Business investment and SNZ

The calendar says it is summer, but “summer” seems to have bypassed Wellington.  We’ve been back for 10 days and on not one of them has it been warm enough for a swim.  Right now, my phone says it is warmer in Waiouru than in Wellington.  And so, between driving lessons for my son, I’m still pottering in the national accounts data released late last year, although this will be the last such post for now.

At the end of November, I ran a post here on investment and capital stocks, drawing on the annual national accounts data released a few days earlier.  One of the central charts was this one

What about business investment?   SNZ don’t release a series for this –  but they could, and it is frustrating that they don’t –  so this chart uses a series derived by subtracting from total investment general government and residential investment spending.  It is a proxy, but a pretty common one.

bus investment to marc 19

Business investment as a share of GDP has been edging up, but it is still miles below the average for, say, 1993 to 2008, a period when, for example, population growth averaged quite a lot lower than it is now.  All else equal, more rapid population growth should tend to be associated with higher rates of business investment (more people need more machines, offices, computers, or whatever).

So common is this proxy for business investment that for a long time it was how the OECD was doing things, including in cross-country comparisons where New Zealand mostly did poorly.    Note that none of this approximation would be necessary if Statistics New Zealand routinely published a business investment series.  There is no obvious reason for them not to do so –  no individual institution confidentiality is being protected (as an example of one reason SNZ sometimes advance for non-publication).

My working assumption has long been that government-owned business operations designed to make a profit (notably SOEs) were not being included in “general government”.    I didn’t just make up that assumption; it is a standard delineation advanced by the OECD themselves.  Here is their own definition

Definition:
General government accounts are consolidated central, state and local government accounts, social security funds and non-market non-profit institutions controlled and mainly financed by government units.

In other words, “general government” would include government types of activities, including things –  even semi-commercial things –  mainly funded by government units (whether large losses, or direct subsidies or whatever).   Core government ministries would count.  State schools would count as part of “general government”, but fully private schools would not.  And nor, on the standard interpretation would the investment of New Zealand SOEs (required to aim to generate profits for the Crown) or fully market-oriented trading companies that might happen to have a majority Crown shareholding.    Such trading companies are mostly funded by their customers (and private debt markets) not by the Crown.

But it turns out that this isn’t how SNZ has actually been doing things in New Zealand, at least as regards the “sector of ownership” data I’ve used (and which the OECD has typically used for New Zealand).

I learned this because of a pro-active outreach by an SNZ analyst, to whom I’m very grateful.  This analyst emailed me noting that he had enjoyed my posts on the annual national accounts, but…

In that post you include a chart showing general government investment as a share of GDP. It appears that for your analysis you have utilised the sector of ownership and market group breakdown of our GFKF data, combining both market and non-market activities of entities with central or local government ownership. I wanted to make you aware that this includes state owned enterprises – market orientated units with government ownership. As a result your government investment figures will include, for example, Air New Zealand’s investment in aircraft and electricity units with government ownership.

I suppose it makes sense when one thinks about it (Air NZ and most of the electricity companies are majority government owned, and SNZ confirmed that they do not pro-rate).

As it happens, help was at hand.  The SNZ analyst went on

An alternative source for general government investment data is our institutional sector accounts which include GFKF for each institutional sector.  In recent years we have adopted a new sector classification – Statistical Classification for Institutional Sectors (SCIS) – to give more visibility to the roles of the various sectors in the economy. SCIS sector 3 (General government) GFKF is held under the series SNEA.S3NP5100S300C0 . We are currently expanding the range of sectoral National Accounts that we regularly compile and disseminate on both an annual and quarterly basis.

The following chart compares the sector of ownership basis with the SCIS basis for general government investment as a share of GDP.

poole 1

This then goes on to impact the presentation of business investment as you have calculated it:

poole 2

What are the implications?  “True” general government investment is lower than in the chart I’d shown (the blue line in the first SNZ chart).  But it also marks even more stark how stable the share of GDP devoted to general government investment has been (over 20+ years) despite big swings over that period in the rate of population growth).

On the other hand, business investment as a share of GDP is higher (over all of history) than I have been showing it.  But the extent of the recovery in business investment is even more muted than I had been suggesting.  Despite rapid rates of population growth, business investment in the most recent year was little higher than it was 6-8 years ago, and not that far above the lows seen in the 1991 and 2008/09 recessions.

The helpful SNZ analyst went on to note that SNZ could do things better.

I acknowledge your point that we can improve our presentation of investment data. We are looking at what we can do to improve this, particularly in giving more prominence to the government and business investment dimensions that your post highlights. We do want to support a consistent basis for the monitoring of government and business investment. Our development work to expand our sector based accounts will support this and allow us to improve both our annual and quarterly presentation. Note that the institutional sector accounts have a shorter time series available, but as we work through this we will consider extending the length of the SCIS based GFKF time series.

A quarterly “business investment” series should be treated as a matter of some priority.

The other aspect of my proxy that had bothered me a little over the years was the possibility of an overlap between residential investment and general government investment.  If the government itself was having houses built that should, in principle, show up in both.  I could, therefore, be double-counting my deductions.  I was less worried in years gone by –  the government itself wasn’t having many houses built –  but the current government has talked of large increases in the state house building programme.

SNZ’s analyst suggested I didn’t need to bother.

Apart from needing to make a choice over how to define general government investment as discussed above, the proxy you are using for business investment seems fit for purpose in the interim.

  • There is very little overlap between residential building investment and government investment, so subtracting both from the total is not doubling up on the subtraction much.
  • We represent households ownership of investment properties through separate institutional units to the households themselves. These units are classified to SCIS class 121 (non-corporate business enterprises). There is not a lot of business sector investment in residential property outside of this SCIS class, so subtracting all residential investment in your proxy is fit for purpose.

And yet I was still a little uneasy and went back to him

Thanks too for confirming that there is little overlap between residential building investment and government investment.  That had been my clear impression in the past –  and I know the OECD has done “business investment’ indicators the same way I was doing them –  but had been a little uneasy that with building of state houses ramping up again the overlap might be increasing.  If there still isn’t much overlap is that because (say) the construction only moves into Crown ownership when it is completed?

To which he responded

With regards to your question about the state housing ramp-up and whether that is causing the overlap between government (sector of ownership) investment and residential investment to be increasing… conceptually we should be capturing the state housing under government ownership. This is below our published level, and I’d want to look into the data sources and methodology used before being confident in the quality of the government residential investment data. But based on what I can see, Government residential investment does look to be a small share (typically around 1-2%) of total residential building investment, and there is not a clear trend of change in the share over the last 15 years. The values involved are not large enough to alter your interpretation of business investment in the way that you have derived it.

I was still a bit uneasy –  1-2 per cent didn’t really seem to square with talk of thousands more state houses –  but would have left it for then.  Except that the SNZ analyst came back again

A colleague has reminded me of our building consents release in February (https://www.stats.govt.nz/news/40-year-high-for-home-consents-issued-to-government) where we said:

Home consents issued to central government agencies reached a 40-year high in the year ended December 2018, Stats NZ said today.

Central government agencies, including Housing New Zealand, were granted consent for 1,999 new homes in 2018, which is the highest number since the year ended November 1978 when 2,105 were consented.

“There has been significant increases in new home consents issued to central government agencies in the last few years, with levels approaching those last seen in the 1970s,” construction statistics manager Melissa McKenzie said.

However, private owners (including developers) accounted for 94 percent of the 32,996 new homes consented in the year ended December 2018.

Partnerships between the government and private developers to build new homes may not be reflected in the central government numbers as the results depend on who was listed as the owner on the consent form.

Now, the building consents data then forms the basis for the compilation of our building activity statistics, through a combination of survey sampling and modelling. There is a lag between consent and building activity. So the timing is uncertain, but we should expect the higher consents to flow through to increased building activity. As the last paragraph notes, there are some practical aspects that may impact on the quality of the sector to which the building activity is assigned.

The building activity statistics are a key data source for our residential investment statistics in the National Accounts, but I’d want to look into the National Accounts methodology more to understand whether there are any other aspects impacting the quality of the government residential investment data.

So there seem to be a few problems to be sorted out at the SNZ end, leaving users of the overall investment data –  and particularly anyone looking for a timely business investment proxy –  somewhat at sea.   It probably isn’t a significant issue for making sense of the last decade or two, but if the state is going to be a bigger player in having houses built for it the data for the coming years will be murky indeed.

Unless, that is, Statistics New Zealand treats as a matter of priority the generation and publication of a timely “business investment” series.  They are only agency that can do so, that has access to the breakdown of which government-owned entities are investing, and what proportion of residential building activity is for government.

I guess this is just one among many areas where we see the results of SNZ not really being adequately funded, over many years, to do core business (even as they have funding for extraneous purposes, notably the collation of wellbeing indicators, some sensible, some barmy).   There aren’t many votes in properly funding such core activities, but it doesn’t make them less important.

I really do appreciate the pro-active amd helpful approach of SNZ’s analyst.  I hope his managers are receptive to the need to improve the quality of the investment data SNZ is publishing.

And the bottom line?  So far as we can tell, business investment has remained very weak, and quite inconsistent with what one might have expected in the face of the unexpected surge in the population over the last five years.  Firms, presumably, have not seen many profitable opportunities.

Decomposing the NZ economy…and Australia’s

Continuing on with updating my regular charts in light of the national accounts revisions released last month, I got to the one distinguishing (indicatively) between real growth in the tradables and non-tradables sectors of the economy.    Recall that for these purposes the primary sector (agriculture, forestry, fishing, and mining) and the manufacturing sector count as tradable, together with exports of services.  The rest of GDP is classed, loosely, as non-tradables.   As I’ve noted in an earlier post

The idea is to split out those sectors which face international competition from those that don’t.     It is no more than an indicator, and people often like to point out the components of “non-tradables” where, at least in principle, there is international competition.   But as a rough and ready indicator, it serves its purpose.   It was first developed by a visiting IMF mission about 15 years ago to help illustrate how one might think about the impact of a lift in the real exchange rate.

Here is the latest version of the chart, with both series expressed in per capita terms.

T and NT to sept 19

In per capita terms, there has been no growth at all in (this indicator of) the tradables sector since about 2002.   That is 17 years now.  The economy is increasingly concentrated in the non-tradables sector, the bits (generally) not very exposed to international competition.

One can –  people do –  quibble about adding up these components, so here is a chart of the individual components of the tradables sector measure.    It starts from mid-2002, when the tradables aggregate first got to around the current level.

T and NT components NZ to sept 19

None of these sectors has done particularly well,  The best performer –  oft-cited hope of the future –  services has averaged per capita growth of 0.6 per cent annum.  The mining sector is smaller than it was, and agriculture, forestry and fishing (taken together) has managed no per capita growth since 2012.

Perhaps there is no connection at all between this performance and developments in the real exchange rate

OECD ULC RER 2020

but I doubt many detached observers would think so.

It can get a little repetitive making the point, so this time I decided to put together –  for the first time in some years – the comparable charts for Australia.

Here is the aggregate chart for Australia

Aus T and NT to sept 19

Australia’s tradables sector had also gone more or less sideways for a while, but no longer.     Here is how the two countries’ tradables sectors look like on the same chart.

T and NT tradables

The 1990s were pretty good for the tradables sectors of both countries.  And although Australia has again been performing better in the last few years, even that growth is slower than Australia experienced in the 1990s.  As for New Zealand….well, no growth at all.

Here, for completeness, are the non-tradables sectors of the two countries.

NT components

Our non-tradables sector has been growing a bit faster than Australia’s in recent years.  That looks to be mostly because we’ve had a period of faster population growth –  rapid population growth tends to require more resources devoted to non-tradables sectors (notably construction).

nz and aus popn growth

And what about the breakdown of Australia’s tradables sector?

Aus T components

It is very different from the New Zealand picture in almost every respect.    The mining line didn’t surprise me –  it was the story I expected to be telling –  but the others did, including the continued strong growth of services exports.  Back in 2014 and 2015 it looked as though something similar was happening on both sides of the Tasman, but no longer: services exports here (per capita) have simply stagnated again.

New Zealand and Australia have both enjoyed pretty strong terms of trade in the last couple of decades (Australia’s more volatile than ours).  But over the decades, New Zealand average productivity (real GDP per hour worked) has kept dropping further behind Australia’s –  roughly 42 per cent ahead of us now, compared to about 25 per cent in 1970.   And yet OECD data suggest our real exchange rate has risen relative to Australia’s over that half-century.

aus nz RER

It isn’t that much of a rise –  around 15 per cent –  but the longer-term economic fundamentals pointed in the direction of a fall at least that large.      Policymakers here have, unwittingly (although that isn’t much of an excuse after all this time) delivered a climate –  a combination of factors –  that mean it is very difficult for the tradables sector to grow much in New Zealand.     Unless that changes it is difficult to envisage New Zealand not continuing to slip further behind, not just Australia but other advanced countries as well.

If the government were at all serious about responding to the productivity failings, these are sorts of imbalances they’d be instructing the Productivity Commission to investigate and make sense of.

Wages and the economy

Getting back to taking a look at the revisions to the national accounts data published just before Christmas, I thought it was about time to update my chart about how wages rate have been doing relative to the underlying performance of the economy.    There isn’t, and sbouldn’t, be anything mechanical about the relationship between the two series, but looking at how wage rates have moved relative to movements in GDP per hour worked at least opens the way to some further questions and analysis.

In this exercise I am looking at:

  • the analytical unadjusted series of the Labour Cost Index (available for both just the private sector and for the whole economy).   This series holds itself out as measure of changes in wage rates before any adjustment/deduction for productivity growth. and
  • nominal GDP per hour worked.  Nominal both because official wages series (including the LCI) are nominal, and because nominal GDP captures the direct effects of terms of trade changes.  In a country where the terms of trade move about quite a lot, those changes make a difference in understanding changes in returns to investment and, over time, capacity to pay labour.

There is general inflation in both series, of course.   Here are the two individual series starting from 1995q1 (when the LCI series starts).

wages 2020 1

And in this chart, I have shown the changes in the ratio of wage rates (this measure) to nominal GDP per hour worked.   A rising line indicates that, on these measures, wages have risen faster over the period in question that GDP per hour worked.   Doing so strips out the effects of general inflation (in both numerator and denominator) and enables us to better see when changes in the ratio of wages to economywide “productivity” or earnings capacity happened.  The blue line is the quarterly series, and the orange line is the four-quarter moving average of that quarterly series.

wages 2020 2.png

Over the almost 25 years of this data series, wages rates have risen about 10 percentage points more than nominal GDP per hour worked.    Even over the period since the last recession begain (the peak of the previous business cycle was 2007q4), wages rates have risen in total 4-5 percentage points more than nominal GDP per hour worked.  It isn’t the smoothest series in the world, and there are measurement challenges in quite a few of the underlying components, but the overall direction of movement –  over quite a long period now – is pretty clear.  (And it isn’t just a public sector wages story –  private sector wages have, over time, risen faster than public sector ones.)

In and of itself, this series is neither good nor bad news, regardless of whether you are “a worker” or “a capitalist”.     After all, as is well-known, New Zealand’s productivity performance has been poor for a long time.  One could readily envisage an alternative world in which there was much stronger productivity growth, and really rapid business investment growth associated with those opportunities, in which wages (real and nominal) rose materially faster than they did over history, and yet a bit slower that nominal GDP per hour worked grew.  A comparable chart for Australia (included here) suggests something like that may have happened there.   In New Zealand, however, business investment –  and, in particular, growth in the productive capital stock per hour worked –  has also been pretty weak for a long time.

But to the extent –  pretty feeble as it is –  that the New Zealand economy has grown, wage rates have grown faster.

Here are a few associated series.   Here is growth in real GDP per hour worked, where I’ve shown both the time series and the series of five-yearly averages in the growth rate of labour productivity.

wages 2020 3.png

Productivity growth over the last decade has averaged worse than at any time in the history of the series  (yes, that may partly be a global phenomenon, but (a) that is no consolation to wage earners, and (b) remember that we started so far behind leading OECD countries that we should have been looking for some convergence).

And what about the terms of trade, the other component in nominal GDP per hour worked?

TOT 2020

Our terms of trade lifted a long way in the decade from about 2003 to 2013 –  enough to lift average incomes nationwide by about 6-7 per cent.   And yet there was none of the sort of business investment boom one might otherwise expect in a country experiencing such a favourable, exogenous, shift in its external trading conditions.   As it happened, this was however the period in which wages rose fastest relative to growth in nominal GDP –  which again has a somewhat anomalous feel to it.

And here is one last chart: New Zealand’s real exchange rate, using the OECD’s relative unit labour cost measure.  I’ve also shown the average for the last 15 years, and it is easy to see how much higher that average is than the average of the previous couple of decades.

OECD ULC RER 2020.png

In many respects, the real exchange rate measure is just a variant on the earlier chart, highlighting the relationship between wages growth and growth in the underlying productivity capacity of the economy. But it is more telling, in context, precisely because it introduces an international dimension.    New Zealand has lost a lot of external competitiveness in the last couple of decades, even though the terms of trade performed strongly.

Perhaps not surprisingly, our export sector (and imports) as a share of GDP has been falling and (at best) flat.   Business investment has been pretty weak, and strongly focused inwards.  And productivity growth has been poor.

To be clear, I’m not suggested at all that these outcomes are the fault of workers as workers (as voters it might be another matter).  Wage negotiations –  employers and employees –  occur against a backdrop that neither individual firms nor individual workers (or unions) can do much about.  The overall picture is much more the responsibility of broader policy settings –  at least on my telling very rapid policy-driven population growth into an economy with few things going right for it.  That has had the effect of skewing the economy inwards.  It boosts the demand for labour, and so workers have done ok given the mediocre overall performance of the economy. But that should be no consolation for anyone given that, overall, we kept drifting further behind the leading group of advanced economies and are increasingly being overtaken by former Communist, formerly fairly poor, eastern and central European countries.

A government that was really serious about fixing the productivity failures would be asking the Productivity Commission and The Treasury to focus on these big picture issues and challenges.

 

Once one of our largest towns

A few years ago, in slightly whimsical post-holiday mode, I did a post highlighting a snippet I’d discovered in the Whakatane museum that until about 1950 the Whakatane port handled more shipping tonnage than Tauranga’s did.   These days, of course, Whakatane’s “port” is known only for sports fishing and White Island tours and Tauranga handles the most cargo of any port in the country.  How economies change in just a few decades.

This summer we spent our holiday at Waihi (with my in-laws) and Waihi Beach.  I’ve come to quite like Waihi, and it seems I’m not the only one.  Just a few months ago it was named the “most beautiful small town” in New Zealand, and if that surprised me a little it is certainly a pleasant place, with an air of prosperity about it – and decent French and German bakeries  – one often doesn’t find in small towns these days.     It seems to share in the same sort of insane zoning practices that hold up house prices almost everywhere (if you get on the right side of the council rules there is apparently money to be made subdividing semi-urban sections –  which in any sane world wouldn’t happen for a town set surrounded by large amounts of fairly flat rural land.)    As for the air of prosperity, probably it helps to be on the main road from Auckland to Tauranga, but Waihi has a more prosperous feel than Paeroa, 15 miles nearer Auckland, and I presume that must be down to mining –  represented by the huge open-cast pit perhaps 50 metres from the main shopping street.

What perhaps makes Waihi something of an anomaly is that it is both prosperous and well-kept and yet has fewer people than it had 100+ years ago.

Just prior to World War One, Waihi had an estimated population (31 March 1913) of 6740.  By New Zealand standards, that made it a big place.    Here were the urban area populations at the time.  Of course, then the urban population was mostly in handful of large cities (the old “four main centres”)

waihi 1.png

but Waihi was the 13th largest town/city in the entire country, not much smaller than places like Nelson and Plymouth (and ahead of those other six places I’ve shown, all now substantial cities).  Of those top 13, only Waihi and Palmerston North were not ports.

And why?   That was (gold) mining.   Waihi was by far the largest gold mining operation in New Zealand (and had been the location of the major miners’ strike the previous year –  a confrontation that at its height involved 10 per cent of all New Zealand’s police, and the death of one striker).    And mining in New Zealand wasn’t on a trivial scale.  These were the days of the Gold Standard, when many monetary systems (including our own) were backed by/convertible into gold.  In 1910, New Zealand –  mostly Waihi – accounted from just over 2 per cent of the world’s annual gold production.  Gold production was similar to that from the Australian state of Victoria.  Of the Australian states, only Western Australia produced a lot more (3 to 4 times total New Zealand production).

What about now?   There is still gold (and quite a lot of less-valuable silver) being mined in Waihi.  In fact, just recently Labour ministers overruled one of their Green Party colleagues on a decision that will facilitate mining for some years to come.

But relative to what is going on elsewhere it is a shadow of what it was (and, of course, much less labour intensive).   Total New Zealand gold exports are now about 5 per cent of those of Western Australia.  As a gold producing country, New Zealand now ranks between Ethiopia and Finland, mining about a quarter of one per cent of the world’s new gold production (did you know –  I didn’t –  that China is now, by some margin, the largest producer of gold?).     Most likely, there is a lot of gold elsewhere in the Coromandel Hills, but the political barriers to exploiting it remain formidable.

And as for Waihi, if the mine and its gold and silver production helps keep a town fairly prosperous and well-kept, the latest SNZ population estimate is only 5160, just behind Dannevirke, Carterton, and Dargaville.  Waihi’s population means it is now only our 56th= largest urban area, almost halfway down the SNZ list.  The smallest of the other places on my earlier chart –  Blenheim –  now has six times Waihi’s population.  In fact glancing down the list of 115 urban areas from 1913, Waihi’s drop in the ranking looks more precipitate than any other town in New Zealand, perhaps matched only by a handful of (then much smaller) South Island mining towns.

Natural resources really can make a difference.  Even today, they are the difference between Waihi and numerous down-at-heel rural communities scattered around New Zealand.

Financial literacy: how about schools fix maths etc and governments free up the housing market

It was anything but a slow news week globally, but here in New Zealand not much seemed to be happening (not even much summer, at least in Wellington).    Perhaps that was why the Sunday Star-Times chose to devote two full pages (with the promise of more in the next couple of weeks) to the hardy perennial cause of –   in the words of the headline – “More financial literacy needed”.   Especially (it appears) for kids, from schools.  In years gone by, there have even been public opinion polls –  paid for by people championing the cause –  suggesting that the public agree.

I’m as sceptical as ever, perhaps more so as my own kids have progressed through the education system.  What follows is mostly from a post I wrote on the issue a few years ago

I’m sceptical at a variety of levels.  First, and perhaps most practically, these surveys (and the reported views of advocates) never ask what people would prefer schools to stop teaching.  There are only so many hours in the day/year.  I’d face the same question as to what should the schools stop teaching, but given a choice, personally I’d rather that schools were required to teach a sustained course in New Zealand and British/European history than that they teach so-called financial literacy.   Kids are exposed every day to their parents’ attitudes to, and practices with, money and things.  They aren’t directly exposed, to anything like the same extent, to maths, science, history, or foreign languages.

Second, as far as I can see, the evidence is pretty mixed as to whether teaching “financial literacy” makes any difference to anything that matters.  Are countries with higher “financial literacy” scores richer as a result, more stable, happier?  And a recent report (page 32) for our own government agency that deals with this stuff actually showed that, for what it is worth, the “financial literacy” of New Zealanders scored quite well in international comparisons.  What is the nature of the problem?

financial literacy

Third, why would we expect that the government, and its representatives, would be good people to teach children about money?  …at a bigger picture level, in one way or another governments are the source of most financial crises –  Spain, Ireland, Argentina, the United States, China.   Governments are more prone than most to undertaking projects that they know provide low or negative economic rates of return.  Governments face fewer market disciplines than citizens. And governments don’t have to live with the consequences of their mistakes.  So perhaps I could support a civics programme that included a section on critically evaluating election promises and government policy announcements.

Fourth, much of the discussion in this area is quite strongly value-laden.  And no doubt it has always been so.  I recall the day when our 6th form economics class was visited by a banker, to try to promote savings etc.  He brought along a hundred dollar note –  this was 1978, and it was probably the first time any of us had seen one.  Trying to set up a discussion about the merits of bank deposits (probably with negative real interest rates at the time), he asked us all what we’d do with the $100 if we had it.  Various class mates rattled off their spending wishes, but the banker was totally flummoxed when one of my friends, a strong Christian, told him that what she’d do was to give it away.

And where, for example, in all the discussion of financial literacy is there any reference to the idea that one of the best routes to financial security is to get married and to stay married?  There are elements of both causation and correlation there, but finding the right spouse, and learning what is required to make a lifelong commitment work, is almost certainly a more (financially) valuable lesson that knowing that when interest rates fall bond prices rise.  But it is not one we are likely to hear from the powers that be –  particularly not under the current government.

And fourth, this becomes an excuse for yet more bureaucratic/political bumpf, reinforcing a sense that governments should have “strategies” about everything and anything.  I was somewhat surprised to learn that our government has a financial capability strategy.  Why?

Building the financial capability of New Zealanders is a priority for the Government.  It will help us improve the wellbeing of our families and communities, reduce hardship, increase investment, and  grow the economy.

The National Strategy for Financial Capability led by the Commission for Financial Capability provides a framework for building financial capability. It has five key streams:

  • Talk: a cultural shift where it’s easy to talk about money
  • Learn: effective financial learning throughout life
  • Plan: everyone has a current financial plan and is prepared for the unexpected
  • Debt-smart: people make smart use of debt
  • Save and invest: everyone saving and investing

On this measure, might we assume that “debt-smart” would mean taking as much interest-free student debt as possible and paying it off as slowly as possible?  Not an approach I will be encouraging in my children.

More generally, I’m not sure that any of these items represent areas where we should expect governments to bring much of value to the table.  One might marvel that human beings had got to our current state of material prosperity and security –  let alone how our pioneers built a country that was once the richest on earth – without the aid of government financial literacy/capability strategies. And since when has a traditional Anglo reticence about matters of money been something for governments to try to change?   Better perhaps might be a focus on improving the financial capability of governments.

The Commission’s own research (p 26) shows what one might expect, people develop more “financial literacy” as they need it.  So-called “literacy” is low among young people (18% of 18-24 year old males are “high knowledge”), who don’t need it much.  It rises strongly during the working (child-rearing, mortgage etc) years (53% of 55-64 males are “high knowledge”), and then looks to tail off a little in retirement.  All of which is unsurprising, and (to me) unconcerning.

I know the so-called Commission for Financial Capability doesn’t cost that much money, but as I’m sure they would point out, every little counts.  The money they fritter away on national strategies and capabilities is money that New Zealanders don’t have to spend, or save, for themselves.

As an easy way into this, consider this US-government funded online quiz, a shop window for a US project on better understanding financial literacy.  I imagine that most readers of this blog will score 6/6, while the average American scores 3.  But then stand back and ask yourself why the average American (or New Zealander) needs to know the answers to these questions, phrased rather in the manner of a school economics exam.  People who read blogs like this take for granted a knowledge of the answers, but in what way has that knowledge made your life, or mine, better?

Back to 2020.  As ever, in the Sunday Star-Times articles there is no hint of what schools might sensibly cut back on to squeeze in more financial literacy teaching (or “money mojo” as a couple of middle-aged commentators suggest calling it).     It isn’t as if our core school academic results –  maths, English, science etc-  are so impressive that the marginal time would be a zero cost resource.  There are only so many hours in the day, weeks in the years, years in a school life.  And in recent years, schools have been told to add “digital literacy” to their teaching, they are about to be required to teach New Zealand history (something I generally welcome), and seem to devote ever more time to climate change issues (“all we ever heard about in social studies”, in the words of one of my kids).    And yet you’d have thought that binding budget constraints would have been one of the ideas anyone wanting to teach financial literacy would be conscious of themselves, and take seriously.

Similarly for all the talk in the articles about how tough life is, there is no hint of any recognition that (say) average labour productivity (the underpinning of average material living standards) even in underperforming New Zealand is now more than 50 per cent higher than it was when I left school.   And equally no hint of any recognition of the role governments –  the people who would be teaching “financial literacy” –  have played in the alarming underperformance of our economy.   There is some mention of housing challenges, but none of the conscious and deliberate choices governments made, and keep on making, to render decent houses all but unaffordable to young families in our larger cities.     Fix that at source and life (financially) would be a great deal easier for many of our lower income people.  But that would involve governments making good and responsible choices, not continuing to shred the prospects of each successive generation.     Even then, there would still be no obvious role for governments doing “financial literacy” education, but at least our governments might have a little more credibility as some fount of discipline and financial wisdom.

Parents do “financial literacy” all the time –  not necessarily in the words they use (some more reticent than others) but in the choices they make, and which kids see them making.  About consumption, about debt, about giving, about choice and opportunity cost, about budget constraints (if not in quite those words), about celebration (and self-denial), about partnership –  about casts of mind (extravagant, frugal or whatever).   We model –  often inadequately perhaps –  the values we encourage our kids to live by.   It is how society works, and always has.

And I’m quite sure I don’t want Jacinda Ardern, Chris Hipkins, Simon Bridges, Nikki Kaye (or the teachers’ unions) getting in the way with their corrosive views.  Rather better that the politicians focused on fixing the stuff that governments messed up in the first place.  I was having a sad conversation yesterday with my daughter, who asked if it was really true that houses had once cost less than $100000.   I had to explain briefly the idea of general inflation, but went on to tell her that when I was first house-hunting in 1985 I’d looked at several decent places priced at around $80000.   Adjust for the CPI and that would be around $230000 today, but try looking for a house in south Wellington for $230000 –  even one with 1985 type fittings, decor etc –  and you’ll be stiff out of luck. Even at twice that price it would be almost impossible.  That is deliberate government recklessness.