts like this a bit surprising.

core crown expensese 2018 budget

Not only is government spending over the next four fiscal years planned/projected to be a smaller share of GDP than in the last four years under the previous government, but that government spending share averages less than in every single year of the Clark/Cullen government. In the interim, nothing has been done to raise the NZS eligibility age, so that that particular fiscal outlay is becoming more burdensome every year. And all the campaign rhetoric – and actually the rhetoric in government – is about rebuilds, past underfunding etc etc. Something doesn’t seem to add up. I suspect, as I’ve argued previously, that the aggregate spending line can’t, and won’t, be held over the next few years.

And you will recall that the Labour-Greens pledge around government spending was (as it first appeared last May)

4. The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.

During the global financial crisis Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.

In the separate release on the rules yesterday, that second paragraph now reads

Core Crown spending has averaged around 30% of GDP for the past 20 years. The Treasury forecasts show we are staying below this – peaking at 28.5% of GDP in 2018/19.

It is as if 30 per cent has become a ceiling – staying below it a badge of honour for the government – rather than something to fluctuate around.

Perhaps the Minister would defend himself by noting that over the forecast period the economy is running at capacity, and he needs to allow for the inevitable next recession at some point. But with planned spending averaging 28.5 per cent of forecast GDP, it would take an unexpected 8 per cent fall in nominal GDP (relative to the current forecast path), with no change at all in government spending (say, wage settlements being lower etc) for government spending to equal 31 per cent of GDP, even in a single year in the depths of such a recession. And even 31 per cent wouldn’t be out of the recent historical range of the spending to GDP ratio. Again, relative to the political rhetoric, something doesn’t compute.

There are also some puzzling things in the Treasury macro forecasts – which are Treasury’s responsibility, not that of the Minister of Finance. Here is the difference in the interest rate projections of the Reserve Bank and The Treasury. The Bank forecasts the OCR directly, while The Treasury forecasts the 90 day bill rate, but you can easily see the difference.

rb and tsy int rates

Only last week, the new Governor (over)confidently told us that official interest rates “will” remain on hold for some time to come. The Treasury clearly doesn’t believe him, reckoning that by this time next year we’ll already have had 50 to 75 basis points on OCR increases, with lots more increases in the following two years.

Even though I think the Governor was expressing himself too strongly, I just don’t believe the Treasury numbers at all. They imply a lot of pent-up inflation pressures building up now that can only be nipped in the bud if the Bank gets on with the job and tightens policy. And yet, on Treasury’s own numbers, the output gap has increased from around -1.5 per cent of GDP (for several years) to around zero now, and there has been only a very modest increase in core inflation. It is hard to see how the quite small projected increase in capacity pressures will now finally get core inflation back to 2 per cent – requiring quite a lift in the inflation rate from here – and how those pressures are likely to appear if people really thought such a significant tightening of the OCR was in prospect. As it is, on these Treasury numbers, it is another three years until inflation gts back to 2 per cent. That is even slower than in the Reserve Bank projections.

Also a bit sobering were the Treasury export forecasts. From time to time the government talks – as its predecessor did – about lifting exports (and imports presumably) as part of a successful reorientation of the economy. Treasury clearly doesn’t believe that any such reorientation is underway.

exports to gdp budget 2018

Just some more of the same dismal picture. But I guess that is what one would expect when the two parties just keep on with much the same policies that got us where we are today, with the economy less open (as measured by trade shares) than it was averaging 25 years ago).

I mentioned earlier the uncertain timing of the next recession. If the Treasury projections come to pass we’ll have gone 12 years (since the 2010 double-dip recession) without a recession. That is possible, but it probably isn’t an outcome people should be planning on. I noticed last night this chart from a recent survey of US fund managers.

next recession

Quite possibly, like economists, fund managers picked six of the last three recessions. Nonetheless, it is a salutary reminder of where things can go wrong. For example:

The Fed could end up overtightening (often a contributor to past downturns),
Emerging market stresses (eg Turkey and Argentina) could foreshadow something more widespreads,
Economic data in the euro-area seems to be weakening, and the likely new Italian government doesn’t look like a force to increase confidence and resilience in the euro,
and of the course there are risks around China, and in the Middle East – trade wars and other aspects of geopolitics.

Nearer to home, some straws in the wind are also starting to pile up.

I don’t do medium-term economic forecasts – nor does any wise person – but with the terms of trade assumed to hold at near-record highs, there is a sense that the macro picture the government is using, and selling, is a little too good to last. In that respect – but probably only – it is eerily reminiscent of the start of 2008 when The Treasury revised its advice and confirmed to the then government of the day that it thought the higher revenue levels were likely to be permanent. Little did they realise…….

Of course, our government debt levels are very low – net debt is only 7.3 per cent of GDP – so these risks aren’t some sort of existential threat (although any new global downturn will greatly exacerbate fiscal problems elsewhere, and further constrain policy freedom of action and limit the ability of the advanced world to bounce back quickly). But our authorities do need to be more actively planning for the next downturn: it will come, and when it does it appears that the government and the Reserve Bank have not yet done anything much to assure that they have anything the freedom of monetary policy action we can usually count on. (Perhaps instead of offering his unsolicited thoughts on all and sundry political issues, the Governor could substantively address that issue, which is core to his remit.)

Israel: economic success, or not

May 17, 2018May 17, 2018 Michael Reddell Israel

I’m out of town this morning, so just something brief and prescheduled:

Israel has been in the media a lot this week. Much of that has been about the confrontation on the Gaza border.

But it has also been the 70th anniversary of the founding of the state of Israel. In many respects it is an astonishing achievement, even if I remain sceptical of its longevity. Sadly, demography and history seem to be against them. Demography? 400 million Arabs and 80 million Iranians, few of whom seem reconciled to the idea of a permanent state of Israel. History? Well, the Crusader states last longer than 70 years, but were wiped out. More recently, Smyrna (let alone the cleansing of the millenia-old Jewish community in Baghdad).

But the economic achievement of Israel can be, and often is, overstated. I noted on Kiwiblog the other day, a celebratory post, including this

In 70 years, Israel has become one of the world’s leading scientific and technological companies[countries?]. 45 of their top inventions are listed here.

12 Israelis have won Nobel Prizes – one literature, three peace, two economics, six chemistry. (Note a further 155 Jews in other countries have won a Nobel Prize, comprising 22% of all nobel prizes since 1901 despite being just 0.25% of the world’s population).

A few of their inventions are:

cellphones

Intel chips

ICQ

Polio vaccine

antivirus software

ingestible video cameras for cancer detection

USB flash drives

All of which is pretty impressive. But what does it amount at an economywide level?

As regular readers will know I frequently point out that over recent decades New Zealand’s cumulative growth in productivity (real GDP per hour worked) has been lower than in almost all other OECD countries. And we started below the average and had been aiming to catch up.

But how has Israel done by comparison? This chart just shows the ratio of real GDP per hour worked for New Zealand and Israel relative to that of the United States (as a representative high productivity OECD economy), starting from 1981 because that is when the Israel data starts.

israel nz comparison

We’ve done badly, and they’ve done even worse.

I’m sure there are all sorts of explanations. For example, Israel spends a large chunk of its GDP on defence and security, and even if that demand spurs innovations in some specific industries, it is unlikely to be a long-term positive for economywide productivity. As I’ve pointed out previously, Israel is also remote – albeit in different ways to New Zealand: political barriers, security fears etc, limit the opportunities for trade and investment. And Israel doesn’t exactly have the least heavily-regulated economy in the OECD.

But it is also hard to go past the elephant in the room. To listen to the advocates of economic benefits of immigration, Israel should really the poster-child, the unquestionable success story. Any Jewish person anywhere can move to Israel and claim citizenship, and large numbers have. Population growth in Israel in recent decades has been faster than anywhere else in the OECD – partly birth rates and partly migration – and (for whatever reason) Jewish people tend to come quite highly-skilled. That part of the population growth has probably been a boon from a defence and security perspective, and of course the Law of Return is pretty fundamental to Israel’s sense of national identity, and its founding purpose.

But evidence of economic gains appears elusive.

Very unwise and quite inappropriate

May 16, 2018May 16, 2018 Michael Reddell Adrian Orr, Uncategorized

That was my immediate reaction yesterday when someone asked my view of Reserve Bank Governor Adrian Orr’s latest public comments, on the Christchurch rebuild, PPPs, government infrastructure spending, and so on.

Here was just a sample of what the Reserve Bank Governor said, as reported by Stuff’s Hamish Rutherford

Orr, who is now the governor of the Reserve Bank, made an enthusiastic plea for New Zealand to embrace “third party capital” – a reference to public private partnerships – as a means of boosting investment in infrastructure.

“This country, we’ve gone through the lowest ever global interest rates, we’re in good fiscal health. Why aren’t we investing?” Orr said in an interview.

“Personally, as a citizen of New Zealand I’m very pleased to see public investment being planned and trying to get underway, and I’m even more pleased as a citizen of the world that third party capital is increasingly being allowed to be part of the public infrastructure investment.”

Orr acknowledged he was giving a plug for his former employer, the NZ Super Fund

He goes on to complain about the rebuild process, and the lack of investment opportunities for NZSF, about public procurement processes, even weighing on the woes of Fletcher Building.

As I’ve said before, if having left the NZSF job he was now retired – or even just joining the ranks of company directors and consultants – there would be no problem with him expressing his views.

But he is a public servant. And as Governor of the Reserve Bank he personally exercises an extraordinary degree of power, singlehandedly making the monetary policy decisions, as well as exercising a huge range of regulatory powers over banks, insurance companies and other non-bank deposit-takers. He is the most powerful unelected individual in New Zealand. In the areas Parliament has empowered him.

But the stuff he was talking about in his interview yesterday was – again – none of his official business. He is welcome to his personal views, but when he speaks publically he should be speaking only on the things he has official responsibility for. Either that, or change jobs and make a run for Parliament. As someone observed to me recently, too often Orr sounds as if he would really prefer to be Minister of Finance. But he isn’t. He has no popular mandate, and responsibilities only as specifically laid down in various bits of legislation (primarily the Reserve Bank Act).

Why does it matter? Because if the public is to be confident in delegating huge amounts of power to unelected officials, they also need to be confident that those unelected officials aren’t misusing that power, or the pulpit it can provide, to pursue personal or political agendas.

I’ve written several posts recently about the new book, Unelected Power, by former Bank of England Deputy Governor Paul Tucker. Touching on some of these sorts of issues, Tucker notes that in his time at the top of the Bank of England he never knew the personal politics of his senior colleagues, and he was glad of that. Perhaps that is just the famed English reserve, but it is something to reflect on here. I’ve written previously about Don Brash overstepping that mark – in a way that really soured relations between the Bank and the then government. Arguably Orr’s case is worse, both because he is weighing in on immediately relevant political issues, including more or less directly attacking the stewardship of the previous government, and because he is overtly on the same side as the current government. When (as central bank Governor) you openly disagree with the current government on general policy issues it might still be unwise and very wrong , but at least no one thinks you are in league with the government. The whole case for an independent central bank, is so that they can act independently, in those specific areas Parliament has asked them to handle. The Christchurch rebuild, PPPs, infrastructure finance more generally, are not among those responsibilities. Nor, for that matter, is “giving a plug” for the Governor’s former employer.

When the initial Stuff story appeared, I was a bit surprised the journalist didn’t seem to have sought a comment from the Opposition Finance spokesperson, who as it happens is also a Christchurch MP. You just do not see anything like this degree of overt political comment from central bank Governors in other advanced economies, and one of Paul Tucker’s other points is that delegating power to independent agencies really only works well if the legislature is effective in scrutinising and holding it to account the independent agency, including ensuring that it is (a) doing its job, and (b) only doing its job (in other words, sticking to the mandate democratically elected people have given them). Parliamentary scrutiny of the Reserve Bank was very weak under the previous government, and appears to be no better now. There is still no word from Amy Adams about the Governor flagrantly overstepping the bounds.

But a few hours later, her colleague Gerry Brownlee came out swinging at the Governor. I don’t often agree with Mr Brownlee, but on this occasion his remarks seemed both forthright and to the point. He was “incensed”

Brownlee said he was “incensed” by the comments which he believes mischaracterised the situation. As Canterbury Earthquake Recovery Minister he visited the fund about investment options but were told were not on the scale the fund needed.

“It certainly looks like the Reserve Bank governor has bought into the current Government’s mantra that everything the previous government did was wrong and everyone should join in in saying so.

“And I think that’s a very dangerous position for him to be in.”

When a senior MP describes himself as “incensed” by comments made by the central bank Governor – especially when they aren’t about things in the Governor’s remit – it is time for the grown-ups in the room to wake up and do something about the situation. When the Governor so undermines confidence in himself, he weakens his own position, he weakens the Bank, and that is potentially damaging for the country.

I’m still a bit puzzled by what game the Governor is playing.

It could be that he just hasn’t yet adjusted to his new role. In various earlier incarnations he was chief economist for the National Bank and for Westpac. In roles like that part of his job was to say to provocative stuff in an interesting way, to get coverage for him and his bank. Back in the spotlight now, with every serious media outlet only too happy to report his every word, perhaps he just hasn’t adjusted yet. I find that a little hard to credit, for various reasons, including that he is 55 not 35, has already spent eleven years as a public sector CEO, and that yesterday’s remarks weren’t the first time he’s overstepped.

Perhaps, too, he just sees no connection between the comments he makes on climate change, infrastructure finance, the Christchurch rebuild, PPPs etc and his day job. But he’d have to be extraordinarily naive to believe that, and he isn’t. His views are reported because he is the Governor, not as “Adrian Orr, citizen of Devenport [or wherever he now lives]”. Another really senior unelected role is that of the Chief Justice: just think of the outrage if she were out giving speeches and interviews on all manner of political issues, unrelated to the administration of justice. That is a measure of how wrong Orr’s current stance is – and he wields more power personally than the Chief Justice.

And that leaves the even more unwelcome possibility that, in some sense, Orr is playing politics. A former colleague put it to me the other day that “Orr is a political animal, par excellence”. I’m sure he is only ever uttering his own genuinely-held views, and I’m not sure he is even that good a political player (on the evidence of the last few weeks) but look at his incentives. The Governor has a huge number of turf battles to fight and win this year, around the various stages of the review of the Reserve Bank Act. Will the Bank keep prudential responsibilities in house? Even if so, will the policymaking powers stay with the Governor, move to a committee, or be removed back to the Minister? What sort of people will be appointed to the new Monetary Policy Committee, and what sorts of constraints will the Minister put on their freedom to challenge the Governor? Might tighter budgetary constraints be put on the Bank, or regular (properly-resourced)_ provisions for external reviews be established? And so on.

And how to win those battles? Good quality analysis and advice goes only so far. Orr might reasonably conclude that things are more likely to go his way, if the Minister and his Cabinet colleagues (and parties outside Cabinet) smile benevolently on the Governor and think of him as “one of us”.

I’m not fully persuaded this is the bulk of the story either. Orr has, after all, been a public servant for the last 15 years, and if his approach is all about political game-playing and seeking leverage with ministers, you’d have to think he’d have the art down pat better than the overtly political stuff on display in recent weeks. There has to be a risk that, whatever his intentions, he has overstepped the mark so far and so often, so early, that at least some in government might be having a case of buyer’s remorse, wondering quite what they have got themselves into with this new Governor – who might be “sound” ideologically, but seems to lack that deeper sort of soundness the nation should be able to count on.

Whatever the explanation, it needs to stop.

When there was speculation last year as to who might be the next Governor, one reason on my list of factors counting against Adrian Orr was precisely that he was a strong character, given to speaking his mind, and one whom the Board (and specifically the Board chair) might find hard to keep on a leash. The same thought might, I speculated, worry a new Minister of Finance. Of course, in the Board’s case it has become increasingly clear that they see themselves as facilitators for, and defenders of, the Governor, not needing to do anything to hold him to account. But if they really care at all about the institution, and about good governance in New Zealand, they need to call the Governor to order now.

I noted earlier my surprise that the Opposition finance spokesperson had not commented on the way the Governor is operating. Neither, it appears, has the Minister of Finance. Perhaps it would be worth some journalist asking the Minister for his comments, even if only to record him refusing to comment, washing his hands of any responsibility (for the conduct of someone he appointed, in an agency he is responsible for).

The Governor is damaging himself, and he is damaging the institution. It is early days and there is still time for a course correction, but it needs to happen now, and to be decisive. It isn’t, after all, as if the Governor is without messes to clear up in his own areas of responsibility (eg here and here). And leave politics – including public finance, infrastructure, climate change or whatever – to those we’ve elected.

(I have deliberately avoided engaging with the content of the Governor’s comments. Even if I fully agreed with him, they would still be unwise and quite inappropriate, and it is the process point – good governance – that matters most.)

UPDATE: I notice that issues about Orr’s remarks are beginning to be highlighted elsewhere.

UPDATE 2: Rereading the post I wrote when Orr’s appointment was first announced, there is nothing (positive or otherwise) in it I’d resile from now, and some of the potential areas of concern touched on then already seem to be being realised.

UPDATE 3: For those who don’t normally read the comments here, I suggest at least looking at the one by former Reserve Bank official, Geof Mortlock.

UPDATE 4: The Minister of Finance has indeed refused to comment.

Eyes determinedly shut

May 15, 2018May 15, 2018 Michael Reddell Adrian Orr, China, NZ politics

After a series of posts late last year, I haven’t written much recently about the New Zealand economic and political relationship with the People’s Republic of China. It isn’t that I’ve lost interest, or become somehow less convinced of the importance of the issues. It remains, for example, a disgrace that unrepentant former PRC intelligence officer Jian Yang – who now acknowledges misrepresenting his past on official documents – sits in our Parliament, protected by his own party and not subject to any critical scrutiny from the new Prime Minister or her party. All parties seem determined to look the other way. Businesses trading with the party-State no doubt quietly cheer them on. Don’t ever rock the boat, don’t ever display any self-respect, seems to be the watchword. Deals need doing, bottom lines enriching.

I’ve been busy with other things, but yesterday was the “China Business Summit 2018” in Auckland, operating under the logo “Eyes Wide Open”. The Prime Minister and the Minister for Trade and Export Growth both gave what were billed as keynote speeches. I want to focus on the Prime Minister’s speech, but couldn’t go past David Parker’s risible description of

“China’s leadership on issues like…trade liberalisation have the potential to add momentum to collective efforts in the region”.

No serious observer – no one with other than an obsequious political agenda – could regard the PRC as a leader in the cause of trade liberalisation. The PRC lags badly, mostly to the detriment of their own citizens. That is so whether it is tariffs under consideration, or non-tariff barriers, and it is as true of the letter of law as well as the way laws are actually applied (recalling that the PRC is not exactly known for the priority placed on the rule of law. As the Chief Justice of the PRC regularly reminds people, in the PRC the law is at the service of the Party.

Curiously enough, even Stephen Jacobi – executive director of and spokesman for the (largely) taxpayer-funded advocacy group the New Zealand China Council seems to agree. He is reported in another article this morning again stressing how difficult it will be to get the upgrade to the New Zealand/China preferential (“free’) trade agreement unless New Zealand gets more actively on board with the PRC geopolitical initiative, the Belt and Road. Because, let’s be clear, the PRC’s barriers to international trade are a great deal higher than those New Zealand still has in place. For them, deals (“FTAs”) are primarily about politics, not about some rules-based international order – which may from time to time be useful to them, but only instrumentally.

But what of the Prime Minister’s speech?

There is lots of gush, and little reality.

We will look to cooperate with China to promote regional stability and development

How, one wonders, do we see the PRC promoting regional stability – that isn’t just the quiescence of the indebted, the intimidated, or the bought – in flagrant aggression in the South China Sea, standoffs with India, in the repeated threats to prosperous and democratic Taiwan, in the intimidating patrols around the Senkaku Islands, in loading up developing countries with debt, in the threats to democracy in places like Cambodia or the Maldives?

She moves on to note that

The Belt and Road Initiative is a priority for China. New Zealand is considering areas we want to engage in the initiative, and other areas where we will be interested observers.

In fairness, that is hardly a ringing endorsement – and perhaps less than her audience would have liked – but recall what our government (previous one) has already signed up to in the Memorandum of Arrangement. I wrote about that a few months ago. You might recall that the two governments agreed.

BRI 3
I think the ball is in the PRC’s court when it comes to avoiding threats to regional peace. By pretending otherwise, New Zealand governments simply give cover to the PRC agenda.

Of course, there is worse in the agreement, with talk of us both promoting the “fusion of civilisations”

BRI 2

As I noted in the earlier post

I’m quite sure I – and most New Zealanders – have little interest in pushing forward “coordinated economic…and cultural development” with a state that can’t deliver anything like first world living standards for its own people (while Taiwan, Singapore, South Korea etc do) and whose idea of cultural development appears to involve the deliberate suppression of culture in Xinjiang, the persecution of religion (Christian, Muslim, Falun Gong or whatever), the denial of freedom of expression (let alone the vote) and which has only recently backed away from compelling abortions. And that is just their activities inside China. “Fusion among civilisations” doesn’t sound overly attractive either – most of us cherish our own, and value and respect the good in others, without wanting any sort of fusion,and loss of distinctiveness. But perhaps Simon Bridges [who signed the agreement for the previous government] saw things differently?

Perhaps one day the Prime Minister could tell us, straightforwardly, whether this stuff – an agreement the New Zealand government is party to – reflects her values?

In her speech yesterday there was a whole section headed “New Zealand Values”

This brings me back to something that this government has placed front and centre of its agenda – our values

But what might those values be? She goes on to tell us (or at least I think she does – the language is a bit garbled).

This is why my government is placing such an emphasis on our core values, like on environmental and climate change issues.

So that was no mention of:

democracy,
rule of law, domestically and internationally,
freedom of speech,
freedom of religion,
standing by countries that share similar values, when they are threatened.

or anything of the sort. Just climate change and the environment (although are those “values” or just issues?) – where, conveniently, her rhetoric and the PRC seem to, for now, align.

Then she moves to the standard fallback line of one New Zealand minister or Prime Minister after another.

Naturally, there are areas where we do not see eye to eye with China.

We will just never, ever, come out and clearly and state what those differences are. Instead, she trivialises the (unspoken) differences

This is normal and to be expected with any country, especially where we have different histories and different political systems.

It is as if she treats the PRC as a normal country, rather than one of the biggest abusers of domestic human rights and most aggressive external powers anywhere. It is today’s Soviet Union, except probably with more evidence of an active external aggressive agenda. Our Prime Ministers a generation or two back didn’t trivialise the difference between the Soviet Union and the West in the way that John Key did, and Jacinda Ardern does. Then again, I’m pretty sure we didn’t have party presidents (Haworth and Goodfellow) issuing congratulary statements on the occasion of meetings of the Soviet Communist Party.

But there weren’t big business interests – private and government (think universities) – with dollars at stake then.

Of course, the Prime Minister tries to cover herself with talk of

New Zealand and China can and do discuss issues where we have different perspectives. We can do this because we have a strong and a mature relationship – a relationship built on mutual respect; and a relationship that is resilient enough for us to raise differences of view, in a respectful way. This is a sign of the strength and maturity of our relationship.

But it is just words when our leaders – accountable to the citizenry, not to Fonterra, Zespri or university vice-chancellors – will never utter a word of concern in public. Maybe they do occasionally raise issues in private – and the PRC authorities politely ignore them – but even that argument was undercut by the Deputy Prime Minister in comments yesterday

The foreign minister was asked whether China’s influence in New Zealand, Australia and the Pacific would be on the agenda during his trip.

“I’m in a job called foreign affairs, and diplomacy is rather important. You’ll know I’m naturally a tactful person, and I won’t be raising those issues in the way you put them.”

These aren’t values they stand for, just dollars.

The Prime Minister can talk in generalities all she likes

Our reputation as a leader on environmental issues; as a fair player internationally; as a defender of the international rules-based system, a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue, is fundamental to who we are as a nation and as a society.

But specifics are what count. Anyone can give POLSCI 101 talks, but when she won’t (say) stand up and call unacceptable China’s illegal creation of new artificial islands in the South China Sea, its illegal assertion of sovereignty, and the militarisation of those new “islands” – to reference just her talk of “a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue” – it is hard to take her seriously on the values score. When she won’t call out Jian Yang’s position, or the way in which PRC-affiliated entities have gained effective control of Chinese language media in New Zealand, or the way several universities and many of our schools are taking PRC money on PRC terms, it is hard to take her seriously when she talks of values, even as it directly affects New Zealand. [UPDATE: This very morning she managed to openly criticise actions of two other countries.]

But probably the big-business entities putting pressure on the government to do whatever it takes to get the “FTA” upgrade – unconcerned about values, but very interested in bottom lines – will be happy with her.

It all seems a lot more Neville Chamberlain than Michael Joseph Savage (whose government was quite critical of the appeasement of Nazi Germany). But however deluded Chamberlain was, nobody supposed his stance was just about the money.

And, since most of you come here for the economics, I was struck by an account I saw of the appearance last week by the Governor of the Reserve Bank at Parliament’s Finance and Expenditure Committee, where he was asked about China. Astonishingly, the Governor reportedly claimed that the Chinese economic story was well-understood – I think most of those close to it would argue that anyone who thinks they really understand it is only revealing how much they don’t know – but then he want on to make what is simply a factually inaccurate statement. He claimed, so it is reported, that China was in some “miraculous” period where it was moving into “first world economic wealth”.

Productivity is the foundation of prosperity. The cohort of countries near the very top of the OECD league tables (several northern European ones and the US) have real GDP per hour worked, in PPP terms, of around US$70 an hour. Here – from the Conference Board database – are the 2017 numbers for the various first world Asian economies, and for the PRC.

Real GDP per hour worked (USD, PPP)
Singapore	64
Hong Kong	54
Taiwan	51
Japan	46
South Korea	37
(PR of) China	14

Even underperforming New Zealand manages US$42 an hour. Other countries matching the PRC productivity numbers include such denizens of the first world as Indonesia, Ecuador, and Peru.

It sounds as if the Governor has been buying the hype. But I suppose his political masters won’t be unhappy: flattery and never ever uttering a sceptical word are among their watchwords.

Breathtaking indifference

May 14, 2018May 14, 2018 Michael Reddell Immigration, labour market, New Zealand economic performance

On TVNZ’s Q&A programme yesterday, the Minister for Workplace Relations, Iain Lees-Galloway was interviewed.

The Minister and his government are keen to increase union membership and are putting in place further significant increases in the minimum wage.

From his interview yesterday, here is part of the Minister’s story

….all the evidence from around the world shows us that when you have more people covered by collective agreements, that helps to drive wages up. It also helps to drive productivity, and yes, we’re a government that’s focused on transforming our economy into one that’s productive, more sustainable.

It almost invites one of those Tui ads. We’ll come back to wages in a moment, but just consider for moment that claim that there is causal relationship between steps to increase union membership (and collective bargaining) and higher (economywide) productivity. It is a shame the interviewer didn’t push the Minister on the point, but his comments suggest that he really has little idea what productivity is. It is about businesses, old and new, finding new products, new markets, new ways of doing things, new ways of combining capital and labour in ways that successfully take on the world. I’m not suggesting that unions can never play a constructive role – although they can also play a destructive one. But the Minister offers no credible story for how a greater role for unions in New Zealand will make any material positive difference to the ability of firms operating in New Zealand to take on the world from here.

That is especially so because he is quite open that his goal to shift the balance in the labour market, so that a larger share of GDP flows to labour.

CORIN So the purpose of these changes is to boost union power.

IAIN Well, it’s to get a better share of the economy. We’ve talked about having an economy that’s more inclusive, where working people can actually bargain for a fair share of a prosperous economy. That’s what we’re trying to achieve.

I’m not going to debate what is “fair” here, but as a matter of arithmetic, more for one side means less for the other, unless somehow the size of the cake itself increases faster. And since firms are the ones making the investment and location decisions, it isn’t self-evidently obvious that increased union power would lead to faster rate of real GDP growth.

In support of his claims, the Minister attempted to use the example of Australia.

If you look at the wage gap between us and Australia, that has broadened over the last 30 years. Australia didn’t dismantle their collective bargaining framework in the same way that New Zealand did. That’s part of the story, but absolutely, we’re strongly of the view that people not being in a strong bargaining position has meant they haven’t been able to make the demands on the employers.

Reading that, I had hazy memories of some posts last year (eg here) drawing attention to an increase in the labour share of GDP in the last 15 years. But what about the comparison with Australia?

Here is the change in the labour share of GDP (less net production taxes and subsidies) since 1990. Why 1990? Well, the Minister talked about the last 30 years, but also explicitly highlighted the labour market reforms most of which date to 1991. I’ve shown the numbers not just for New Zealand and Australia, but also for the other three Anglo countries.

New Zealand is the median country. The labour share of income fell a bit less here than in Australia. If one takes the comparison just over the terms of the last two governments, so starting from 1999, the labour share of income here has increased – and in each of these other Anglo countries, it either fell or increased less than the increase in New Zealand.

I don’t want to make very much of pretty small differences. But the numbers just don’t seem to support the Minister’s case. And to revert to productivity, Australia has had one of the faster rate of productivity growth (real GDP per hour worked) among the older OECD countries since 1990. I’m not aware of any evidence suggesting that collective bargaining and the role of unions has been a material (positive) part of that story. A rather more common story is to emphasise the role of the rapid increase in Australia’s mineral exports.

The interviewer moved onto minimum wages

CORIN You talk about balance. How fair is it for a business, let’s say a business making a product that’s sold globally, with 25 staff, to now face the higher minimum wage; they lose their fire-at-will rights; they’re going to face much stronger unions, more compliance costs; they are operating in a global marketplace; they’ve lost their flexibility; how fair is it for that business?

IAIN I don’t think they’ve lost any flexibility at all. And operating in a global market means that businesses need to be resilient. They need to be able to work with the different market forces. Now, if a small change to the minimum wage is going to be that detrimental to them, they don’t sound resilient, and so what we actually need is to signal to businesses, as we have done, what our plans are for the minimum wage and for our other industrial law changes, give them an opportunity, if they don’t feel like their business model can operate in those in that environment–

CORIN So tough luck if they can’t make that work?

IAIN To give the opportunity to transition. Because we need businesses to transition into an environment where in a high-skill, high-wage economy, they are able to operate.

CORIN I think there’ll be plenty of people watching this morning who run small businesses, very frustrated and will be yelling at the TV, saying their margins are small; they’re battling away; they’re trying to employ Kiwis. They will see these changes, and certainly Business NZ is arguing that this week, as being unfair and unreasonable.

IAIN Look a lot of businesses come and go, regardless of any changes the government makes. So, yeah, most start-ups, for instance, don’t actually last beyond a couple of years. That’s the nature of doing business. What we as a government have to do is make sure there is an environment in which new businesses can develop; new jobs can be created; and as thing change for people, new opportunities become available for them. That, I think is the most important thing – that we have a strong economy where if businesses do come and go over time, which they do, that there are new opportunities for people to take up.

Now, no one is going to dispute that firms come and go, that is the nature – the desirable nature – of a market economy. But the indifference of the Minister here is all but breathtaking. His attitude appears to be that somehow we don’t want firms that can’t manage to turn a profit paying what has already been one of the highest minimum wages (relative to median wages, or to the overall productivity of the economy) anywhere.

He mightn’t, but the people who hold those jobs at present might have a rather different attitude. Sure, they’d prefer a higher wage, all else equal. Who wouldn’t? But that isn’t the scenario the Minister paints. It isn’t even the usual line the advocates of higher minimum wages run, that somehow hardly any jobs will be lost. The Minister seems to recognise that some firms will be forced out of business, and he just doesn’t care. Because amid all the blather about “new opportunities” and the earlier rhetoric about “transforming our economy into one that’s productive”, there is nothing in what the Minister is saying – or what his leaders and colleagues have been saying – to give anyone any confidence that government policy is about to transform our underwhelming productivity performance.

It is true, of course, that there might be some small measurement effects from big increases in the minimum wage. If some people are priced out of work altogether they will tend, on average, to be the least productive workers. Average productivity of those who remain may be a little higher as a result. But that is no comfort to anyone, and doesn’t earn New Zealand as a whole better opportunities in the wider world. In some cases, firms may even respond to higher minimum wages by mechanising more, but again that isn’t a gain for New Zealanders as a whole – but rather a second-best response (not the production process they’d have preferred, and which market opportunities would have warranted) to a direct government intervention. Pricing some people out of the labour market is no way to improve opportunities (and incomes) for all.

It is also not as if the increases in minimum wages are small. The minimum wage was set at $15.75 last April, and under coalition agreement it is to reach $20 per hour in April 2021. That is a 27 per cent increase in four years. There will be some inflation over that period. But on the Reserve Bank’s forecasts the other day, that will total only 6.7 per cent over four years. In real terms, minimum wages are rising by 19 per cent in only four years.

All of which might be fine if there was productivity growth to match. Over the last five years there has been only about 1.5 per cent productivity growth in total.

real GDP phw may 18

Perhaps the next few years will be different? But there is nothing in the Minister’s remarks offering any sort of credible explanation as to how, or why we should expect something better? Most likely, some firms – not very resilient, in the Minister’s terms – will be forced to close, to downsize, or to adopt production patterns that are less efficient than market opportunities and market prices would lead them to prefer.

Those losses are more likely to be concentrated in the outward-facing tradables sectors of the economy. Domestically-oriented firms don’t have unlimited pricing power, but they often have some – especially when across the board regulatory changes like this are put in place. Most outward-oriented firms – whether in tourism, export education, farming or wherever – have very little, if any.

And it is not as if the economy has been successfully becoming more outward-oriented over recent years either, even before this latest scheduled lift in the real (unit labour cost) exchange rate.

One mark of a successful economy tends to be an increasing share of the economy accounted for by exports and imports – local products and services successfully taking on the world, enabling locals to consume the best the world has to offer.

Perhaps the Minister wishes for a world of abundant home-grown high-performing, high margin businesses. It might even be a worthy aspiration, but wishing doesn’t make it so, and there is no sign that government has any credible story as to what might make it so.

Changing tack, as I noted in my post on Saturday, I did an interview with Wallace Chapman for yesterday’s Sunday Morning programme on Radio New Zealand. Later in the same programme, Chapman had an interview on population issues with Massey university sociologist Paul Spoonley (he runs the government-funded immigration advocacy research programme CADDANZ) and with environmental economist Suzi Kerr, of Motu and Victoria University.

It was a slightly unnerving discussion, at least to anyone who counts children as a blessing. Kerr seemed set on encouraging people to have fewer children for the “sake of planet” (observing that she and all the people she worked with had chosen to have two or fewer), observing that adjustment to climate change would be easier with fewer people. In the course of the discussion, she was careful to disavow any particular expertise in immigration – and didn’t come across as a particular immigration booster (countering Spoonley’s arguments in a couple of placs) – but never once did she suggest that if we were concerned about reducing the number of people here that immigration policy – affecting non-New Zealanders – would be an obvious place to start. Non-citizen immigration is, after all, an increasingly large share of New Zealand’s population increase, and the total fertility rate here is already below replacement, reaching a record low last year. I suspect she isn’t much interested in New Zealand specifically and is more interested in “saving the planet”, including talking of redistributing people round the world. It was a little disconcerting given that she has just been appointed as a member of the government’s new Climate Change Commission (a fact Radio New Zealand failed to point out in introducing her). One hopes that in her new official role she will think rather harder about the easier options – if not ones necessary welcome to the political masters to whom the owes her appointment – open to New Zealand to ease the cost of adjustment to the government’s carbon targets.

As for Spoonley, he asserted – of my comments on immigration (lack of NZ specific evidence of benefits) in the earlier interview – that I was partly right and partly wrong. If he remains convinced of the economic benefits of immigration to New Zealanders as a whole, perhaps he could engage with some of the indicators I’ve referred to in various recent posts (eg here and here) – the underperforming Auckland labour market, the outflow from Auckland of New Zealanders, the way in which the margin by which real GDP per capita in Auckland exceeds that in the rest of the country is small and shrinking, all in an economy with an underwhelming overall productivity performance, and a shrinking share of the outward-oriented sectors. Spoonley’s apparent preference – to encourage/incentivise immigrants to move to places other than Auckland – is no (economic) solution either, just transferring the problems to even less productive places.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Month: May 2018