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.

19 thoughts on “40 years on

  1. Very little further reform has happened since 1989. All the planks were pretty much in place and it has been tinkering ever since.

    And I’m not sure about job prospects for graduates being much better now when many have to work in call centres.

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    • I arrived 30 years ago on a holiday visa. I snapped up a job with Fletcher building within a week of sending out my resume. Surprisingly Fletcher Building was still struggling with how to use spreadsheeting PC software technology. Each project manager had a Apple Mac on their desk but no idea how to use it. With those spreadsheet skills in project and cashflow management I landed a job quite easily.

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  2. Thanks, Michael, for a really interesting article. You’ve reminded me that 46 years ago I had my first stint at teaching Form 7 economics. The textbook throughout NZ then was Samuelson.

    I share your despair for NZ’s decline, and I’ve been despairing for much longer, having been born in 1940.

    I remember well, experiencing the surprise that people from both the UK and the USA expressed when they came to visit NZ, at we NZers’ high standard of living. Back in the 1940s and 50s, our average family lived a considerably better life than an average UK or USA family. They had far greater extremes of wealth than we did, but since then we’ve seem to have been emulating them.

    In the 1980s my old friend Tony Sage, a chartered accountant, used to write articles published regularly in the NZ Herald bemoaning that we had so much immigration. He reckoned that NZers would be better off without it, and that our best efforts should go into what we do best — agriculture and horticulture, with as much hi-tech manufacturing as we could win world-wide markets for.

    Muldoon and his disastrous ‘think big’ projects in the 1970s didn’t help.

    If only the first Labour government had stared down the Bank of England and not given in to its demand that we not use our very own RBNZ to create ex-nihilo new money with which to fund our infrastructure, as the Canadians did right through until 1974, when the BIS inveigled Pierre Trudeau to put a stop to the practice.

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    • Unfortunately, the government and our economists did do a Think Big on agriculture, the big one being Dairy farming and Fonterra. Unfortunately we are now paying the price of decimated manufacturing capability and reliant on food production that draws on a huge amount of land and water resources will very poor returns.

      Muldoon did have the right approach. Our economists are the ones still struggling with a agriculture economy mentality which belongs to the age of the Roman Empire.

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  3. Those GDP per hour worked figures.

    farming has become more efficient (is a reason for some regions (or small towns) shrinking, but what else. How about teachers and the property sector (I assume land price inflation hasn’t found itself into those figures)?

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    • Nope, farming is not more efficient because in the productivity equation you do not count the number of cows. All we did was add a few more extra cows and productivity jumped. Economists negligently forgot to count the pollution costs, the water and land resources required to run a few extra cows until we got to peak cow. Now we know rather late, after having decimated our high skilled manufacturing capability.

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      • Getgreatstuff, you wrote: “All we did was add a few more extra cows and productivity jumped.”

        Would you say, when a manufacturer of widgets installed a few more machines in order to increase productivity, “All they did was add a few more extra machines and productivity jumped.”?

        Methinks not, because the word “productivity” is invariably taken as meaning “labour productivity” unless specified otherwise.

        For example, along with an increase in dairy cows came the widespread replacement of herringbone cowsheds by rotary cowsheds that are highly automated, thus further increasing productivity.

        IMHO, we haven’t reached “peak cow” just yet!

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      • Machines replace a human monkey and increases outputs with less use of land and water resources. What is the difference between human monkey and a cow? They are both animal mammals, need feeding, loving and housing.

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      • Peter, how have we not reached peak cow? 10 million cows demand the use of land and water resources to the equivalent of 200 million human monkeys. Do the maths.

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  4. It doesn’t say much to talk of a time traveller coming from 1979 to today, in the same country. It would probably also be impressive to go from 1979 NZ to 2019 Bucharest.

    A time traveller from 1979 might also be disappointed to witness the moral slum of modern entertainment, and the inane stupidity of public life.

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      • I arrived in NZ in the early 80s not long after 1979. Today is definitely a much better place. Love the entertainment though. Showgirls and Mermaids strip clubs were around in the dingy dirty part of town when I arrived in the 80s. Today these places are still here but the area is now classy and even more entertaining with girls from all over the world. Too bad for the ladies, Showboys was around in the 80s but no longer around today.

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    • Can’t fully remember, but it will have been some mix of the contrarian streak in me (there was a lot of zealous enthusiasm for the new Jerusalem at the time) and doubts that the politicians would hold the line on price stability (even then you had Winston and his followers and Jim Anderton’s lot campaigning against RB independence and the 0-2% target). I wasn’t wrong to identify the ongoing tensions – there has not been an election since 1987 when some party or other wasn’t campaigning to change some aspect of the RB Act or PTA (something not seen in other countries) but I’m glad to have been wrong about the empirical magnitude of the pressures (in the end, we got nothing worse than a gradual move up to a 1-3% target, and for the last decade we’ve been below the midpoint of that range.

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  5. “” 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 “” Obviously we have different children – mine are not so easy to amuse.

    As I was reading your comparison of productivity per capita on the radio was a discussion of the cancer drugs that Pharmac does not subsidise but other countries do. The expert fielded all the interviewer’s questions adeptly but never said the obvious: “NZ is too poor, we can’t afford them”. Productivity isn’t everything but sometimes it is life or death.

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    • We spend $900 million on Oranga Tamariki ie stripping babies from their mothers and $400 million on Waitangi Treat settlements each year. Perhaps that is why we are too poor to fund cancer drugs?

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