Month: June 2018

Playing distraction on the PRC

Michael Reddell China

On Newsroom on Friday there was a rather soft article giving a platform to an academic with a pretty strong vested interest in a “nothing to see here, move right along” approach to the People’s Republic of China.

Jason Young is acting director of the Contemporary China Research Centre (CCRC), based at Victoria University.  The chair of CCRC is Tony Browne, former New Zealand Ambassador to the PRC, who also just happens to be the chair of the PRC-funded (and controlled) Confucius Institute at Victoria University (CCRC and the Confucius Institute seem to share an administrator as well).  The CCRC itself seeems to work hand-in-glove with MFAT, seems to get considerable direct funding from government departments, and its advisory board is largely made up of public servants (MFAT, MBIE, Treasury, NZTE, Asia New Zealand Foundation) plus the chair of Education NZ and the former chair of the New Zealand China Trade Association. (None of this, of course, was in the Newsroom article.)  I’ve heard some stories about the role of MFAT in blocking anyone who might prove awkward from consideration for the role of Director.

Perhaps the NZ CCRC does some good work, and holds the odd interesting conference, but when push comes to shove it is hard not to see it as a taxpayer-funded front for the “nothing to see here” line that our politicians and business elites seem committed to.  In that respect, it is perhaps worse than the New Zealand China Council –  which openly functions as a taxpayer-funded advocacy group, while the CCRC hides behind the veneer of academic independence, integrity etc.

In Friday’s story, the first of Jason Young’s comments was largely pretty reasonable.   Asked about the recent testimony in the US and the papers published by the Canadian intelligence services,  he noted –  as I have –  that

Jason Young…. suggests both the Canadian and US reports are based in large part on the ‘Magic Weapons’ report published by Canterbury University professor Anne-Marie Brady last year.

Brady’s report, which detailed concerns about China’s attempts to influence migrant communities and take over ethnic media among other issues, received media coverage at the time.

However, Young says the latest round of coverage has done little to advance the case made by Brady.

“For many of us it’s just more hype around the same types of questions without new evidence.”

Perhaps “a repetition of the same claims in an increasing number of overseas fora” might have been a less-loaded description than “just more hype”, but lets not quibble too much.

Young goes on

Young believes the debate in New Zealand is becoming counterproductive, with opposing sides staking out increasingly polarised positions on the topic.

“We’re not talking about empirics, we’re not furthering the debate, all we are having is a more extreme and radicalised position being put forth…[and] we don’t talk about the bigger issues.”

Which prompts three thoughts:

  • first, if you are the director (even acting) of the Contemporary China Research Centre, surely you might have some responsibility for participating in, and actively facilitating debate, and exploration of the evidence, issues, and risks?    And yet, there is almost nothing of that sort coming from the CCRC.    They seem more focused on getting public servants properly house-trained.
  • debate?     We have a debate?   There isn’t much sign of one in New Zealand at all, most academics maintain a stony silence, and the contrast in that regard with Australia is particularly striking (whether or not you happen to agree with the current, more sceptical, stance of the Australian government).
  • As for empirics:
    • well no one doubts (because he has acknowledged it) that Jian Yang is a former member of PRC military intelligence structure, a member of the Chinese Communist Party, who also acknowledges that he misrepresented his past on New Zealand immigration forms, reportedly at the encouragement of the PRC authorities.  Jian Yang sits in New Zealand’s Parliament.
    • no one doubts the effective PRC control of almost all the Chinese language media in New Zealand,
    • no one doubts that a former Foreign Minister received a large donation to his mayoral campaign –  auctioning, of all things, the works of Xi Jinping –  from sources in the PRC,
    • no one doubts the ties of senior Labour backbencher Raymond Huo to United Front organisations, or his role in adopting a slogan of Xi Jinping’s for Labour’s ethnic Chinese campaign last year,
    • Charles Finny –  former senior diplomat, and himself on the CCRC advisory board –  observed on TVNZ last year that he knew both Jian Yang and Raymond Huo were close to the PRC Embassy and thus he was always careful what he said around them.
    • we know that several of our universities, and a number of high schools, take PRC money and allow the PRC to control appointments, and the content of teaching.
    • even abstracting from the Confucius Institute concerns, we know that our universities have made themselves very financially dependent on PRC students.
    • we know –  it is on public record –  that the presidents of both the National and Labour parties have been praising the Chinese Communist Party and Xi Jinping.
    • we know that a number of former politicians have ended up in well-remunerated roles in PRC-related entities, and that their continuation in such roles is inconsistent with ever saying anything remotely critical of the PRC.
    • and we know that our senior politicians –  whether in government or (in the National Party’s case) in Opposition – never ever say anything critical of the PRC regime (in stark and noticeable contrast to the sort of approach their predecessors took to, say, apartheid South Africa, pre-war Germany or Italy, the Soviet Union, and so on).
  •  So we could debate, for example, the risks and significance of joint research agreements New Zealand universities enter into with PRC institutions –  technology transfer, by fair means or foul, being a well-known PRC priority – or we could debate party fundraising in New Zealand, where the limited evidence might be open to various interpretations.  Evidence around cyber-attacks isn’t made public.  But there is still lots of hard factual material to be going on with.    And it is not as if most of the PRC activities are unique to New Zealand –  even if perhaps no other advanced country yet has a former PRC intelligence operative in Parliament.

Young goes on

Young says the Government’s messaging on the issue has been “quite minimal”, influenced in part by the sensitivity of allegations related to espionage or foreign influence and the role of our spies.

“The Government has got a responsibility to set China policy, to engage with China, and also have ground rules.”

Prime Minister Jacinda Ardern has made some steps in that direction, he says, pointing to her recent speech at a China business summit outlining her view of the region and the kind of relationship that was needed.

It would surely be more accurate to say that the Prime Minister –  like her predecessors –  seems to simply wants to pretend there isn’t an issue (a very different stance than that taken by her Australian Labor counterpart, Bill Shorten).    If, perchance, in the quiet of her heart she really does deplore the regime, and worry about its activities here and elsewhere, she owes it to the public to promote an honest open conversation.  But, so far, all the evidence is that she is just unbothered –  she has uttered not a word about Jian Yang, she promoted Raymond Huo, and so on.   Remarkably, the New Zealand airforce is conducting exercises with the PRC air force this week –  the same airforce that not a couple of weeks ago was landing long-range bombers on illegally constructed “islands” in the South China Sea (to not a word of concern from New Zealand).

Young’s contributions conclude this way

More generally, Young says the discussion about China needs to be based more on evidence and less on “hyperbole”.

“If someone is claiming New Zealand is the weak link in Five Eyes, what is the claim based on and what is the evidence behind that?

“The argument that New Zealand has somehow changed its security position in relation to Chinese influence, where’s the evidence for that? I can’t see any basis for it.”

It’s not that there’s nothing to talk about, he says: given China holds very different views to New Zealand and other countries, there are valid areas of concern.

But ensuring those concerns are backed up with evidence is critical to stop the debate from losing shape, he says.

Personally, the Five Eyes arguments (generally) seem to me like a bit of a distraction.  But so, in a sense, do Dr Young’s comments more generally.  There is plenty of hard evidence to be going on with, and a real reluctance apparent among the establishment to turn over stones lest awkward stuff might be uncovered.  Dismissing the sorts of issues that Professor Brady, and some others (including Newsroom, who first broke the Jian Yang story) have been raising as “hyperbole” itself looks like another attempt to play distraction, and avoid the real issues.  I’m sure Dr Young –  and Tony Browne, and Steven Jacobi, and the Prime Minister, the Leader of the Opposition, the leaders of the Greens and New Zealand First –  all know the character of the PRC regime:  evil at home, expansionist abroad, working to neutralise and/or divide countries like New Zealand or Australia (or Greece, or the Czech Republic, or…or….or) –  but they seem not to care one bit.  Or, if they really do care, to be so afraid, and to have lost any sense of self-respect or regard for New Zealand values, that appeasement has just become their watchword.  It is shameful.

The Newsroom article in which Dr Young is quoted also talked to another academic keen to downplay the issue; this time an Australian one, James Laurenceson, deputy director of the Australia-China Relations Institute, a think-tank based at a university in Sydney, and funded by large donations from two recent PRC migrants to Australia.

“The New Zealand government’s line tends to be to dampen reports down, but in Australia it goes in the opposite direction,” Laurenceson says.

He also suggests New Zealand has been more willing than Australia to scrutinise the allegations of foreign interference, and is unequivocal about which approach he favours.

“I can’t point to one single advantage of the approach Australia has taken,” Laurenceson says

What he means is that the New Zealand government prefers to ignore the issues altogether and, at least in public, pretend there is simply nothing to see.  In Australia, by contrast, an Australian (Labor) Senator was forced to resign for his close ties to the same billionaire who funded ACRI.  In Australia, in a bipartisan effort, the intelligence and security committee has recently released a 400 page report on the planned new laws designed to limit foreign government intervention and influence activities.   Yes, some Australian exporters appear to be paying a price, but sometimes doing the right thing –  standing up for your own country and its values, not just for the next dollar –  will cost those who parley with evil.  While Jacinda Ardern and Simon Bridges, aided and abetted by taxpayer funded bodies like the China Council and the CCRC, pretend there is just nothing to see.

There was a nice contrast to the New Zealand approach in The Australian newspaper on Saturday, in a column by their respected foreign editor Greg Sheridan.  For example

The last couple of weeks are a good indication of things to come. The range of our disagreements with Beijing in this period has been­ ­bewildering.

Beijing hates the foreign interference legislation. It hates that [Liberal MP, Andrew] Hastie under parliamentary privilege named a Chinese national resident in Australia as the suspect in a US case regarding a bribe paid to a former senior figure at the UN. It hates the fact that Canberra prevailed on Solomon Islands to refuse a Chinese bid to build an underwater internet cable. It hates that US court proceedings revealing alleged Chinese bribes in Papua New Guinea were front-page news in Australia.

It hates that Defence Minister Marise Payne rightly criticised the deployment of long-range bomber aircraft into islands that Beijing has illegally occupied in the South China Sea. It hates that, Beijing having ordered ­Qantas to refer to Taiwan as ­“Taiwan, China”, Payne said ­Qantas should not be bullied by governments and that Australia had “always called Taiwan, Taiwan”.

Beijing also didn’t like Payne’s reiteration of Canberra’s longstanding position on disputed territories in the South China Sea at the recent Shangri-La Dialogue, nor did it like her pointedly saying that countries should be allowed to express such concerns without being intimidated, coerced and bullied by other nations.

Beijing, like everyone else, understood who she was talking about.

In all these matters, the Turnbull government has taken the only position any self-respecting government could.

A self-respecting government, but not a New Zealand one.

After I’d read the Newsroom article, I found a recent podcast of a discussion between Jason Young and James Laurenceson.   It was another attempt by Jason Young –  remember all that taxpayer funding at stake, and those close ties to the Confucius Institute –  to play down the issues in New Zealand (to be clear, I’m not suggesting Young’s views are determined by financial incentives, but that he holds the role he does because he holds views that aren’t going to rock the boat with MFAT, the government, or the PRC).

In the course of the discussion –  in which he also highlighted the difference between New Zealand and Australia, in the depth of commentary and debate over there, without apparently seeing any role for people like him to take it deeper here – he attempted to draw a distinction between influence and interference.  But again, it was all about an attempt at minimalisation and trivialisation.  He accepts that PRC influence-seeking activities go on here, but then minimises that by suggesting “everyone does it” –  as if the character of the PRC regime is something we should be indifferent to, relative to say the UK, France, Germany, India, Singapore or whoever.  The issues aren’t just about process, but content, character, and so on.  As far as “intervention” is concerned, Young asserted that the “bar was not yet met” on such claims.  Perhaps that is a definitional issue, but when there is a former PLA intelligence operative in our Parliament, when another MP uses Xi Jinping slogans to advance his party’s cause (himself being associated with various United Front bodies), and when our politicians (and academics apparently) are too scared to speak out –  we never had a problem criticising South African apartheid or French nuclear testing – I think we all know that interference has happened.  Just because the mugger with the baseball bat doesn’t actually hit you, doesn’t mean that when you handover your wallet, the mugger hasn’t interfered.

Finally, as if to make Jason Young’s point about the greater depth and seriousness of the debate and analysis in Australia, there is even a better class of material to debate.  Professor Hugh White is an academic at ANU, former deputy head of Australia’s Defence Department, and a long-time writer on strategic issues in east Asia and Australia.  He has been criticised for, as some argue, being too ready to assert that Australia needs to recognise that the the PRC is already, or soon will be, the dominant power in East Asia, and re-align accordingly, making nice with the PRC and moving away from the US.

But he had a bracing short commentary out a few days ago, Australia’s real choice about China. 

Australia’s problem with China is bigger and simpler than we think, and thus harder to solve. It isn’t that Beijing doesn’t like Julie Bishop, or that it’s offended by our new political interference legislation, or that it’s building impressive new armed forces, or staking claims in the South China Sea. It’s that China wants to replace the United States as the primary power in East Asia, and we don’t want that to happen. We want America to remain the primary power because we don’t want to live under China’s shadow.

And that’s a big problem for Beijing. Its ambition for regional leadership isn’t something the Chinese are willing to compromise. Nothing—not even economic growth—is more important to them. So our opposition is a big fault line running through the relationship.

This shouldn’t come as news. China’s ambition, and the problems it poses for Australia, have been unmistakably obvious for a decade, but most of us have been in denial about it.

ending, after noting his real doubts that the US is willing to pay a price to retain its position

…at the end of last year, the government announced new laws to prevent covert political interference, clearly aimed at China.

That’s when China decided to exert a little pressure. It didn’t take long for Canberra to get the message. By early this year, Turnbull and Bishop were already backpedalling hard. They tried to deny that the foreign interference laws were aimed at China, talked up China’s positive contribution to the region, and even took the remarkable step of repudiating Washington’s new tough language about China as a rival and a threat.

But Beijing hasn’t been assuaged, and so the pressure is still on. It isn’t much so far—at least compared to what they could do if they wanted to cause us real pain. But it’s enough to remind Canberra—and the rest of us—what national power means. It means the capacity to impose costs on another country at relatively low cost to oneself, and China now has that in abundance. We’re being warned.

This problem isn’t going to go away, so we have to make some choices. Now we know that China is serious, what price are we willing to pay to resist it, and how far are we prepared to go? Those choices must be based on a realistic assessment of China’s power and ambitions, and of the cost we will incur by opposing them.

We haven’t had that kind of realistic assessment until now, in part because it has been so easy to accuse those who recognise the reality of China’s power and ambition as advocating surrender to it. That is, of course, absurd. And now, perhaps, we can put this absurdity behind us and start seriously to discuss how to deal with the biggest foreign policy challenge since at least World War Two.

It isn’t clear that the issues are really any different for New Zealand, including because of the absolute importance of our relationship with Australia.  But there is no New Zealand politician or, it seems, academic willing to actually make this straightforward point, and lead a debate about the implications, and choices, for New Zealand.  Perhaps where I depart from White is that I think he overstates the economic threat the PRC could pose to either New Zealand or Australia, other than in the short-term and in a handful of sectors that have dealt with the devil and left themselves over-exposed. Countries make an sustain their own prosperity.

But isn’t that the sort of debate and analysis one might hope for from a body labelled Contemporary China Research Centre. Or the sort of leadership one might hope for from our politicians.  New Zealand’s current approach –  keep silent, pretend there isn’t an issue, lie (in essence) about the character of the regime, and appease like anything –  wasn’t the right approach in the 1930s, and isn’t likely to be now.  It is a shameful betrayal of our interests, our values, and –  not incidentally –  of our friends in the free and democratic parts of east Asia.

Electioneering 1954 style

Michael Reddell National Party, New Zealand economic history

A few weekends ago I was fossicking in a charity book sale when I stumbled on The National Government 1949-1954: FIve Years of Progress and Prosperity, published by the National Party.   It was, it appears, published as part of National’s 1954 election campaign: 150 pages of (often quite detailed) text and tables, complete with a detailed chronology of measures, and an index.

I’ve always been interested in that first National government.  Apart from anything else, the Prime Minister (and Minister of Finance) was my grandfather’s cousin –  they’d been close, and in our family Sid Holland was always “Uncle Sid”.  It was a government with a fairly mixed record.  Through my career at the Reserve Bank I was always quietly proud that a relative had legislated to establish the primacy of price stability in what we expected from monetary policy and to put monetary policymaking at a further remove from direct ministerial control (even if, in practice, it didn’t make much difference).

There was some genuine liberalisation –  including of those banes of New Zealand economic management for too many decades, import licensing and exchange control.  And there was the ANZUS Treaty –  which I hadn’t previously known came into effect on ANZAC Day, a nice touch –  and the interesting episode of New Zealand’s approach to the Suez crisis.  It was the time of the wildly popular first ever visit by a reigning sovereign.  And the sort of short-term austerity that led to the Auckland Harbour Bridge being built too narrow from the start, or central planning that meant that for years the Reserve Bank wasn’t allowed to start building its own building.

In the territory of serious black marks, it is hard to defend the way the 1951 waterfront strike was handled –  not so much the confrontation with the watersiders itself, but the brutal undermining of civil liberties and the freedom of the press during that period –  often using powers introduced by the previous Labour government.

Perhaps only in New Zealand  –  where good histories and biographies are few – could a government that was in power for eight years, with a leader who spent 17 years in the role, not have either a decent scholarly treatment of that government or a biography of its leader.

But what of the book?

It has a foreword by the Prime Minister which, I imagine, captures quite well the way National saw things in those years

It is a proud thing to belong to a Government which is able to say that the people have never been better off, that there is a new spirit of vigour and enterprise abroad in the land, that there was never a time when so much progress was being made in the development of the resources of the country.

Once again, New Zealanders feel that the future belongs to them…….

Freedom, which is at the heart of the National Government’s philosophy, is perhaps an intangible thing – until you have lost it.  But it yields tangible results. The Government’s recrod, which this book outlines, is the answer to those who stand to the creed of Socialism.

But having lauded freedom, the Prime Minister goes on to laud the apparently growing role of the state.

A vast programme of development works is in progress –  imaginative and progressive schemes like the new pulp and paper and timber industry in the Rotorua-Bay of Plenty area, the utilisation of geothermal steam, the huge hydro-electric project at Roxburgh.  More hospitals, more schools, more houses –  there is no neglect of everyday necessities because of the scale of the development programme.  The Government has liberalised and extended social services, more is provided for other social services, trade is booming, the needy are cared for, the workers are prosperous, savings are greater.  On all fronts New Zealand has gone ahead, as a young country should…..

I lived in Kawerau as a child, but it is only over the last decade as I’ve come to read a lot more New Zealand history that I’ve come to realise how big a deal –  in some way, the decade’s Think Big, complete with outside capital and protected markets –  the Kawera/Murupara development really was in the 1950s.  The state was at the leading edge of promoting economic development, as it saw it (in this book, the Kawerua scheme is described –  perhaps with a little exaggeration, depending on how one classifies Vogel’s interventions –  as “the greatest single enterprise ever attempted in New Zealand”.

On the one hand, in the early 1950s, New Zealand still had some of the very highest material living standards in the world.  On the other, only a few years later people started writing serious reports (eg the new Monetary and Economic Council and the new NZIER) observing that New Zealand’s productivity growth was lagging behind.  Sadly, it was to be the story every decade from then to now.

But this post isn’t really intended to be an abbreviated political or economic history of the decade.  It was more that I was fascinated by things the National Party chose to highlight, and the accounts of interventions I’d just never been aware of.

Take rest homes for example.  When I was young, almost all of them were run and provided by church groups. I had never given much thought to why –  caring for the vulnerable was one of those things the church had done since Roman times.   But this little book tells how the government skewed the playing field:

Soon after taking office the Government introduced a policy of helping charitable or religious organisation to establish homes for aged people. Generous subsidies, up to 50 per cent, are offered, together with loans finance on favourable terms in respect of housing schemes.

The next sub-section recounts the introduction of a similar subsidy for such groups to establish youth hostels.

There are reminder of times past: anti-tuberculosis campaigns get two-thirds of a page to themselves.

There were 506000 radio licences in New Zealand in 1954, and not a single television.

And in a country of two million people, there were still only 334580 telephone subscribers (and a little subsection on “Mobile telephone services” –  some 2000 people had telephones in vehicles, up from only 192 when the government had taken office five years earlier).

The forerunner to Air New Zealand –  Tasman Empire Airways Ltd –  flew 30888 people trans-Tasman in the entire year to March 1954: fewer than 100 a day.  Domestic air services, so the party (fairly) boasted, has increased substantially during its term in government, but total passenger numbers were still less than 1000 per day.

And if economists are (largely rightly) inclined to be censorious about the excess demand policies of the period (inflation nonethless kept in check) there is still something to hanker after in these numbers:

In spite of the large increases in the labour force, ample work is still available.  At 15/1053 the number of vacancies for men was 13500 and for women 6500. Unemployment in 1953 averaged only 85 persons throughout the year.

(These were people registered as unemployed.  Five-yearly census numbers were higher, but still very low by modern standards.)

These were the days when, in New Zealand almost uniquely, cars held their value, the numbers imported being rationed.  There was an exception for people with overseas funds themselves (the “no-remittance” scheme) –  which made an English OE additionally attractive.  My grandfather was not infrequently heard to jest that my father proposed to his daughter only because she had a car, (having done her OE).

What of monetary policy?

The declared policy of the Government is to divorce currency and credit from political control, to avoid the issue of credit unbalanced by goods and services, and to stabilise internal prices by establishing a proper balance between money and goods.

From an economist’s perspective, two out of three isn’t bad, but that middle phrase is disconcertingly reminiscent of the real bills doctrine.  In fairness, the same government liberalised what were then known as “capital issues controls” restricting the ability of firms to raise funds on market.

And if there were elements of liberalisation, (eg the “state monopoly of coal seams” was abolished  on 10 October 1950) there was also this

The Potato Board was established in 1950 to control the production and marketing of main crop potatoes.

Why, one has to wonder?

In the some things don’t seem to change category, there was the boast that

Maori land claims.  Removal of grievances over land claims is being vigorously pursued, Claims settled include: [and a list follows]

Perhaps in the same category, pages and pages are devoted to housing and housing finance, including this curious observation under the heading “Encouraging local authorities to buy land and develop it for housing”

A retarding influence in many cases has been the desire on the part of local bodies to avoid placing a further burden on ratepayers by raising loans for housing activities, but the loan procedure has been simplified to open the way for local authorities to engage in housing activities without recourse to long-term finance.  They can now finance these projects on bank overdraft.

I’m clearly missing something in understanding the greater appeal of a bank overdraft.

Meanwhile large scale immigration has restarted (I wrote about it here), including subsidised (“assisted”) migration.  Being a skilled building trade worker was enough to get assisted passage for married people (at the time, policy explicitly favoured single people because of the housing shortages).  But there is no hint of the politicians realising –  what economists knew even then –  that new arrivals added more to housing demand, and overall resource pressure, than any feasible increase in supply (even in the building sector specifically).

For an economic history junkie, it is a fascinating read.  There is the line from L P Hartley’s novel The Go-Between that “the past is another country, they do things differently there”, and it comes to mind strongly reading this book  And, it won’t surprise regular readers to know that the other thought that comes to mind is one along the lines of “if only” we’d done things differently then and since, and could still today boast of being one of the richest countries in the world.  How much more we could offer our people –  on market, and off.  Of course, in material terms, people are better off today than they were in 1954.  That is an important benchmark, too easily lost sight of –  only a few years prior to 1954 my mother had done her masters’ thesis on the incidence of basic home appliances in Dunedin (far from universal) –  and yet, and yet, the failures and lost opportunities since then, which mean we now languish so far down the international league tables, matter too.  Both National and Labour must take responsibility for that failure.  Not that one would know it from either party’s campaigns last year.

 

The government consults on slashing productivity growth

Michael Reddell Emissions reduction, Emissions targets, Productivity

Since the current government took office, I’ve highlighted from time to time (eg here) the tension between the rhetoric about the desire to lift New Zealand’s productivity performance (poor for decades, woeful in the last five years or so) and to increase the outward orientation of the economy,  and the specific policy promises which mostly seem likely to work in exactly the opposite direction.

The determination to reduce carbon emissions even more aggressively than the previous government’s goal, especially while sticking with a largely unchanged immigration policy that continued to drive up the population, seemed a prime example. I didn’t have any numbers, but the direction of the effect seemed pretty clear.

But now the government has published some numbers, which really should be getting a lot of attention.    Yesterday the Green Party leader James Shaw (Minister of Climate Change) launched a consultative document on what form the “net zero by 2050” target might actually take.  Perhaps naively, I’d assumed they had meant what they said, but in fact they are consulting on three quite different variants.

  • Net zero carbon dioxide by 2050: this target would reduce net carbon dioxide emissions in New Zealand to zero by 2050 (but not other gases like methane or nitrous oxide, which predominantly come from agriculture).
  • Net zero long-lived gases and stabilised short-lived gases by 2050: this target would reduce emissions of long-lived gases (including carbon dioxide and nitrous oxide) in New Zealand to net zero by 2050, while stabilising emissions of short-lived gases (including methane).
  • Net zero emissions by 2050: this target would reduce net emissions across all greenhouse gases to zero by 2050.

The third of those was, I think, was what most people had in mind.

Somewhere in the consultative document the first of these options is described as not being that different, in overall effect, from the target put in place by the previous government.

At the front of the report, the language –  not just from the Minister but from the MfE bureaucrats is very upbeat.    From the bureaucrats’ Executive Summary

This is our chance to build a high value economy that will hold us in good stead for the future. By upgrading our economy and preparing for the future, we can help make sure quality of life continues to improve for generations to come.

To read that, you’d suppose that pursuing ambitious emissions targets would make us richer, and better off in material terms.

A few paragraphs on the MfE officials suggests that the British have already shown us the way

Our economy is already dynamic and constantly adjusting to change. Jobs are continually created and lost. For some of us, the changes through the transition could be small or not noticeable – we could be driving vehicles powered by 100 per cent renewable electricity. For others, the changes could be bigger. The transition will affect how we travel, use land and what we produce and consume. Other countries, such as the UK, have shown that it is possible to reduce their emissions while growing their economy and maintaining a high standard of living.

This is probably what they had in mind (using OECD data which still only goes up to 2015).

emissions uk nz 1

That certainly makes the UK look good relative to us.

Then again, here is the emissions data for the two countries per unit of GDP.

emissions uk nz 2

The drop in emissions per unit of GDP has been almost exactly the same, over 25 years, in the United Kingdom as in New Zealand.   Our numbers are a lot higher than those in the UK but (for example) their economy trades with bankers/lawyers etc and ours trade with sheep and cattle.   There are different opportunities and different emissions profiles.

(And, as it happens, productivity growth in the UK in the last decade –  although not prior to that – has been materially worse than that in New Zealand.)

So the upbeat story about other countries having blazed a prosperous trail doesn’t really seem to have anything to it, at least in the one example MfE cites.  The main difference between the total emissions profiles is simply that we’ve adopted policies that raised our population much faster than the population growth in the UK.  It really is almost as simple as that.

But after the upbeat introduction, a bit of realism starts to creep in.

As we reduce emissions, the economy will continue to grow but possibly less quickly.

Only “possibly” though, although one’s confidence should have been waning already when a few lines later one reads that

We will need to invest in innovation and plant a lot more trees, to ensure we maintain a strong economy over the coming decades.

Because we all know that advanced countries get and stay rich by planting (lots and lots of) trees.  At best, it seems that they are likely to be a mitigant –  absorbing carbon emissions possibly more cheaply than some other methods.  They aren’t likely to add to our productivity or per capita income.

To the credit of the Ministry, they have had some modelling estimates done, and the Minister has allowed the summary results to be published.   It is not very satisfactory that the full model results have not been published yet, in what is a fairly short consultative period.  In fact, the suggestion is that the modelling work hasn’t even been finished yet

This and future material will be published on the Ministry for the Environment website as it is finalised.

But better to have what they did publish than to have to try to get it out of them via the Official Information Act.

NZIER was commissioned to do some modelling on the impact on GDP of the various net zero target options.  This is the table reproduced in the report.

emissions NZIER

As MfE observes

The analysis by NZIER suggests that GDP will continue to grow but will be in the range of 10 per cent to 22 per cent less in 2050, compared with taking no further action on climate change.

(Note that emissions per unit of GDP have been steadily trending down for decades as it is –  see first chart above.)

These are really big numbers.  I have never before heard of a government consulting on a proposal to cut the size of the (per capita) economy by anything from 10 to 22 per cent.  And, even on their numbers, those estimates could be an understatement.

The baseline assumptions NZIER have used produce average real GDP growth over 2017 to 2050 of 2.2 per cent.  They do not lay out the assumptions in more detail, but Statistics New Zealand population projections show average population growth over that period of 0.7 per cent per annum, so they seem to be assuming baseline productivity growth of something like 1.5 per cent.  That would be high by the standards of recent decades, but (except for rhetorical purposes) it does not matter very much: the focus is on the difference the various carbon emissions targets make to future productivity growth.

The numbers in the table do not show the unadorned comparisons.    They helpfully show the difference the varying degrees of ambition in the possible net emissions targets makes: the more ambitious the target, the worse the expected economic growth.  But in each of the three different scenarios (described in the very top line of the table), the modellers assume that the magic fairy helps out.     They assume faster rates of innovation in these particular sectors, over and above what is embedded in the baseline assumed rate of productivity growth.   This is how they describe it:

  • faster energy innovation occurs, driven by higher emissions prices and transitional policies that double the baseline energy efficiency trends across all industries and provide a shift to 98 per cent renewable energy by 2035 with the remaining 2 per cent used being gasfired generation in dry years only
  • faster transport innovation occurs, driven by higher emissions prices and transitional policies that increase electric vehicle uptake to 95 per cent of the light vehicle fleet and 50 per cent of the heavy vehicle fleet by 2050
  • faster agricultural innovation occurs, this sees a one-off innovation of a methane vaccine introduced in 2030 being adopted across all farms, which reduces dairy emissions by 30 per cent and sheep and beef emissions by 20 per cent. A reduction in global demand for dairy (11 per cent fall in 2050 output from 2015 levels) and sheep and beef (15 per cent fall) is experienced as consumer preferences shift towards lower emissions intensive foodstuffs, such as synthetic meats.

All of which might be fine, but there seems to be no allowance at all for the possibility that higher input costs etc might discourage investment in innovation (relative to baseline) elsewhere in the economy.  Affordable energy was, after all, a huge contributor to economic development in the last few centuries.

So on the best-case magic ferry scenario (the furthest right column) –  with much increased innovation in these sectors, and no offset elsewhere –  the full net zero target by 2050 would result in GDP in 2050 being a full 10 per cent lower than otherwise  (with 20 per cent of assumed overall productivity growth just given up).

If we only get the added innovation in agriculture, or only get it in transport and energy, the sacrifice is perhaps 40 per cent of all productivity growth (the difference between the 2.2% GDP growth baseline, of which productivity growth is about 1.5%, and the 1.5% and 1.6% GDP growth scenarios (in which productivity growth is only 0.8 or 0.9 per cent)).     A sacrifice of 0.7 per cent annual productivity growth for 33 years means accepting living standards 26 per cent lower than otherwise by 2050.

Again, to the credit of the government, they are also explicit about where the costs are likely to fall

Modelling shows the impact of domestic climate action would be felt more strongly by lower income households, because a higher proportion of their spending is on products and services that are likely to increase in cost as we reduce emissions across the economy.
Our modelling suggests the households that are in the lowest 20 per cent bracket for income may be more than twice as affected, on a relative basis, than those households with an average income.

Quite breathtaking really.   We will give up –  well, actually, take from New Zealanders –  up to a quarter of what would have been their 2050 incomes, and in doing so we will know those losses will be concentrated disproportionately on people at the bottom.   Sure, they talk about compensation measures

The Government has a number of tools it could choose to use to compensate affected households for higher costs, such as tax or welfare measures.

But the operative word there is could.  The track record of governments –  of any stripe –  compensating losers from any structural reforms is pretty weak, and it becomes even less likely when the policy being proposed involves the whole economy being a lot smaller than otherwise, so that there is less for everyone to go around.  The political economy of potential large scale redistribution just does not look particularly attractive or plausible (and higher taxes to do such redistribution would have their own productivity and competitiveness costs).

I guess I am impressed that the government was willing to publish a document suggesting adopting a policy which it openly documents would come at such a large potential cost to New Zealanders (substantial even if the magic fairy comes to our aid to the extent assumed in these scenarios).  It must surely be a first in history.   No one asked the citizens of, say, 1948 Czechoslovakia if they wanted to be impoverished (relative to a faster growing West).  But it is hard to see what is in for New Zealanders –  lagging badly behind other advanced countries on productivity anyway, with constant complaints about child (and other) poverty) – to just happily sign in to such a huge economic sacrifice?   And for what?

I guess these targets are advocated by zealots, but even the zealots surely recognise that what New Zealand does is not going to change the climate, and that many countries already richer and more productive than we are are proposing adjustments that are materially less costly or demanding that what the New Zealand government is proposing here.   I am not suggesting we can or should do nothing –  there is some minimum effort probably required to ward off the threat of trade sanctions –  but surely on any reasonable cost-benefit assessment of the interests of New Zealanders, we would be confronting these costs – the wilfully given up opportunities for our kids and grandchildren –  and pulling back?  Or we might be thinking again about whether deliberately boosting the population –  bringing people to a country with high baseline emissions per unit of GDP –  is sensible for the world, or (more importantly) for our own people.  I would be keen to see a variant of the NZIER results in which the population growth (and thus baseline emissions growth) was materially lower than what is assumed, based on current immigration policy.

To repeat, I would be surprised if ever before in history a democratic government has consulted on proposals to reduce the material wellbeing of its own people by up to 25 per cent.      Wars, of course, come at a very considerable cost –  and sometimes are worth fighting –  but again, I doubt any democracy (or perhaps even any tyranny) ever entered a war thinking that as a result of doing so they would be so much poorer 30 years on.  It is simply a breathtaking proposition –  the more so in a country that at the moment struggles to achieve any material productivity growth at all.

And as a reminder of what productivity means, see this recent post.

UPDATE: One issue I didn’t spot earlier is how there can be no marginal cost in going from the 75% to the net zero option, under either of the two scenarios shown.  To one decimal place, the assumed average growth rates are identical.  Given that going from 75% to net zero involves dealing with the short-lived gases (from agriculture), which are some of the most intractable issues (without dramatically shrinking the industries), it is difficult to see that this particular model result can be plausible.   But, to the extent, that the model results are the same under the two alternative targets, it undermines the case made by some that this document represents the government trying to walk back the original commitment to (true) net zero.

 

Don’t just avoid the politically awkward issues

Michael Reddell Emissions reduction, Emissions targets, Immigration, Productivity, Uncategorized

When in late April the Productivity Commission released its draft report on a transition to a low emissions economy, I took them to task for completely (and presumably consciously and deliberately) ignoring the role of New Zealand’s immigration policy in driving up New Zealand’s emissions –  albeit they acknowledged that “population growth” was a factor.  Perhaps more importantly, they didn’t address at all the possibility that –  however we got to where we are today – cuts to the target rate of non-citizen immigration might offer a more cost-effective way –  less damaging to productivity and the living standards of New Zealand –  of meeting the sort of carbon reduction targets governments commit themselves to.    I suggested that they were playing politics, trying to keep onside with a new government.

That still seems the most plausible explanation for the complete silence.   If they thought my argument was wrong, or had some modelling suggesting that other abatement strategies offered lower-cost adjustment, they could readily have reported those arguments and any such evidence.   But they just stayed silent.

The only real justification for having a body like the Productivity Commission –  funded by your taxes and mine –  is that they are at sufficient arms-length from ministers, and don’t just play political games, to say the uncomfortable, or to address the politically unpalatable issues and options.  Having a longer-term focus, if they don’t get traction today, they might tomorrow.

We should hope that even government departments would do that –  offering the sort of free and frank advice that Chris Hipkins was calling for yesterday – but too often they just won’t (and as I saw that last year when I OIAed MfE and MBIE and found that they’d offered no advice or analysis at all on the immigration/emissions/low-cost abatement nexus).  But it is inexcusable when an independent body like the Productivity Commission just rolls over and takes the path of least resistance.  As I noted in a post when the draft report was released

In the short run that might make it more likely they get a hearing from the government. In the long run, that sort of approach to issues won’t stand them  –  or the cause of good policymaking and analysis in New Zealand, already enfeebled enough – in good stead.

As I’ve said before, convinced as I am of my own arguments, I’m not complaining that the Productivity Commission doesn’t reach the same conclusion I do.  My complaint is that they haven’t even been willing to address the issue, when they know that it makes a real difference.    Confront the issue, look at the evidence and arguments, analyse and test them, and reach your (well-supported) conclusions (and leave the goverment to decide policy, sensible or otherwise).    But don’t just pretend there is no issue: that is a betrayal of your mandate from Parliament.

Submissions on the draft low emissions report close tomorrow.  I put in a brief submission this afternoon.

Submission to Productivity Commission climate inquiry draft report

There isn’t much new in it, but I ended this way

There probably won’t be off-the-shelf modelling exercises from other countries you can simply look to in evaluating such options  [low target immigration options] (and you are now under self-imposed time constraints, having failed to consider the issue in your draft report).    But in a sense that is the point of this submission.  The issues facing New Zealand in meeting emissions reduction objectives are different from those facing many other countries and we need analysis that takes specific accounts of the issues, options, and constraints that New Zealand itself faces.

 In conclusion, I would urge the Commission to begin to take seriously the role that rapid immigration policy led population growth has played in explaining the growth in New Zealand emissions since 1990, and the possible role that modifications to our immigration policy could play in facilitating a reduction in emissions, consistent with current or possible alternative official targets.   No doubt technological advances will offer options for relatively painlessly reducing emissions to some extent.  But those options will be available to all countries.  As official agencies already recognise, New Zealand faces some specific challenges that are quite different to those other advanced countries will be dealing with.  We make it much harder for ourselves to meet the emissions targets our governments have committed to if we persist with such an unusually large non-citizen immigration programme.    The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”.  The aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible.  Lowering the immigration target looks like an instrument that needs to be seriously considered if that goal is to be successfully pursued.   In particular, you cannot legitimately ignore the issue –  in what looks disconcertingly like a reluctance to tackle controversial or politically awkward options –  and still lay claim to being the source of independent fearless advice and analysis that is really the only good argument for having the Productivity Commission in the first place.

Leaving them with the visual reminder of the cross-country correlation between population growth and growth in total emissions (which relationship exists even just for agricultural emissions)

total emissions

and that, in New Zealand, with birth rates well below replacement for several decades, immigration is increasingly the main reason why the population is still growing much at all.

And immigration doesn’t appear to be making New Zealanders better off (higher productivity) just…..more congested, with higher house prices, and with more emissions that other (themselves costly) tools have to be adopted to offset or abate.

Voting on monetary reform

Michael Reddell Banking, Monetary policy, Switzerland

This coming Sunday, voters in Switzerland get to vote on the future monetary system.  I don’t share the New Zealand Initiative’s enthusiasm for Switzerland –  the only OECD country since 1970 to have had slower productivity growth even than New Zealand –  but I do like the element of direct democracy in their system: binding referenda on matters initiated by citizens.  No doubt it produces some silly results at times, but that’s part of democracy –  not ideal, just better than the alternatives.    And it isn’t as if our own system is immune to silly policies, unaccountable institutions etc.

I’d forgotten that the Vollgeld referendum was coming up until I saw yesterday that the eminent Financial Times economics columnist Martin Wolf was expressing the hope that the Swiss vote for change this Sunday.  It isn’t clear that he really favours the general adoption of the specific system called for in the Swiss referendum but, in his words,

Finance needs change.  For that, it needs experiments.

Dread word that: experiments.  I remember the efforts we went to one year to get all uses of the word out of the OECD’s review of the New Zealand, in the midst of the reforms of the late 1980s and early 1990s.   For better or worse, one can’t do randomised control trials in macroeconomics and monetary policy: “experiments”, if tried at all, have to be done on entire nations.

What are the Swiss being asked to vote on next week?  The Vollgeld (“full money”) initiative is described by its proponents here, and described/analysed by a couple of independent Swiss economists here.

The key element of the proposal is this

The 100% reserves requirement means that all sight deposits in Swiss Francs (CHF) in Switzerland would have to be entirely kept as reserves in the Swiss National Bank. This implies that commercial banks would not be able anymore to use a fraction of these deposits to finance their lending activities, as they currently do. Swiss money would then entirely become “sovereign money”, controlled by the Swiss National Bank.

Proponents of the Vollgeld approach put a great deal of emphasis on something they label as “money”.   As they note, the issuance of notes and coins is controlled by the state –  even if in practice, supply simply respond to demand –  and argue that the same should apply to other transactions balances (eg a traditional cheque account).    Some seem to argue from a principled position that money creation is a natural business of the state, and thus direct control over the quantity of transactions balances created is simply a logical corollary.   Of course, in New Zealand it was almost 80 years after the establishment of responsible government before the state here issued any payments media (coincidentally, but not inconsistently, we were the highest income country in the world through much of that period).  Personally, I’d continue to mount an argument for removing the current state monopoly on the issue of bank notes.

Others focus on more pragmatic arguments around monetary and financial stability.  If all demand deposits are fully backed by deposits at the central bank – or, at the limit, if all demand deposits were directly claims on the central bank – and were held on a separate balance sheet, there would be no more bank runs on demand deposits.

Ideas of this sort aren’t new.  Proponents often hark back to the so-called Chicago Plan proposed by some prominent US economists in the 1930s, and at one stage in his career as orthodox a figure as Milton Friedman favoured 100 per cent reserve requirements for demand deposits.

But if the broad ideas aren’t new then, as the independent Swiss economists observe, runs on demand deposits also aren’t the main issue in real-world financial fragility.  They put that down to the existence of deposit insurance –  although Vollgeld advocates argue that under their system deposit insurance could be got rid of – but whatever the explanation

…the main source of fragility of modern banks is …..rather the wholesale short term debt issued by banks and held by professional investors, including other banks. These investors, who are not insured, may suddenly stop lending to a bank (this is called a wholesale run) if they suspect that the bank may have solvency problems. This wholesale short term debt is an important source of funding for the banks in the current system, but it is also a source of fragility, as the Global Financial Crisis of 2007-2009 has shown. The 100% reserves requirement would not apply to short term debt.

Wholesale funding markets seizing up was an issue even for Australasian banks in 2008/09.

Vollgeld advocates (at least those looking at the issue in detail) are aware of these other sort of “runs”, or market refusals to rollover funding at maturity, but don’t have a detailed response.

To tackle it, paragraph 2 of article 99a of the VGI mentions that the SNB would have the power to set a minimum duration for the debt issued by commercial banks. The VGI does not give much detail on this question, but it is clear that a new liquidity regulation would have to be introduced as a complement to the 100% reserve requirement. Indeed, financial stability can only be guaranteed in the Vollgeld system if the banks are strictly limited in their ability to issue wholesale short term debt as they do today.

I’ve long argued that the issue goes beyond even that.  One could have all –  or almost all – lending done by closed-end mutual funds (ie no early redemption at all, you just sell your claim on the open market) –  something like the model favoured by prominent US economist Larry Kotlikoff – and there would still be financial crises, they would just take a different form.   The nature of a market economy is that people get optimistic, and then over-optimistic, about particular industries, or the economy more generally.  And then opinion changes –  actual outcomes don’t quite meet expectations or whatever – and the flow of new investment, the flow of finance dries up.  The dot-com boom, and subsequent bust, were good examples of that.  So, in their way, were the Australasian post-deregulation booms and subsequent busts in the 1980s (they involved some bank failures late in the post-bust adjustment, but those failures were incidental).

And nothing in the Vollgeld proposals (or in similar Sovereign Money proposals in other countries, including New Zealand) deals with that.  Nor does it really deal with the fact that many countries –  including New Zealand and Australia and Canada –  have gone for a very long time without bank failures (except in that brief post-deregulation transition period), and yet not been immune to recessions, periods of ill-judged investments, or prolonged booms or prolonged periods of underperformance.

Some advocates of reform put a great deal of emphasis on the alleged problem that lending simultaneously creates deposits, at a systemwide level.  This is a feature not a bug.  Lending transfers claims on resources from one person to another, and both sides of that need to be recorded –  if I borrow to buy a house, the counterpart to that is that the seller of the house collects the proceeds of the sale.    These people tend to confuse the position of an individual bank –  for whom secure access to funding is absolutely critical – from the macroeconomics of the system as a whole.   No (later troubled) New Zealand finance company –  none of whom banked with the Reserve Bank – conjured its deposits out of nowhere: they first persuaded depositors and debenture holders to back their business model, and finance all manner of (often quite bad) projects.   The finance companies didn’t fail because they had on-demand deposits (mostly they didn’t) but because they made really bad loans, and were part of the associated misallocation of real resources.  Nothing in the Vollgeld initiative (or similar Sovereign Money proposals) seems to address that.

So why does someone as eminent as Martin Wolf encourage Swiss voters to vote for the Vollgeld initiative on Sunday?     Mostly, it seems from reading his article, because he grossly exaggerates the real economic cost of financial crises, conflating the headline events (runs on banks, wholesale or otherwise, bailouts etc) with the correction for the misallocation of real resources that occurrred during the boom years and (in the case of 2008/09) treating all the slowdown in productivity growth as a consequence of “the financial crisis” when signs of it were already apparent before the crises. (I dealt with some of these issues in this post some time ago. )   Changing the rules around transactions balances just wouldn’t make that much difference.  And although Martin Wolf and the Vollgeld advocates talk bravely of how such reforms might allow governments to more readily walk away from failing banks (ie the bits not offering transactions balances) at best that is aspirational.   AIG and the federal agencies weren’t offering transactions balances –  and were bailed –  and even in New Zealand one of the key motivations for the OBR model isn’t about transactions balances, but about maintaining the credit process (all the information on firms that enables banks to continue to provide working capital finance with confidence).

Over the years, I’ve spent lots of time looking at various monetary reform proposals.  When I was a young economist, Social Credit was still represented in the New Zealand Parliament, and their acolytes regularly wrote to the Governor and the Minister of Finance.  Their ideas genuinely were wrongheaded and dangerous.  In my experience, though, most such proposed reforms aren’t, and they often capture important elements of truth.  But the proponents typically oversell the likely gains from what they are proposing.  I don’t think the Vollgeld initiative model would be particularly damaging or costly –  although there are a lot of details not spelled out, and the transition could be very unsettling (especially in a world of zero or negative interest rates) – but it just wouldn’t offer the gains the proponents claim.  Monetary matters are rarely quite that important and in a market economy, human nature will have its head, and sometimes things will turn out badly.  More often, of course, real financial crises reflect wrongheaded policy interventions that skewed choices and incentives and made the bad outcomes more likely (I’d include both the US crisis of 2008/09, and the Irish crisis in that category –  and probably the Australasian and Nordic crises of the late 80s and early 90s).

In truth, calls for reform (from people like Wolf) and public support for ideas like the Vollgeld one (apparently perhaps 35 per cent of people may vote for it), probably stem more from some ill-defined sense that something is wrong (with economic and political outcomes).  Banks and monetary systems are a convenient target –  just like the idea here that somehow fixing monetary policy might make a material difference to our economic underperformance – but probably the wrong one.

Readers sometimes suggest that the Reserve Bank is reluctant to ever fully engage with alternative models. I’m not sure what they’ve been doing more recently, but when I was at the Bank I spent quite a bit of time over the years unpicking various proposals and trying to understand their strengths and weaknesses.  It wasn’t always very systematic, and often depended on the interests of individuals, but I’d be surprised if the Bank is that much different now.  We even used to send people along to debate some of those proposing alternative models.  A speech I did along those lines is here.   I’m not sure I’d stand by absolutely everything in it today, but we were an institution willing to engage.

Another Orr interview

Michael Reddell Adrian Orr, Banking, Housing

The Governor of the Reserve Bank was interviewed over the weekend on Newshub Nation. Perhaps even fewer people than usual watched the programme, since it was  on over a holiday weekend, but I saw a few comments –  public and private –  suggesting it was a rather odd performance so I finally had a look myself.  I had to agree with the commenters.

There were three broad topics covered in the interview:

  • infrastructure finance,
  • bank conduct issues, and
  • mortgage lending.

Of those three topics, only the third is really within the ambit of the Governor’s responsibilities.

On infrastructure finance, you’ll recall that a few weeks ago the Governor weighed in on this issue, claiming to be speaking both in his former capacity of head of the New Zealand Superannuation Fund (NZSF) and in his current role as Governor.  He was venting about his frustration that NZSF had not been able to invest in infrastructure projects in Christchurch after the earthquakes.

“My single biggest frustration when I was at the Super Fund was the inability to be able to invest in New Zealand infrastructure.

“We never got to spend a single penny in Christchurch. I stopped going down. It became too hard,” Orr said.

“I went down, even once CERA [the Canterbury Earthquake Recovery Authority] was formed, and the person said ‘it’s great to see you here, Minister [Gerry] Brownlee is very pleased you’re here. Now, tell me again which KiwiSaver fund you’re from’.”

Understandably, that upset Gerry Brownlee and prompted a rare criticism of a central bank Governor from the Leader of the Opposition and a suggestion that the Governor should stick to his knitting –  the core stuff he now has legal responsibility for.

Orr now claims he wasn’t being specifically critical of the Christchurch situation –  although see the quote – and that he was just making a general point, one he is not defensive about at all.  There isn’t, in his view, enough “outside capital” being brought into infrastructure development, here and abroad.

His mandate, so he claimed in this latest interview, was his obligation to contribute to “maximum sustainable employment” –  the words recently added to the Policy Targets Agreement governing the conduct of monetary policy.   As I’ve pointed out recently, this argument just doesn’t stack up: the words in the PTA are about the conduct of monetary policy (interest rates and all that) not a licence for the Governor to get on his bully pulpit and start lecturing us –  politicians and citizens –  about all manner of other policies he happens to think might be a good idea.   It is a doubly flawed argument because even the new monetary policy mandate is about employment –  not productivity or GDP per capita –  and the Governor will know very well that you can have a poor fully-employed economy or a prosperous fully-employed economy.   Infrastructure finance –  even well done –  has almost nothing to do with sustainable levels of employment.

In the latest interview, he was asked (very first question) about the recent bid by NZSF to invest in light rail in Auckland.  Instead of gently reminding the interviewer that such things aren’t his responsibility any longer, the Governor weighed in.  Any opportunity for outside capital should be welcomed, we were told.  The Governor went on to lament the “hang-ups” people have –  “people”, we were told, were the problem here, “getting in the way” of sensible solutions.  The Governor complained that all this leads to infrastructure being financed by debt or taxes, when it really should –  in his view –  be financed by equity (perhaps he didn’t notice that the NZSF itself was, and is, funded by debt and taxes, or that he has previously called for governments to take on more debt).  The Governor complained about politicians being scared of tolls, and argued that they “need to get over it”.     Challenged as to whether these were not political debates, the Governor argued that he was trying to get these out of the political debate –  as if mere citizens, the dread “people”, might not reasonably have a view not only on what projects should be done, but how they should be owned/financed.   Wrapping up that particular segment of the interview, the Governor opined that the wider economic benefits of light rail were “incredibly important” to maximising sustainable employment”.

It all remains, as I put it some weeks ago, very unwise and quite inappropriate.  Even if his views had merit (which, I would argue, they mostly don’t), these are issues which have nothing to do with the Reserve Bank (where the Governor wields a great deal of barely trammelled power).  As I put it in an earlier post

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. 

The arrogance of it all is pretty breathtaking too –  we “the people” are the problem.  Officials and politicians sometimes say things like that in private (feeling that they really deserve a better class of “people”), but generally not in public.  And the Governor seems to have no conception of the way in which genuine outside capital in a private project in a competitive industry, where all the gains and losses accrue to the private providers, differs from the public-private partnerships he waxes lyrical about (even while championing what would, at best, have been only public-public partnerships, since NZSF is just another pot of government money).    Contracting, in ways that both preserves the public interest and ensures continuity of high quality service, has proved hellishly difficult.   Providers of outside capital in PPPs –  whether state entities of the sort Orr has championed or private ones –  don’t care at all about the fundamental merits of a particular project, so long as they can write a contract that more or less guarantees returns to them.  In such a world, easy access to money can be a recipe for a smoother road to more really bad projects being done –  anyone recall the synthetic petrol plant, as an example of outside capital and guaranteed rates of return?

I’m not suggesting the Governor is totally wrong –  I’m pretty sympathetic to congestion pricing on city roads for example –  but in his official capacity, it is none of his business.    There is a vacancy coming up for Secretary to the Treasury; perhaps could apply for that position?  Or he could run for Parliament –  though probably not with that dismissive attitude to “the people” –  or retire and get a newspaper column.  But it is nothing to do with the Reserve Bank, and he jeopardises the Bank’s position –  both the ability to do its day job with general support, and increasing the chances of future partisan hack appointments –  if he goes on this way.

And what about his claim that infrastructure finance is really core to what the Reserve Bank does?  There was this from his public statement a couple of weeks ago

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.

In the last month, we’ve had a Monetary Policy Statement and a Financial Stability Report.  There were no mentions at all of infrastructure in the Monetary Policy Statement and, once again, a single mention in the Financial Stability Report –  a brief reference to “market infrastructure”.  The Governor just seems to be making it up on the fly, when these issues are no more part of his official brief than most other areas of government policy are.  

The second strand of the weekend interview had to do the ongoing banking conduct investigation  –  in which the Reserve Bank and the FMA demand banks and insurers prove their innocence, on points which (at least in the Reserve Bank’s case) are really not the government agency’s business.  There wasn’t much new in this part of the interview, apart from the somewhat surprising claim that the Reserve Bank has a very good insight into banks and insurers (which makes you wonder how CBL failed, or Westpac ended up using unapproved capital models for years, or how a few weeks ago the Governor could have been convinced there were no problems here, but now leaves open the possibility that he could recommend a Royal Commission).

As the Governor ran through his checklist of issues, it was more and more clear how little any of this had to do with the Reserve Bank’s statutory responsibilities.  He was concerned, for example, as to whether banks were “customer-focused”.  Personally, I rather hope that, as private businesses, they are shareholder-focused, working first in the interests of the owners.   Now, working in the interests of the owners does not preclude caring a great deal about good customer service (whether in banking or any other sector) but it shouldn’t be the prime goal.  And whether or not banks offer good customer service has very little to do with the Reserve Bank’s statutory focus on the soundness and efficiency of the financial system.    Perhaps we all wish it did, but some friendly customer-focused banks fail, and most flinty hardnosed one don’t, and vice versa.  There is no particular connection.

Similarly, the Governor was concerned about remediation when customers have problems with their banks.  Perhaps there is a role for some agency of government to take an interest (perhaps…..) but there is no obvious connection to the Reserve Bank’s prudential regulatory functions.  Over the years I’ve had plenty more complaints about my supermarket than about my bank, but (fortunately) no one seems to think governments should regulate customer service in supermarkets.

The Governor has found a partial defender in Gareth Vaughan at interest.co.nz.  But as Vaughan notes, it hasn’t typically been the Reserve Bank way

In 2015 when Australian authorities were probing high credit card interest rates, my colleague Jenée Tibshraeny tried to find someone, anyone, in a position of power in New Zealand to take an interest in credit card interest rates here that were at similar levels to Australia. This is what a Reserve Bank spokesman told Jenée;

“The Reserve Bank of New Zealand regulates banks, insurers, and non-bank deposit takers (NBDTs) at a systemic level – i.e. to make sure the financial system remains sound.”

“We don’t regulate from an individual customer protection perspective and don’t have comment to offer about pricing of products and services offered by banks, insurers and NBDTs,” a Reserve Bank spokesman said in 2015.

That stance is entirely consistent with the legislation the Reserve Bank operates under.  Vaughan concludes

Personally I welcome the Reserve Bank thinking of consumers, be they borrowers, savers or insurance policyholders. By taking an interest in consumer outcomes Orr is humanising the Reserve Bank, and making it more relevant to the general public.

However, if this is the path the Reserve Bank wants to go down, and has government support to do so, then perhaps phase 2 of the Government’s Reserve Bank Act review is a good opportunity to enshrine this more consumer outcomes focused role into the Reserve Bank Act. The terms of reference for Phase 2 are due to be published during June.

In a sense, that is the point.   Responsibilities of government agencies are something for Parliament –  the pesky “people” and their representatives again –  to assign, not for individual officials to grab.  I happen to disagree with Vaughan here –  between the FMA and generic consumer protection law, there is no obvious gap for the Reserve Bank –  but it should be a matter for Parliament.

It remains hard not to conclude that Orr is driving this populist bandwagon for two reasons:

  • to avoid letting the FMA take the limelight (the Reserve Bank has never been keen to play second fiddle to the FMA, especially on anything affecting banks) and
  • to distract attention from the Reserve Bank’s own poor performance as a prudential regulator, encapsulated in the recent scathing feedback in the New Zealand Initiative report.

He seems to have been remarkably successful so far – journalists seem to have been so pleasantly surprised by on-the-record media access to the Governor that they don’t bother asking the hard questions, and the Governor gets to portray himself as some sort of tribune of the abused masses (with or without evidence).

Personally, I find the sort of concerns outlined in today’s Australian about the Royal Commission itself , or concerns about the potential for these show trials to reduce access to credit, including (in particular) for small businesses, ones our officials or politicians might take rather more seriously.  But, probably, feel-good rhetoric is more satisfying in the short-term.

The final part of the Governor’s interview was about mortgage lending.  It wasn’t impressive.  The Governor declared that “we’re scared” about the high debt to income ratios evident among households with mortgages, but then in the next breath stressed that banks were very well capitalised and highly liquid etc.     Those two observations are simply inconsistent: if the Reserve Bank really has grounds to be scared (a) bad outcomes should be showing up in their stress tests (which they don’t) and (b) the Bank should be articulating a concern that banks are insufficiently capitalised and raising capital requirements further.  And it isn’t clear how the Governor thinks that, in a regulatory climate in which land prices are driven artificially high, ordinary people would be able to buy a house without a very high initial debt to income ratio.  But this seems to have become an evidence and argument-free zone, in favour of emoting about the “high debt” (not, as I noted last week, much higher relative to income than it was a decade ago).

The final question in the entire interview was about whether loans for Kiwibuild houses should be exempt from the LVR restrictions.  The Governor’s initial response was that he didn’t know, and couldn’t answer.  But then, pushed a little further, he expressed a view that such loans should be exempt……..they were, after all, about adding supply, and doing it quickly, and helping low income people into homes who might not otherwise be able to manage it.

Quite what was going on there wasn’t very clear.  There is already an exemption for people purchasing new houses (and any debt developers take on in the construction phase isn’t covered by LVR restrictions anyway).

The new dwelling construction exemption applies to most residential mortgage lending to finance the construction of a new residential property.

The construction loan should either be
(1) for a property where the borrower has made a financial and legal commitment to buy in the form of a purchase contract with the builder, prior to the property being built or at an early stage in construction. This could be traditional ‘construction lending’ where the loan is disbursed in staged payments, or it could be a loan to finance the purchase of a property, which will be settled (in one payment) once the build is complete.

(2) For a newly-built entire dwelling completed less than six months before the mortgage application. The dwelling must be purchased from the original developer (the contract to buy at completion can be agreed while the building is still being constructed).

This exemption didn’t exist when LVR were first rushed in by the previous Governor, but pretty quickly industry and political pressure built up and the Reserve Bank amended the policy.  In doing so, they revealed the fundamental incoherence of the LVR framework:  the Reserve Bank has always claimed that it is about protecting financial stability and reducing (their view) of excess risk in bank mortgage books.  And yet, lending on new properties –  all else equal – is riskier than lending on existing houses.  Existing houses are, for one thing, finished.  They are also in areas that have been occupied for some time.  By contrast, new houses –  especially in new subdivisions –  can be left high and dry when and if the property turns, or the economy turns down.  Think of the pictures of abandoned subdivisions on the outskirts of Dublin, or of some US cities in the last downturn.

And the Governor’s, apparently off the cuff, suggestion that credit restrictions should be easier for low income people who might not otherwise be able to get into a house, was distressingly reminiscent of the US policies –  political and bureaucratic – in the decade before the US crisis, which ended badly (for banks, and for many borrowers).   It is a recipe for encouraging banks –  supposed to be “customer-focused” in the Governor’s view –  to be more ready to lend to people relatively less able to support debt.  It is, frankly, irresponsible.   (And all this is before one even gets to questions about the extent to which Kiwibuild will simply crowd out other construction –  the Bank’s analysis on which they simply refuse to release, despite having opined on the issue in past MPSs.)

The quality of policymaking – official and political – in New Zealand has fallen away quite sharply in the last 15 or 20 years.  Sadly, Adrian Orr as Governor increasingly seems at risk of averaging it down further.  All while showing no sign of addressing the problems in his own backyard –  whether as regulator, analyst, or as sponsor.

Sir William and the rockstar economy

Michael Reddell National Party, New Zealand economic performance, NZ politics, Uncategorized

I don’t really want to revisit the questions of whether retired politicians and senior public servants should be given honours largely for just turning up and doing a (fairly reasonably remunerated) job, or even whether there are really 15 people per annum in this country deserving of knighthoods.  I touched on those issues in a post in January.

But two awards in yesterday’s list caught my eye.  The first was the knighthood to former Prime Minister and Minister of Finance Bill English, and in particular the descriptions of Bill English’s contribution.

There was the official citation, the words put out under the name of the Governor-General, but presumably supplied by the current Prime Minister and her department

As Finance Minister from 2008 until 2016, Mr English oversaw one of the fastest-growing economies in the developed world, steering New Zealand through the Global Financial Crisis and the Christchurch earthquakes and ensuring the Crown accounts were in a strong financial position.

And, even more incredibly, a story by Stuff political reporter Stacey Kirk in which she noted that the official citation had been expressed “rather dryly”, as if it didn’t do full justice to the man’s contribution, and going on to observe, without a trace of critical scepticism or irony,

More colourful commentary at the time would globally brand him the man responsible for New Zealand’s “Rockstar Economy” – the envy of government’s worldwide and a textbook example of how to pull a country out of recession.

From a sudden jump yesterday in the number of readers for an old post of mine from 2015 on the emptiness –  or worse –  of the “rockstar economy” claims, it seemed that at least a few others might have been a bit sceptical of Kirk’s column.

I’m not going to quibble about everything.  The Crown accounts were in a strong position when National took office in 2008, and were in a fairly strong position when they left office.  Net debt was higher when they left office than when they took office, but the deficits which were emerging in 2008 as the recession took hold –  recall that only a few months earlier in the 2008 Budget, Treasury’s best estimate was that the budget was still in (modest) surplus – were gone and the budget was back in surplus when National left office.

The terms of trade make a big difference to the government’s finances.  Here is Treasury’s chart from this year’s Budget, illustrating how much help our unusually high terms of trade have been in recent years.

cab with tot adj

It is a real gain, but it is an exogenous windfall, not something any government or politician could simply conjure up.

What about the official claim that Bill English was responsible for “steering New Zealand through the Global Financial Crisis”.   It has become part of established rhetoric, but it has never been clear to me –  and I was working at The Treasury at the time –  that there was anything of substance to it.    As ever, the biggest single contributors to getting New Zealand through this particular recession were (a) time, and (b) monetary policy.    The crisis phase in other countries had been brought to an end by about March 2009 –  initially as a result of extensive interventions in those countries (bailouts, fiscal stimulus, lower interest rates, and so on).  That took the pressure off the rest of us.  And our own, operationally independent, central bank had cut the OCR by 575 basis points by April 2009 (having begun to cut well before National took office in mid-November 2008), and some mix of the sharply lower interest rates, global risk aversion, and lower commodity prices had also lowered the exchange rate a lot.  The Reserve Bank also put in place various liquidity assistance measures, at its own initiative.

What role then did New Zealand politicians play in “steering us through”?  The previous Minister of Finance had put in place the deposit guarantee scheme, designed to minimise any risk of panicky runs on New Zealand institutions. I happened to think (having been closely involved) that was a good and necessary intervention, even if on important details the Minister departed from official advice, in turn increasing the later fiscal cost.  On taking office, the new Minister of Finance, Bill English, made no material changes to the scheme, and took no material steps to rectify its weaknesses.   Mr English did approve the (better-designed) wholesale guarantee scheme, designed to assist banks tap international wholesale funding markets in a period when those markets had largely seized up.  It didn’t end up being extensively used, but was also the right thing to have done at the time.

What else was there?  In the 2009 Budget –  delivered after the crisis phase abroad had passed –  a couple of rounds of tax cuts, promised in the 2008 election campaign (itself occurring in the midst of the crisis) were cancelled.  That was prudent –  given other fiscal choices the government had made –  but there wasn’t anything extraordinary or particularly courageous about it.   There was no discretionary fiscal stimulus undertaken in response to the crisis by either government –  or nor was it needed, given the scope monetary policy here had.

The truth of the international financial crisis of 2008/09 is that the New Zealand was largely an innocent bystander, caught in the backwash.  There wasn’t much governments could, or did, do about it, and – to a first approximation –  what they (Labour and then National) could do, they did.   Both supported an operationally independent Reserve Bank and it, largely, also did what it could do (if, arguably, a bit slow to get off the mark).  And then the storm passed and we started to recover, in a pretty faltering sort of way.

What about the other bit of that official citation, the claim that “as Finance Minister from 2008 until 2016, Mr English oversaw one of the fastest-growing economies in the developed world”?    Why does the current Prime Minister continue to buy into this sort of nonsense –  the myth  (no, sheer falsehood) of the “rockstar economy”?    To the extent the claim has any meaning at all, it simply reflects the much faster rate of population growth New Zealand experienced, especially in the last five years or so.   Over that five year period (2012 to 2017), New Zealand’s real GDP per capita increased at almost exactly the rate of the median OECD country.   Which is okay, I suppose, but nothing to write home about, especially once one remembers that we are poorer than most of these countries, and are supposed to have been trying to catch-up again.

But, one more time, let’s dig a little deeper.

Productivity growth is the only sure foundation for sustained improvements in material living standards.  Over the full period 2007 (just prior to the recession) to 2016 (the last year for which there is data for all OECD countries), New Zealand experienced labour productivity growth basically equal to that of the median OECD country.  Again, perhaps not too bad, but no sign of any catching up.     What about the last four years, the period to which most of the “rockstar economy” claims related?

real gdp phw english

Spot New Zealand –  if you can –  down next to Greece.  And adding in 2017 –  for which we have data, but some other countries don’t yet –  would not improve the picture.  Our recent productivity record –   through the period presided over by Bill English (and John Key and Steven Joyce) –  has been really bad.

What that means is that, to the extent that real GDP per capita growth has been middling, it has all been achieved by more inputs (mostly –  since business investment is weak –  more hours worked), not smarter better ways of doing things, old and new.  Perhaps it really is a rockstar economy: a John Rowles or Cliff Richard one, belting out the same 1960s favourites over and over again?   Recall that, being a poor OECD country, New Zealanders work more hours per capita than most other advanced countries do.

And despite more hours worked, it isn’t even as if we were particularly good at keeping the economy fully-employed during the English tenure.  In this chart, I’ve standardised the unemployment rates of the G7 group of big advanced countries and of New Zealand so that both are equal to 100 in 2007q4, just prior to the recession.

U rates g7 and NZ

Our unemployment rate went up about as much as the G7 countries (as a group) did, but just haven’t come back down anywhere near as much.  For the G7 as a whole –  which includes such troubled places as Italy and France, and is mostly made of countries that exhausted conventional monetary policy capacity –  the unemployment rate is now lower than it was before the recession. But not in New Zealand.

Politicians don’t directly control the unemployment rate (or most of the other measures in this post), but it is pretty amenable to micro reforms, and (within limits) to monetary policy action.  Under Bill English’s oversight, minimum wages kept on being raised, and nothing was done about a Reserve Bank that consistently kept monetary policy too tight (evidenced by the persistent undershoot of the inflation target set by the same Minister of Finance).

And what about foreign trade as a share of GDP?  Successful economies tend, over time, to have a rising share of GDP accounted for by foreign trade (exports and imports).  Small countries that succeed tend to have much larger foreign trade shares (since abroad is where the potential markets –  and products –  mostly are).

Foreign trade as per cent of GDP
2007 2016
Exports New Zealand 29.3 25.8
OECD median 40.5 42.3
Imports New Zealand 29.1 25.5
OECD median 39.2 39

But from just prior to the recession to 2016 (again the last year for which there is a full set of comparable data), New Zealand’s foreign trade shares shrank, even as those of the median OECD country held steady (imports) or increased (exports).  Relative to our advanced country peers, our economy became more inward-focused.

And that is despite the fact that we’ve had the second-largest increase in our terms of trade of any OECD country –  very different from the other commodity exporters (Norway, Mexico, Chile, Canada, and even Australia).

OECD TOT

Fortune favoured us, and we –  our political leaders, the long serving Minister of Finance foremost among them –  accomplished little with that good fortune.

Of course, not everything has been in New Zealand’s favour.  We didn’t have a material domestic financial crisis, we weren’t locked into a dysfunctional single currency, we went into the lean years with a healthy fiscal position, we had more space to adjust conventional monetary policy than almost any other advanced country, and we’ve enjoyed a strong terms of trade.  For enthusiasts for immigration, we’ve continued to draw in large numbers of permanent migrants, and have accelerated the inflow of temporary migrants.

But there were the earthquakes.  I’m not about to deny that they have held back economic performance, compelling resources to shift into domestically-oriented sectors, rebuilding (and inevitably/rightly so) rather than doing other things.  But even the earthquakes need to be kept in perspective: they were seven years ago now, and in wealth terms were more than paid for by the combination of offshore reinsurance and the lift in the terms of trade. There is still no sign of things turning round now –  of higher business investment, or a greater export orientation, of a recovery in productivity growth.  It is just, at best, a mediocre story.

And did I mention house prices?

real house prices OECD

There are, of course, some other black marks against Bill English.  There were the questions of integrity around the Todd Barclay affair.  There was the willingness to lead his party into an election with a candidate who’d been part of the PRC military intelligence operation, and a member of the Chinese Communist Party, all things hidden from the electorate, and then to go on defending the indefensible as it became clear that important elements of this past had also been withheld from the immigration authorities.

But, even on his own ground – the economy –  the record just doesn’t add up to much at all.

Oh, and as for the other top award that caught my eye yesterday, that was this astonishing one.  I’ll probably write about that elsewhere. [UPDATE: Here for anyone interested in this non-economics issue.]

 

A decade of real house prices

Michael Reddell Housing, Uncategorized

In their Financial Stability Report the other day, the Reserve Bank suggested that low interest rates are a significant part of the story as to why house prices have risen so much, and are so high. I showed this snippet in an earlier post.

fsr chart 1

Not only was there no sign of any analysis of the reasons why interest rates remain low –  they aren’t just some random variable delivered to us from on high, but arise from the interplay of real economic forces –  but they started their analysis from the trough of the financial crisis and (just to compound things) showed asset prices in nominal terms.

The Reserve Bank indicated that they were using the OECD house price index, so I had a look at that data.  Conveniently, the OECD presents the data in real terms, and they provide individual country data for most member states.

In this chart, I’ve shown three lines –  each starting from 2007q4, just prior to the international (and domestic) downturn beginning.   It wouldn’t materially change the chart if I started a year earlier (the peak in US house prices was 2006q4.   Here I’m showing real house prices for New Zealand, for the median of the 30 or so OECD countries for which there is complete data, and the OECD total series (the real equivalent of the line the Reserve Bank showed).

real house prices OECD

Over the full ten year period, real house prices in the advanced world as a whole have barely changed, while in New Zealand real house prices are now 40 per cent higher than they were at the previous peak (having already risen more than in the typical OECD country in the previous surge).   Not one of these countries –  well, there is a possible exception of Turkey, in the midst of a currency crisis at present –  has interest rates anywhere as high as they were 10 years earlier.

In this chart, I’ve just shown the individual country data.

real OECD house prices

New Zealand’s experience isn’t uniquely bad by any means, but it isn’t representative either.  It didn’t have to be this way, but it was a predictably awful outcome once one knew that land-use laws weren’t being materially altered, and the sheer scale of the population pressures government policy has contributed to.    The combination has been toxic, especially for young people who were already struggling to get into the market.

It isn’t even some sign of general success either.  Your eye might go to Greece and Spain at the far left of the chart.  But other countries to the left of us include, for example, the group of central and eastern European countries that I’ve written about previously, who’ve been catching-up and achieving consistently better productivity growth than New Zealand (the Czech Republic and Poland aren’t on the chart because the data for each doesn’t cover quite the full period –  but on the data we have both would also be well to the left of New Zealand).   Our house price debacle has been a disaster all of our own –  well, our central and local politicians’ –  making.  It just didn’t need to be that way.

 

There is abundant land

Michael Reddell Housing

Sometimes –  well, quite often actually –  I’m tempted to despair of the elected leadership in this country.  For decades they’ve failed to reverse –  barely even stopped –  our decline in the international league tables, when productivity growth is the only secure foundation for sustained improvements in material living standards.  They’ve presided over an economy that has mostly been inward-looking –  remember, foreign trade shares have been shrinking, as has the relative size of the tradables sector of the economy –  when increased international trade is a typically a key marker of a successful economy.  Business investment has been weak, for decades.  And they’ve managed to preside over a situation in which, in a land-rich country, we have some of the most unaffordable houses in the advanced world.    And still, apparently, they and their advisers think they know best.    And they wonder why life is tough for altogether many people, as they run around proposing band-aids, while never sorting out the fundamental problems.  Arguably, in fact, they are simply making them worse.

The prompt (the latest one) for that paragraph was an article that appeared on Stuff a couple of days ago (and made it to the hardcopy Dominion-Post this morning).   In it, we read

Wellington region’s population, including the Hutt Valley and Porirua, will increase from 413,400 to 459,200 over the next 25 years, according to Statistics New Zealand.

Wellington City Council district plan manager John McSweeney​ said there was about 290 hectares of greenfield land left to develop in the region – enough for about 3500 houses, based on existing residential subdivision plans which allows up to 12 houses per hectare.

McSweeney said it was likely that the council would have to encourage developers to build more houses closer together.

When I checked, I found that Wellington City covers an area of 29024 hectares.  And yet the Wellington City Council’s (WCC) planning pooh-bah claims there is a mere 290 hectares of land left to develop –  not just in Wellington City, but in the entire region.

This is how much land is in each of the five local authority areas that make up greater Wellington.

Wellington City                         29024 hectares

Hutt City                                     37664 hectares

Upper Hutt                                 53992 hectares

Porirua                                       18251 hectares

Kapiti                                          73148 hectares

Wellington City itself has more than 40 per cent of the population of the greater Wellington region, less than 15 per cent of the land, and yet –  check out the map at this link (and especially the satellite image https://satellites.pro/Wellington_map.New_Zealand#-41.286600,174.776000,12) –  less than half of Wellington City land is in built-up area.

There is abundant land.  Visible, in particular, to anyone who ever flies into or out of Wellington.

And if you object that much of the land is quite hilly, well take a look at the existing city.  This is part of the view from my study.

hills of Wgtn

Hills are everywhere.  Die-hard locals (the sort who find plausible Deutsche Bank’s claim that Wellington is the most liveable city in the world –  of whom I’m not one) even claim to like them, but at very least we all live among, or on, them.   And, in among that vast undeveloped area of Wellington City is lots of pretty-flat land –  the Ohariu Valley for example.

The Wellington City bureaucrat, presumably channelling his political masters, decrees that

The council was looking at options in some of the northern suburbs where land could be rezoned from rural to residential, McSweeney said.

That could create enough residential land for another 10 years of housing developments.

When the real question for him, and for Justin Lester and each councillor, should be, why is all of Wellington City not zoned residential (with appropriate requirements on developers regarding infrastructure provision)?

As one my readers notes, the only way that house prices can be where they really should be –  and for a long time were – at around three times median income is when developers can buy rural land at rural land prices (in turn, requiring that there is plenty of competition so that no potential seller can corner the market, holding the only parcels of (lawfully) developable land.    And yet what we see in and around Wellington –  and around so many other cities and towns – is almost the precise opposite.

Thus, there was a story the other day about the sale of 386 hectares of farm land just north of Wellington (in Porirua city).

The land is currently zoned for farming, but is part of the Porirua City Council Northern Growth Structure Plan. In 2016, it had a rateable value of $3m, but has previously been assessed as being worth more than $60m.

It is obscene.  “Value” created by bureaucrats and politicians, at the expense of potential home owners in greater Wellington, in this case apparently accruing to a family that has held the land since the 1960s.

It calls to mind a conference the Reserve Bank and Treasury held a decade or so ago at which a very able senior figure on the Wellington city council staff spoke.  He noted that most of the developable land (ie zoned residential) was owned by perhaps four groups who, of course, managed the release of this land in a drip-fed way, so as not to dampen the price of their land.    There was, of course, no thought to zoning all the land residential, or even applying land value rating which, at the margin, creates more of an incentive to actually use the land.

Meantime, each new rising generation suffers the heavy burden of trying to get into the housing market, all while bureaucrats and their political masters talk of a “need” to squash people in tighter or live in apartments without gardens etc.

It is 40 years and a few weeks since I first moved to Wellington.  Coming from Auckland as a teenager in 1970s, I still vividly remember the shock I experienced as we drove in Newtown and Berhampore (for those who know the place, think Rintoul St and Adelaide Road) for the first time, on our way through to Island Bay.  Was this the New Zealand equivalant of Coronation St, I wondered even then?   Most of Wellington (city in particular) is pretty densely populated as it is by New Zealand standards, and even the roads are often pretty narrow.  And yet the bureaucrats and politicians want everyone to squash in tighter.  It isn’t how economic development is supposed to work –  space is, after all, a normal good and, in New Zealand, there is no shortage of land.

For once, I’m with a real estate agent, quoted in the original story linked to above.

Bayleys Wellington general manager Grant Henderson said the thousands of sections set to come on market was not enough.

“For Wellington to continue to keep up, it has to keep developing greenfields. It’s crucial we do the developments.”

The latest residential development is earmarked for Plimmerton Farm, which was sold to Upper Hutt developer Malcolm Gillies and his business partner Kevin Melville.

The duo plan to create more than 1500 sections and 60 lifestyle blocks on the site, with some lots expected to hit the market in late 2020.

Up to 100 sites a year would be developed, meaning it would take about 20 years to complete.

By then, the region’s population will have grown by 45,800.

Henderson said there was a lot of residential land yet to be unlocked in Wellington.

“There are huge opportunities, and the sooner we get some supply into the marketplace, the better.”

And Council planners, even if they had the best will in the world –  about choice, and options, and lowering house prices –  still couldn’t tell what would be enough.  That is one of things we have markets for.

Elected councillors do make an appearance in the article

Wellington City Council councillor Andy Foster, who is in charge of urban development, said about 40,000 houses needed to be built in Wellington to cater for population growth over the next 30 years.

This did not include growth in the wider Wellington region, he said.

The council has commissioned research to establish how much space was left to develop and if the city could hold another 40,000 houses, he said.

“Most likely we can’t, and we are very much expecting that. So then we have to say, ‘Well where are they going to go? What do we need to change to accommodate growth?'”

There was a need to densify further. However, it was unclear which parts of the city were best suited for that, Foster said.

“This is going to be a really challenging conversation, and it’s going to be a really big one.”

Or, councillor Foster, you and your colleagues could just give citizens, residents, and potential residents, the choice.  People who want to live more densely should, of course, be free to do so.  Revealed preference –  the way our towns and cities evolve when there is no particular population pressure –  suggests that most would prefer not to, and of those who do end in terraces or apartments many do so simply as a less-unaffordable second-best, there being less land per dwelling in those sorts of developments.

The tragedy is that there is no public revolt against this political and bureaucratic mentality, which undermines communities and renders housing ever-more unaffordable, all in pursuit of some central planner’s vision for the way people should be, more or less, compelled to live.  There is no shortage of land –  and certainly not in Wellington city, or greater Wellington.   Even politicians who seem occasionally to display signs that they know better –  and there have been a few in both National and Labour –  don’t actually do anything about it.   We wouldn’t be having futile debates about Kiwibuild –  or “shortages” of physical houses –  if the land market was deregulated. Instead our so-called leaders –  elected officeholders anyway –  just preside over regimes that, by doing the same thing again and again, can’t but produce much the same dreadful results for a another new generation.  In a few years those will be my kids entering the market, another generation betrayed by our leaders.

New Zealand, the PRC…and the 29th anniversary of Tiananmen Square

Michael Reddell China, NZ politics

The (generally subservient, or even servile) relations between New Zealand and the People’s Republic of China have been back in the news this week.  It isn’t as if there have been material new developments –  except perhaps confirmation that Winston Peters (who won’t tell New Zealanders, let alone the PRC, what his government thinks of the PRC’s latest steps in militarising artificial islands illegally created in the South China Sea) is a fully paid up member of the “never ever upset Beijing” establishment.

The news was mostly just a couple of reports: testimony at a US Congressional commission (and the subsequent train wreck of the radio interview of one of those testifying) and the publication of material from a Canadian security services academic conference.  In both cases, perhaps it was newsworthy that such events were taking place abroad, and that New Zealand’s experience was being aired more widely.   But both lots of material seemed to draw entirely from material already in the public domain, including notably Professor Anne-Marie Brady’s Magic Weapons paper.  The Canadian material is all published under Chatham House rules –  in this case, no ascription of authorship at all – but when I read the material on New Zealand it was so similar to Brady’s other published material, that I just assumed she was the author.

As I noted the other day, in Radio New Zealand’s interview with him, former CIA analyst Peter Mattis, one of those who testified before the Congressional commission, performed really badly.    He just didn’t know the material, and appears to know nothing about New Zealand beyond what he had read in Brady’s paper.     Unsurprisingly some of the more vocal defenders of the “nothing to see here” club were pretty exuberant.  Here was the Executive Director for the (taxpayer-funded) New Zealand China Council

This interview reveals fully the appalling use of innuendo and conspiracy theory in the “debate” about Chinese influence. Well done for exposing it!

But, as I outlined in my post on Monday, none of what Mattis referred to in his testimony –  or indeed of the activities Anne-Marie Brady has written about has been refuted.   Nothing.

Meanwhile the Prime Minister confirmed her membership of the “nothing to see hear” club,  claiming that none of the Five Eyes countries had raised issues with her (as distinct from raising them with diplomats and senior public servants?) and answering questions thus

When asked what specifically was being done to review the country’s safeguards she said the Government made “independent decisions based on evidence and the best option for New Zealand”.

“For example, there is a national security test in our law governing space and high altitude activities.

“Parliament has regulated for national interests in the telecommunications area [TICSA]. We have strong provisions to counter money laundering and the financing of terrorism.”

Which gets to the issue hardly at all –  no doubt deliberately.

Over the course of the week, I found one interesting article commenting on these issues, from an American security expert who lives in New Zealand, former academic Paul Buchanan.  He notes

The impact of Chinese influence operations has been the subject of considerable discussion in Australia, to the point that politicians have been forced to resign because of undisclosed ties to Chinese interests and intelligence agencies have advised against doing business with certain Chinese-backed agencies. As usual, the NZ political class and corporate media were slow to react to pointed warnings that similar activities were happening here

and

unlike the US and Australia, NZ politicians are not particularly interested in digging into the nature and extent of Chinese influence on the party system and government policy. This, in spite of the “outing” of a former Chinese military intelligence instructor and academic as a National MP and the presence of well-heeled Chinese amongst the donor ranks of both National and Labour, the close association of operatives from both parties with Chinese interests, and the placement of well-known and influential NZers ….. in comfortable sinecures on Chinese linked boards, trusts and companies

Buchanan thinks these matters are worth investigation, but notes that

….the more interesting issue is why, fully knowing that the Chinese are using influence operations for purposes of State that go beyond international friendship or business ties, do so many prominent New Zealanders accept their money and/or positions on front organisations? Is the problem not so much what the Chinese do as as a rising great power trying to enlarge its sphere of influence as it is the willingness of so-called honourable Kiwis to prostitute themselves for the Chinese cause?

There wasn’t anything like the same willingness to associate with causes of the Soviet Union, arguably a less repressive and less aggressively expansionist power than the PRC –  and certainly less active in the political life of countries such as New Zealand and Australia.

Buchanan is keen to stick up for the current New Zealand government, suggesting that the Peter Mattis testimony (see above) had attempted to suggest the current government was particularly bad (which wasn’t the way I read it, and certainly isn’t the thrust of Professor Brady’s paper, which came out before the election).

Let’s be very clear: for the previous nine years National was in power, the deepening of Chinese influence was abided, if not encouraged by a Key government obsessed with trade ties and filling the coffers of its agrarian export voting base. It was National that ignored the early warnings of Chinese machinations in the political system and corporate networks, and it was Chinese money that flowed most copiously to National and its candidates. It is not an exaggeration to say that Chinese interests prefer National over Labour and have and continue to reward National for its obsequiousness when it comes to promoting policies friendly to Chinese economic interests.

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Labour may have the likes of Raymond H[u]o in its ranks and some dubious Chinese businessmen among its supporters, but it comes nowhere close to National when it comes to sucking up to the Chinese. That is why Jian Yang is still an MP, and that is why we will never hear a peep from the Tories about the dark side of Chinese influence operations. For its part, Labour would be well-advised to see the writing on the wall now that the issue of Chinese “soft” subversion has become a focal point for Western democracies.

As for what Labour (and New Zealand First) will be like in government, it is still early days.  But, at present, it is hard to put any daylight betweeen the approaches of National and Labour.  No doubt that is welcome to the MFAT officials and the business interests that need to keep things sweet with Beijing, and local party officials who need to keep up the fundraising.  But it is as if they are happy for New Zealand to be almost a vassal state, corrupting our own historical beliefs and values in the process.

Thus, it is fine to say that Jian Yang reveals problems in National.  And isn’t it a disgrace that not a single National MP, present or past, has been willing to stand up, speak out and say that is simply unacceptable to have a former PRC military intelligence official, former (?) member of the Chinese Communist Party, in our Parliament?  But…….not a word on the subject has been heard from anyone in the Labour Party either.  By your silence Prime Minister –  and all your senior colleagues –  you too become just as complicit.  All else equal, it should have been easier for people in the political opposition to speak out than for someone in Jian Yang’s own party (for some of his own party people there is more at stake, including perhaps a list ranking).  But not a word.

And, of course, National makes no effort to call out Raymond Huo, or Labour’s use of a Xi Jinping slogan as part of their advertising campaign last year.    Once we expected higher standards than this from our members of Parliament.  But now, it seems, there are deals to be done, campaigns to finance, and so on.   And so the presidents of both major political parties can laud a tyrannical expansionist regime which, not incidentially, brutally suppresses its own people (as just another example, this article from the latest Economist.)   It wouldn’t have happened (and rightly so) with apartheid South Africa, with the Soviet Union –  or perhaps these days even with US political parties.

Just a few weeks ago, it was that denizen of the centre-left, Hillary Clinton, who was highlighting the risks in her speech in Auckland.  To deafening silence from our own centre-left government.

I don’t suppose any of this reluctance has anything to do with illusions about the nature of the regime.   Our political leaders know about the near-complete suppression of free speech, the prison camp that Xinjiang has become, about suppression of freedom of worship, and about decades of forced abortions.   They know about the PRC’s aggressive and illegal expansionism in the South China Sea, and its increasing intimidation of free, democratic and prosperous Taiwan.  They know about the (in many cases) successful attempts to corrupt political systems in various places around South Asia.  And they know about the activities, and strategies, of PRC authorities in countries like New Zealand, Australia, and Canada (as only three of many) to exert control over ethnic Chinese groupings, including Chinese language media.  They know the PRC now takes the view that ethnic Chinese abroad –  even citizens of other countries –  are expected to work in the interests of Beijing, and are at times coerced to do so (imagine if the British government acted thus among those of us of British descent in New Zealand).   They know our schools (my daughter’s high school among them) and universities are taking money from the PRC regime, on its terms.

But, knowing all this, they just don’t seem to care.  Or if, in some back recess of the brain there is some sense in which they vaguely lament all this, it doesn’t motivate them to do anything about it, or even to have an honest and open conversation engaging New Zealanders.  It is just a corrupted system.

There is a lot of focus at present in Australia –  a country facing very similar issues, but at least with an active and open political debate (including in the Labor Party) as to how best to deal with them –  on legislative changes designed to combat (mostly) PRC influence.   Perhaps there is a case for some legislative initiatives here (eg around former ministers taking up roles serving foreign governments, or organisations controlled by foreign governments), but –  and this comes back to Paul Buchanan’s point –  I suspect the bigger issues aren’t legislative but attitudinal.    On both sides of politics.

Jian Yang would be out of Parliament tomorrow if Simon Bridges and his National colleagues had an ounce of decency on these sorts of issues (and if, somehow, Jian Yang was resistant, at least he’d be an isolated backbencher, out of caucus for the rest of the term).   Jian Yang would be explaining himself to the English language media if there were an ounce of decency and respect for standards in public life.

Confucius Institutes’ activities could be banned from our state schools if either main party actually cared. Universities, supposedly bastions of free speech. could –  as some overseas have done –  close their Confucius Institutes –  but most have made themselves quite dependent on the flow of PRC students.

Ministers and senior Opposition figures could openly lament the aggressive expansionist appraoch of the PRC in the South and East China Seas.  Closer to home, they could ensure they avoid United Front controlled organisations, and speak out for a diverse Chinese language media market.  And so on.

But, instead, they seem terrified. If they did any of that there might not be an upgrade to the preferential trade agreement between New Zealand and China.  And party fundraising might get quite a bit harder.  Some New Zealand exporters might find more technical roadblocks in their path, as some Australian firms have been recently.

This isn’t the approach of a political system that has retained any self-respect whatever.  It is sad to watch, and shaming that these people represent us.  It is, purely and simply, appeasement at work.   As if nothing can be done, and nothing should be done.  Worse than Neville Chamberlain on my reading, because so much here seems to be just about the economic dimensions.

Taking a stand would, most likely, have a short-term cost.  But China does not, and never has, determined our material living standards or those of Australia.  We –  our resources, our people, our institutions –  determine that.  (It isn’t even as if the PRC is one of the economic success stories of Asia –  at best a middle income country, in a region of Korea, Japan, Taiwan, and Singapore.)    If you have a business that is heavily reliant on the PRC –  our universities (basically SOEs) and some tourism operators mostly – you might take a hit.  But, as the old saying goes, when you dine with the devil you need a long spoon.  More specifically, you knew the sort of regime you were dealing with, and you dealt anyway.  It isn’t clear why the rest of us need to be sold-out, or have our values ignored, to serve your particular business interest.  It is one of the (many) downsides of bilateral trade agreements that it encourages ministers to put values to one side, or even a clear assessment of longer-term foreign policy threats, in the interests of corporate interests wanting to increase profits now.

Incidentally, I also doubt that changes to electoral donations laws are very relevant here, Unlike Australia, we already have laws preventing large foreign donations (except, for example, large ones such as those to Phil Goff’s campaign through auctions).  And many of the issues of real concern in Australia relate to very large donations by relatively new Australian citizens of PRC origins.  Unless one wants to move to exclusively state funding of political parties (and I certainly don’t) you can’t pass laws to stop people giving to a party on the basis of the policies such a party professes and practices –  however pernicious such policies might be.  Rather, it comes back to attitudes and to leadership.  Whatever ongoing diplomatic relations –  correct but formal –  our governments need to have with those of the PRC –  there can be no reason for party Presidents to be praising such a dreadful regime.  Perhaps we should revert to the practices of decades past where MPs and party leaders had little or no involvement in, or knowledge of, party fundraising.  And perhaps party leaderships needs the courage to turn down donations when the motives appear questionable.   Would it come at a cost?  Most probably it would, at least in the short term.  But, in a sense, the only real test of a system’s integrity (or that of an individual) is when they are willing to pay a price for what they believe.

Finally, this weekend marks the 29th anniversary of the massacre, by PRC authorities, of hundreds (or perhaps thousands) of unarmed students in and around Tiananmen Square.  The anniversary will go unmarked, and unremarked on, in the PRC of course.  That is the sort of regime our governments and business leaders defend.

This was how National MP Jian Yang alluded to these events in his maiden speech in Parliament

In April 1989 a great opportunity was opened up for me when I received a scholarship from the Johns Hopkins University in America. However, in the weeks following, student demonstrations swept China. The Chinese Government’s policy change afterwards prevented me from leaving to study in the United States.

Perhaps this weekend some journalists could invite him to flesh out his remarks.  An openly critical comment on the PRC –  who embassy he seems to remain very close to –  would certainly be a first.  A refusal to even engage –  by an MP paid and elected by all New Zealanders –  is, of course, more likely.  Perhaps they could also ask Labour MP, Raymond Huo –  also an adult in the PRC in 1989, now chair of the New Zealand Parliament’s Justice Committee – for his take on the events of 4 June 1989, and the sort of regime/Party that undertook such actions and now forbids its own people to even discuss them.   It isn’t as if either MP is a Cabinet minister.  But perhaps speaking out would interrupt the flow of party donations, upset some people doing business in China.  One often reads of PRC authorities using threats to family back in China to keep ethnic Chinese overseas in line.  If that sort of constraint exists in either case, an MP subject to such pressure might have our sympathy, but clearly would not be free to fulfil his duties to New Zealanders.