Productivity failure: Treasury clearly has the wrong model

In various commentaries on yesterday’s GDP data, I saw suggestions that the revisions to recent years’ data suggested that the New Zealand economy had been growing “strongly” in recent years.

As context for that observation, and perhaps shedding a bit of light on the sadly diminished expectations that appear to have taken hold in New Zealand, consider this chart, of real GDP per capita growth.

real GDP aapc 18

After a deep and quite long recession, the peaks in growth in per capita real GDP were a pale shadow of what had been achieved in the previous two economic cycles.   2 per cent annual per capita growth over the long-term would be a reasonably impressive result, but when the growth rate peaks at 2 per cent, and recessions come along every decade or so, it is no more than mediocre at best.  For the last couple of years  (these are annual average numbers) per capita growth has been at levels only previously experienced –  last 25 years –  on the eve of a recession.

But my main interest in yesterday’s numbers was the productivity estimates derived from them.  As I’ve been pointing out for a couple of years now, there has been next to no productivity growth at all in New Zealand for some years.  But in making that observation one is always somewhat at the mercy of the major annual SNZ data revisions.  Sometimes what looked to be in the data gets revised away completely.

How about labour productivity?  Recall that SNZ does not publish economywide productivity estimates –  there is no obvious reason why, when their Australian and British peers do –  so I’ve calculated one, using an average of the two measures of GDP (production and expenditure) and the two measures of hours (QES and HLFS).   And this is the resulting chart.

real GDP phw dec 18

No labour productivity growth at all for the last three years, and a total of 1 per cent productivity growth in the past six years.  Productivity growth under the previous Labour government wasn’t spectacular, but in the six years to the end of 2007 (just prior to the recession) we managed 8 per cent productivity growth.  But only 1 per cent this time round.    It is dreadfully bad, and there are no acceptable excuses.  You’ll hear people talk about global productivity growth slowdowns, and that is true to some extent, but it is largely irrelevant here, given that we start so far behind the leading OECD countries –  those at or near the productivity frontiers.   We have so much room to catch-up, and yet if anything again we’ve been drifting further behind.

Sadly there is little prospect of much change for the better.    Neither the previous government nor the current one appear to take New Zealand’s appalling productivity record seriously, in the sense of doing anything much about it, or even commissioning expert analysis and advice (reluctant as I’d be to suggest another “working group”).   And in a sense they’ve been accommodated in that stance by their self-proclaimed lead economic advisers, The Treasury.   Treasury publishes their HYEFU forecasts each December and buried in the supporting tables are forecasts for labour productivity growth (on an hours basis).    I could only find those tables back for the last five years, but here is what they have been forecasting (I’ve shown the four complete forecast years for each set of projections).

HYEFU forecasts for labour productivity growth published in Dec
Forecasts for June yrs 2014 2015 2016 2017 2018
2016 2.2
2017 1.6 1.6
2018 1.1 2.1 2
2019 1.2 0.8 1.5 2
2020 0.7 1.3 1.7 1.1
2021 1.4 1.5 1.2
2022 1.3 1.2
2023 1.2

They seem to have become quite a bit more pessimistic about the medium-term outlook in their latest forecast, but they are still picking almost 5 per cent labour productivity growth in the next four years, when over the last four years we’ve had almost none.   Look at the first column in the table done at the end of 2014: Treasury was actually expecting quite strong productivity growth over that period.  It is pretty clear that they simply do not understand what is going on, and do not have even roughly the right model.  Their productivity projections are wrong, in material ways, year after year.   And if they might be getting a little less unrealistic in the latest set of forecasts, that is small consolation because there is no sign they are offering advice to the government that might turn around the disastrous underperformance.   Too busy with the feel-good “wellbeing Budget” perhaps?

It has been another poor year for New Zealanders at the hands of our policymakers and their lead advisors:

  • no serious action to address and reverse the house price disaster that successive governments have been inflicting on us now for 25+ years (house and land prices up again),
  • no action at all to address the decades-long productivity growth underperformance (particularly bad over the last few years) that now sees a country once among the most productive in the world languishing in the league tables among former eastern bloc states, far far behind our former peers among the leading group of OECD countries,
  • and no sign that either the government or the Opposition really care,
  • or that our Treasury really understands at all the factors that explain the utter (and ongoing) productivity failure.

Governments, of course, don’t create productivity.  But they can and do put roadblocks in the path, often initially unwittingly.    But over time every such roadblock comes with own vested interests.    There is the old line from Upton Sinclair about

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Perhaps that explains the resistance of many in the business community to the changes that are needed.   It can’t explain Treasury’s failure.  I suspect that for them, and perhaps for many of our politicians, it is more a matter of ideological commitments, and an unwillingness to shine the light on the issues and policies that really matter if we care at all about lifting economic performance for our fellow New Zealanders.

Whatever the explanation, it is well past time for a change of heart, and for beginning again to take seriously finally reversing the decades of (relative) failure.

 

19 thoughts on “Productivity failure: Treasury clearly has the wrong model

  1. The really sad thing about this Michael is that it’s occurred in an environment where we’ve enjoyed close to record terms of trade and – by recent historical experience – low real interest rates. These facts make our performance even more dismal.

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  2. I am curious about the taken for granted notion that ‘Governments, of course, do not create productivity’. The US government surely created enough productivity to defeat the Axis in WW2, then post-WW2, productive enough to create all the infrastructure that has made it the largest economy for 7 decades. Couldn’t you argue that because our productivity is measured largely in GDP, and GDP is measured in NZ dollars, and NZ dollars are solely issued by the NZ government, that ONLY the NZ government can create NZ productivity (if measured in NZ dollars for which it is the monopoly issuer)?

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    • I don’t agree with that interpretation. Take WW2, the US govt – or those of NZ or the UK – took the huge amounts of wealth and income our economies had become capable of generating and used it to the cause of defeating the Axis, but they didn’t themselves create the wealth (other than by providing some of the basic pre-conditions: rule of law and so on.

      Measurement is a bit of a red herring. In NZ, for example, until 1933/34 we didn’t have government issued money at all, and yet by most reckonings in the decades prior to that we were one of the richest most productive nations on earth. Abolish the RB tomorrow (which I don’t recommend) and the skills, talents and business opportunities of our people won’t have changed: those are what make us the upper middle income country today (and would make us a really high income country again, if the govt were not responsible for decisions that leave us with such an overvalued real exchange rate.)

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      • Sitting here in Los Angeles and waiting for the 130th New Year Rose Parade, it is not clear to me that our NZD exchange rate is too high at all. At an exchange rate of 0.67 against the USD it is already a substantial discount in value. Our manufactured exports would be offered at a 33% discount to US products. That is already a big advantage. If we can’t compete it has got nothing to do with the exchange rate.

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  3. Maybe they have adopted globalism and count their success as people in other countries being lifted out of poverty. Justin Trudeau has declared Canada to have “no core culture” and to be a “post national country”
    …………

    There is evidence for this type of thinking

    The thing which really annoys me at the moment is the way immigration is framed as a problem.It goes to Alis point [the arguments against immigration are unsustainable] It’s a very simple and inaccurate response to what’s happening in the world. We are globalising; we are part of a new era of globalisation and this country is actually transitioned into that, particularly with it’s connections to the Pacific and Asia in a way that is quite impressive in many, many ways but at the same time we really need to reframe what is happening or provide an understanding and that’s what frustrates me at the moment.

    http://www.radionz.co.nz/national/programmes/smarttalk/20170813

    Mind you the hordes overseas don’t pay their salaries.

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  4. As one wonders what happened in the period 2009 to achieve a significant improvement you have to ask what did “they” do – or do we need to have the two components of hours and GDP overlaid over the graph to see – if “they” can achieve that improvement in one year, it can’t be too hard to do it again. Hopefully its not that pesky exchange rate again

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    • I wouldn’t put much weight on a single year’s data, especially transitioning thru the middle of a recession. Broadly you could see the period from 2007 to about 2011/12 as a continuation of the same trends pre-recession. I’m not suggesting the real exchange rate is unimportant, just that the usual lags are sufficiently long, and it stayed down for only a short period, that it wouldn’t be wise to draw strong conclusions about that period.

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    • Back then the baby boomers were in their 20s. These baby boomers are now in their 60s and aging rapidly. Robotics is our only productivity salvation.

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  5. Continuing mass immigration, a lolly scramble for the regions and a big lift in the minimum wage will lift productivity no end.
    Good times are a coming so better inflict a capital gains tax!

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    • The regions called for more tourists and as a result need the mass migration in order to service the $17 billion that tourists and international students spend throughout the regions. The big lift in the minimum wages mainly benefit the foreign workers. The Capital Gains tax is Jacinda Ardern and her team of communists that wants to rob Peter to pay Paul.

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  6. Macrobusiness blog in Australia has been doing a similar job of exposing the failures of statistics and policy regarding productivity – per capita – over there. The distortions are similar. Capital diverted into non-productive, zero-sum capital gain property “investments”. Immigration causing “growth” but not per capita. Immigration putting downwards pressure on wages, perpetuating labour-intensive processes in some industries. Resting on the laurels of resource exports and ignoring the importance in our day, of “value added” export income.

    The late Sir Paul Callaghan’s presentations entitled “Beyond the Farm and Theme Park” are worth far more than all the “expert advice” coming out of Treasury. So too is William Fruth’s remedial education pamphlet, “the Flow of Money: How Local Economies Grow and Expand”.

    http://policom.com/wp-content/uploads/2018-Flow-of-Money.pdf

    Should be required reading for all elected representatives and policy advisors.

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    • Australia is certainly an underperformer, altho over the period of my chart they have materially outstripped NZ in terms of productivity growth.

      I’m more sceptical of Callaghan, altho the benchmark you propose (“better than Treasury”) may not represent a terribly high bar!

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    • After Las Vegas with its massive glitzy hotel complexes and now a very down to earth visit to Los Angeles. There are homeless people living in tents everywhere. Central Los Angeles is a very rough neighbourhood. The Walk of Fame is full of drunken and drugged out angry people shouting at the throngs of tourists. The police cars are old mainly from the 90s and clearly dirty and dusty. Signs of failure rather than success in the US. The restaurant waiters are rude and the service is poor in the top class hotels like the Sheraton or the Hilton or even in the ordinary restaurants. Tipping is expected because people struggle to live on their wages.

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      • But I did book a restaurant through the use of Yelp for a chinese restaurant Yang Chow famous with a 5 star rating frequently by Hollywood stars. There was a wait period of 30 minutes which I timed my drive and park to be exactly that. Told in arrival that the wait time is from physical registration at the counter and the wait time was 45 minutes. I was livid and voiced my kiwi type road anger type aggression with almost the centre finger kiwi salute and surprise surprise they gave me a seat immediately. Of course someone else was bumped off the queue. A table of white suburban American ladies was chatting about how incredible the food was and a 2 hour wait. I almost choked at how awful the Chinese meals were. Every dish was topped with up with a layer of strip beef slices and brown sauce. The presentation was also a mess and the waiters asked us at least 10 times if we had finished our meal clearly wanting us to leave. They were courteous though but anyone can read the body language. Get out please we have a long wait and want higher productivity. No internet in the restaurant either. High productivity at a massive social cost.

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  7. I recently read that all the productivity gains in the world for the last couple of decades has been in a small number of hi-tech businesses. I suppose they mean Apple, Google, Amazon and many small businesses that are not household names. If that is correct then it is reasonable to expect minimal productivity growth in countries which by their nature do not have significant technical businesses. Another way of looking at it would be to compare all countries ignoring their hi-tech businesses and then maybe NZ and USA and South Korea would show similar productivity growth – the deduction being our govt is no worse than others.

    However it still is a puzzle that produuctivity growth in non hi-tech businesses is so low. It seems rational to deduce significant productivity gains – this century has seen major improvements in GPS systems and mobile phones and social networking that must make many traditional businesses more productive. For example imagine a small BnB – it would refuse unsuitable customers before they knock on the door, it would have its ‘unavailability’ on a daily basis rather than a sign in the window or answering phone calls; there would be far less time wasted on the phone; it can source needed items or contractors online at the best price; it can adjust its charges daily to optimise its profits; it can check if clients want dinner and even arrange for special diets before they arrive; payment is instantaneous rather than the cheque is in the post. All these small changes have occurred since roughly 2000 just when your figures indicate minimal productivity growth. Many of those items apply to other businesses; say plumbers, journalists, librarians.

    So the real problem may be that western civilisation is less productinve at some basic level than it used to be in previous generations? If it is a generational change (say our productive young people are more likely to take sabbaticals or there having increased drug/alchol use) then it should be possible to measure productivity by age or more controversially ethnic origin or religious belief. Bluntly does the existence of a welfare safety net mean we don’t work as hard as our parents?

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    • Come and enjoy the restaurants in Los Angeles. High productivity using the latest Yelp to assist patrons make bookings online. Just queue them up and try and move existing ones out ASAP. Rude but efficient service but then again productivity in the service business is just poor service. You can’t have excellent service without an attentive waiter taking all the time in the world to chat.

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  8. Housing’s Contribution to Gross Domestic Product (GDP) in USA

    Housing’s combined contribution to GDP generally 18%, and occurs in two basic ways:

    Residential investment (averaging roughly 3-5% of GDP), which includes construction of new single-family and multifamily structures, residential remodelling, production of manufactured homes, and brokers’ fees.
    Consumption spending on housing services (averaging roughly 12-13% of GDP), which includes gross rents and utilities paid by renters, as well as owners’ imputed rents and utility payments.

    Significant
    (Don’t know if this is applies in NZ – OECD cross country comparisons would need to equalise)
    Including owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) in GDP has long been a standard practice in national income accounting. Were owners’ imputed rent not included, an increase in the homeownership rate would cause GDP to decline.

    https://www.nahb.org/en/research/housing-economics/housings-economic-impact/housings-contribution-to-gross-domestic-product-gdp.aspx

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