40 years on

The almost-always-upbeat Herald “Business Editor at Large” Liam Dann had a column yesterday reflecting on the changes in the New Zealand economy  in the 30 years since he was studying 7th form economics in 1989.  “Studying” may be an overly generous term here: in Dann’s words

Let’s ignore the fact that I was a distracted surfer with a bad blonde haircut, prone to sitting with the most disruptive kids in the room.

As it happens, it is 40 years since I was studying 7th form economics (I was the nerdy kid).

In the 30 years since Dann’s 7th form economics teacher was bemoaning all that was wrong with the New Zealand economy then, inflation has come down, the unemployment rate is lower, and governments normally aim to run operating surpluses. We were in the middle of an extensive economic restructuring back then, and the full aftermath of the massive credit and asset price boom of the previous handful of years was just about to be felt (DFC, for example, failed in late 1989, while the second BNZ crisis was still another year away).    Net public debt in 1989 was about 40 per cent of GDP  –  not disastrous, but far from good either –  but (little recognised at the time or later) the government was already running primary surpluses (ie deficits were mostly financing costs, the real consequences of which were, in turn, overstated by the effects of inflation).

But I wondered how the comparisons looked with 1979, my 7th form year.   Inflation in 1979 had been even worse than it was by 1989 (when we were already well on the way to getting back to something like price stability), but on the other hand the unemployment rate in 1979 is estimated to have been (backdated HLFS estimates) only  about 1.4 per cent.  Quite a difference from today.     And, somewhat to my surprise when I checked the Treasury’s numbers, net public debt as a share of GDP in 1979 was much the same as it is now.  And if the financial sector in 1979 was still more regulated than it is today – I was regaling my kids yesterday with stories about how the last restrictions on current account foreign exchange transactions didn’t come off until 1982 –  at least at the time the policy changes were in the right direction (liberalising), not the wrong direction as we’ve now been for the past six years.

Some things are clearly better than in either 1979 or 1989 –  New Zealand’s terms of trade reached the end of a longrunning decline in about 1988 and (equally outside our control) have been quite a lot stronger since then.  For such small mercies we should be grateful (a 20 per cent lift in the terms of trade is roughly equivalent to a 6 per cent lift in average national incomes).

And I’m not here disputing that in material terms the average New Zealander is materially better off than our parents were in 1979 or 1989 (be it life expectancy, smartphones, cheaper cars, overseas holidays etc).  That is true of almost every country in the world (think Venezuela for the sorts of places that are exceptions.    And those also aren’t the arguments Liam Dann seems to be making when he says of the present –  the headline to his column  –   “The economic numbers that would have blown us away in the 1980s”.

Instead he talked about how hard it was (in prospect) to get a job as a young person in 1989.  Maybe, but as it happens the employment rates for 15-19 and 20-24 year olds are pretty similar now to what they were in 1989 (and, sure, more people go on to tertiary education now, but it will be a rare tertiary student now who doesn’t have a part-time job.

Now, in a way I have been a little unfair to Dann so far.  Despite the headline, I don’t think his intention was to be that upbeat.  Later in his column he notes high levels of private debt, and the incidence of homelessness (although weirdly he presents the latter as being in some sense the “price of economic stability” –  which is simply wrong.    But he avoids actually identifying the policy changes –  land use restrictions etc –  that have meant that whereas in 1979 (in particular, near the trough of a multi-year real house price slump) or in 1989, houses were relatively affordable, they simply are not today.  I’ve noted previously, that I bought my first house in 1989.  In today’s dollar terms, that house cost just under $300000, just down the road from where I live now.  The same house today would probably cost $850000+ (the median price now for this suburb is just over $900000).    It leaves me very glad I was 26 then, not 26 now.

Perhaps the worst of it is diminished ambitions.

Back in the late 1970s, people talked in terms of how we’d crippled out export prospects, recognising that a small country’s prosperity depended on lot on the ability to create a climate in which locally-based firms were taking on the world and winning.  People talked in terms of the tax on actual and potential exporters that tariffs and quotas represented, and looked forward to a day  when we’d stop tying two arms behind our back.  By 1989 many of these restrictions etc were well on the way to being removed, but everyone knew it took time for the gains to flow –  indeed, we had expert overseas advisers highlightin the significance of the real exchange rate (then temporarily boosted by the drive to get inflation down).

And yet 30 or 40 years on, the foreign trade shares of GDP (exports and imports) are much the same now as they were then.   There is still lots of talk about export-led growth etc, but no remotely credible story from our politicians or officials as to how this might –  at last – come to be.

And then, of course, there is the small matter of productivity. It isn’t everything, but (in words not original to me) when it comes to long-term average material living standards it is almost everything.

The 1970s were a disastrous decade for New Zealand productivity.  We slipped a long way down the OECD rankings in a single decade.

And here is an adaptation of a table I’ve shown here previously (I’ve just added a 1980 column), comparing average labour productivity in New Zealand and in the leading bunch of OECD countries.

Table 1: Labour productivity: New Zealand and a leading OECD group
GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1980 1990 2017
New Zealand 21.4 22.7 28.5 37.3
Netherlands 27.5 40.2 47.7 62.6
Belgium 25 37.9 46.6 64.8
Denmark 25.1 34.8 44.7 64.9
France 21.6 32.0 43 59.8
Germany 22.3 32.2 40.6 60.5
Sweden 27.2 34.5 38.8 61.7
United States 30.9 35.9 41.8 64.2
Median of seven 25.1 34.8 43 62.6
NZ as per cent of median 85.3 65.2 66.3 59.6

We’ve lost quite a lot more ground since 1979/80 or 1989/90.  In fact, the period of worst relative performance on this metric has been in the last few years, when we’ve managed no productivity growth at all.  No individual year is disastrous, but cumulatively it represents as astonishing slippage, that should be alarming – and once seemed so to our elites.

(This table compares New Zealand with the OECD leading bunch now.  I also did the comparison against the seven countries in the leading bunch in 1989 (Italy was one of those countries).  We also kept on losing ground against them, although –  logically –  a bit less so.)

Relative to what might have been our potential –  the global advanced country productivity frontiers, in a countries none of which have anything like ideal policies –  we’ve done poorly on the economic fronts that really count.  Sure, we have achieved a much higher degree of macro stability –  and that is no trivial achievement, although most countries like us (small advanced) have done something similar.    But we’ve fallen further behind on productivity, and rendered the housing and urban land market seriously dysfunctional.  Firms don’t find it more attractive to trade globally from here.   And there isn’t much sign our “leaders”  –  political or bureaucratic –  care much, are interested in finding the answers or acting to bring about better tomorrows.

Liam Dann writes

It has struck me that were I to time-travel back and share New Zealand’s current economic statistics with Mr Shaw, he would be gobsmacked by the nation’s success.

To be honest, reflecting on what I’ve written here, if I could time travel back to 1989 and share New Zealand’s economic situation now with my 1989 self –  a young policy manager and economist at the Reserve Bank – the young me would have been gobsmacked by the extent of the failure and (more so) by the apparent indifference to it, the refusal to grapple with what it would take to make things better.  (Although I would have been pleasantly surprised by the inflation track record –  I recall in the early 90s casually offering a bet to one bank chief economist that inflation wouldn’t average below 3 per cent for the following 15 years.)

What is really depressing – with a son doing Year 12 economics this year (a year that focuses on macro) – is the thought that in thirty years time he might look back astonished at how poorly New Zealand has continued to do relative to countries that were once its peers.