The Retirement Commissioner and “ethical investment”

Presumably someone pointed the Retirement Commissioner to my post yesterday ,as I gather the online version of the triennial report now has a “Foreword”, rather than the “Forward” that appeared until yesterday.  We all make mistakes, typos, and literals, but you’d suppose that well-funded government agencies would have prominent parts of high-profile documents proofread.     Anyway, enough of that (perhaps rather petty) point.

One other aspect of the Commissioner’s report that caught my eye was the bit about “ethical investment”.  This was prompted by the government, which had asked the Commissioner to report on

Information about the public’s perception and understanding of ethical investments
in KiwiSaver, including:
a) The kinds of investments that New Zealanders may want to see excluded
by KiwiSaver providers; and
b) The range of KiwiSaver funds with an ethical investment mandate.


As I noted yesterday, there is a make-work element to the Commissioner’s role (and his supporting office, the so-called Commission for Financial Capability).  You might have supposed that firms operating Kiwisaver schemes, or attempting to sell their products to managers of Kiwisaver funds, might be best placed to work out what, if any, investments “New Zealanders” didn’t want to invest in.  It is a (potential) marketing opportunity, and one the providers are strongly-incentivised to tap.  They also get to experiment, and see which products actually attract (or turn off) savers –  revealed preference often being quite different than (say) idle costless, perhaps even virtue-signalling, response to surveys.

Strangely, the Retirement Commissioner starts this section of the report by mischaracterising the terms of reference

In term of reference five, the Government asked us to provide information about the public’s perception and understanding of ethical investment.

Except that (see above) that wasn’t what was asked for at all.

Anyway, they commissioned a report from consultants at KPMG.  KPMG appear not to like the notion of “ethical” investment, and prefer “responsible investment” instead.    I guess if you poll people and ask if they want “responsible investment” you’ll probably get 100 per cent saying yes.  It all rapidly becomes rather empty –  your “responsible” is, often enough, my “deeply corrosive”, and vice versa.  You can read the KPMG report and all the discussion of how funds can/do try to take account of ESG (environmental, social, governance) considerations.  But there isn’t really much there –  in my observation (as trustee of a couple of funds)  much of it is marketing hype.  Perhaps the one bit of the KPMG report that caught my eye.

kpmg resp i

The key sentence is that one just above the table.   It (and the data in the table) do not make into the Retirement Commissioner’s report.

The Retirement Commissioner’s report then moves on to public opinion noting that

In addition to the KPMG work, CFFC includes ethical investment in its own regular surveys of the public.

There is a footnote there to this internal note, but unfortunately there is no link to the full results of the poll, including either the exact wording of the questions or the respondent comments (selected ones of which are quoted in the report, but with no way to judge how representative these observations are).

They are keen to talk up the results

From this, we know that ethical investment is important to the majority of
respondents, with only 26% of overall respondents, and 18% of contributing KiwiSaver members, stating that they are NOT interested in ethical investment.

Actually, I was little surprised that 18 per cent of respondents were prepared to tell a survey taker that they had no interest in an ethical approach to their investments.  But just saying it just doesn’t mean much.

Anyway, this was the main table on specific types of industries (although it isn’t clear whether respondents were prompted –  I’m guessing so –  with this particular list, or whether everyone came up with their own preferences).

ethical investment

The Commissioner writes about this table thus

We also know that:
• In terms of which investment most want excluded from investments, animal cruelty, worker exploitation, whaling and pornography top the list, with over 70% of
respondents agreeing these are exclusion priorities.

But without knowing the precise wording of the question, we can’t even be sure that is right. The Commissioner seems to interpret the results as meaning people don’t want to invest in these industries, but the description in the table suggests the question might have along the lines of “if there were an “ethical investment fund which industries should be excluded”.  They are two quite different things, as revealed preference seems to confirm.  It is, for example, hard to believe that 43 per cent of New Zealanders really don’t want beer or wine company shares in their Kiwisaver investment –  it not being 1918, and the near vote for Prohibition, actual teetollars being probably no more than 20 per cent of the population.  But perhaps they think it is what an “ethical investment fund” might exclude?  And since parties supporting disbanding the military are notable by their absence, one might also be a little sceptical about what people actually had in mind –  feel-goodness apart –  in their weapons answers.

(There is some interesting demographic data, notably that in all the categories above women were more likely to favour exclusion than men.)

Then it starts to get a bit awkward

A majority of respondents are satisfied with available ethical investment options within KiwiSaver and of those contributing, 70% are satisfied with the range of ethical investment options.

This high level of satisfaction is a surprise because most ethical investment funds do
not meet the expectations reported by survey participants.

But perhaps not so much, because in the internal research note –  but not in the published report –  we find this

However, only a minority selected ethical investment when asked about the criteria for selecting a fund. A possible explanation is that respondents show social desirability bias (select the “right” answer) when asked about ethical investment directly, but their actual behaviour shows limited consideration of ethical investment in KiwiSaver funds.

Revealed preference seems to be that the public don’t really care much at all (and/or, it might be hard/costly to evaluate funds for your own preferences).

But despite all this, the one recommendation in this section of the report is


Of Mindful Money

Mindful Money is a charity that promotes ethical investment, and was recently
launched (September 2019) in response to the public demand for more knowledge
and options to invest ethically. Mindful Money’s mission statement is to: ‘empower
investors and make investment a force for good. Over the next five years we aim to
switch $6 billion of investment funds away from pollution, exploitation and inequality towards a low emissions, sustainable and inclusive economy.’

It is run by someone who was a Green Party MP until the last election.

So, the public show little practical sign of caring very much, civil society has set up its own entity (which has managed to attract some commissions for referrals) and yet one well-funded government agency’s proposal is that yet more public money should be pushed in the direction of this charity.

As they recognise, simply funnelling money to one brand-new private charity would be unusual

While conscious that the regular process would be to go to tender first, we think in
terms of efficiency and cost, and considering that the public want information now so that they can make informed choices that align with their personal values, funding Mindful Money is the most efficient and simple step for the Government to take.

Oh well, never mind about good process, or whether Mindful Money might just be channelling a particular subset of distastes….toss them some public money.  Barry Coates must have welcomed the report.

As I noted at the start, the Retirement Commissioner was landed with this particular term of reference, so they had to write something.   But how they responded was up to them, and it simply wasn’t particular thoughtful or rigorous, more about how do we get on the bandwagon.

In truth, ethical investment is hard, and something of challenge to each of us as to how much we care about particular issues.     Personally, if I were buying company shares directly, I would refuse to purchase companies operating in the small handful of the sectors listed in the CFFC table above (gambling, pornography, and –  depending on definition – animal cruelty).  But there are plenty of other activites I would also refuse to invest in (including hospital companies providing abortions, any PRC company, companies that actively facilitate the interests of the worst regimes on the planet –  including the PRC).   That is easy to say, and actually fairly easy to do.

But once you get into collective investment vehicles –  where the diversification gains and low transactions costs (and even PIE tax rates) are very real advantages –  it quickly becomes very difficult.  For example, much of my retirement savings is in a scheme I joined –  as a manadatory condition of service –  almost 40 years ago.  My ethical views aren’t necessarily those of other members, and even though I’m a trustee of the scheme I have legal constraints on my ability to make what seem like ethical choices to me (and that is probably as it should be).  I’d find it all but impossible to find a Kiwisaver vehicle offering my list of exclusions –  and, on the other hand, I’m very happy to have an interest in shares in arms companies, oil companies etc –  and so, in practice, I do not do anything about the issue.  I’m a trustee of another pension fund –  where there might actually be some commonality of ethical preferences among members –  but even then it is difficult to get members to reveal those preferences consistently and (again) legal constraints.

But all of these issues are yet another reason why I favour winding up the New Zealand Superannuation Fund.  Holding a particular Kiwisaver fund is strictly voluntary (you might not find an ideal fund, but there is quite a bit of choice), but your exposure or mine to the assets held in the New Zealand Superannuation is inescapable.  They like to boast about what “responsible” investors they are, but all that really tells you is that they line up with the personal political/ethical preferences of Matt Whineray and his Board (or Adrian Orr before that).   We simply should not have money coercively taken from us and invested in causes and companies we individually find distasteful, even reprehensible.   That is true whether your burning concern (so to speak) is fossil fuels, pornography, marijuana, abortion, the whales, or whatever.  There is no compelling public policy case for the fund, and the way its investment policy trespasses – ignores – the ethical preferences of many citizens  simply further undermines that case.

Some thoughtful discussion of issues like that might usefully have found a place in the Retirement Commissioner’s report.  It didn’t of course.   Some hardheaded analysis of just how much people really valued “ethical investing” might have made it into the report.  But it didn’t either.

It was a pretty disappointing report all round.


Retirement, NZS and all that

How the years fly by.  My youngest child headed off to high school for the first time this morning.  Only five years of the school system to go.

But it was the other end of the age spectrum I wanted to write about today, in particular the recent report of the Retirement Commissioner (in this case the interim one), reviewing –  as required by law to do  –  retirement income policies.    Very conveniently for a government going into an election with the key party (Labour) campaigning against (its own previous policy, not that many years ago) any idea of raising the age of eligibility for New Zealand Superannuation, the Interim Retirement Commissioner has come out in support of that conclusion.  Apparently, according to Mr Cordtz, the age that was chosen in 1898 –  when the new age pension was hard to get –  is still appropriate into the indefinite future now when (a) health standards are so much better, (b) most jobs are less physically demanding, and (c) the benefit is universal.   Take a look at theterms of reference for this latest review and it looks as though the government was looking to the Commissioner to steer away from any suggestion that raising the NZS age might be a good idea.  So they will be pleased –  not so much by the substance of the report (there isn’t much there) as by the headlines, which are all most will see.

I’ve never been persuaded that taxpayers get any real value out of having a Retirement Commissioner, or the supporting staff in the “Commission for Financial Capability”. That has been so whether or not, from time to time, I might have agreed or disagreed with particular suggestions they were making.    It is a classic make-work bureaucracy, costing quite a bit of money, serving no useful purpose, and typically run by people with no particular relevant expertise, other (presumably) than appealing to the government of the day.  That was true of the previous troubled Retirement Commissioner (who seemed to know about marketing), the current Interim Retirement Commissioner appointed by the current government who seems to know quite a bit about rugby league, and also of the incoming commissioner Jane Wrightson, whose expertise seems to consist in getting a succession of small government chief executive roles.   The money spent on this body could almost certainly be more effectively spent…..almost anywhere in government (health, educations, statistics, whatever).  And at very least it is time to rethink whether we really need a triennial report on these issues (as I noted in a previous post, Parliament should also revisit the current statutory requirement for a Long-Term Fiscal Statement every four years).

But if one is going to write about a report one should actually read it.  Perhaps the low point of the entire document was the Interim Retirement Commissioner’s opening statement.   It was headed “Forward”, but I have to assume he really meant “Foreword” –  especially as he ends his comments  with a pithy quote

“I walk backwards in the future, with my eyes fixed on the past”

that seems singularly inapt when even the government’s terms of reference asked the Commissioner to focus on the future.

Much of the “Forward” reads like something a zealous 22 year old might have written, but which his or her boss would have sent back for a rewrite.  The Retirement Commissioner had no boss, no Board (for example) to which he was accountable.

And so we read

In approaching this review as Interim Retirement Commissioner, I have of course brought my own views and experience to bear, which are naturally different to those of previous commissioners – and no doubt, of future ones also. I come with perhaps less direct experience of the inner workings of government or of the financial sector than some previous commissioners, but believe I have brought a more hands-on view of how a diverse array of lower income and vulnerable New Zealanders experience material hardship.

So, he’ll be out of the job again in a few weeks, knows little or nothing about the policy issues, but he has apparently had a bit to do with poor people.

Then we get a rant about how in his view differing average life expectancies  of Maori and other New Zealanders is somehow a breach of the Treaty of Waitangi.  Err, but…

But I am also aware it is not the role of the Retirement Commissioner to make
findings about breaches of the Treaty, and accordingly my recommendations focus on improving the system for all New Zealanders.

Might have been better to skip the rant then.

Then we get a little essay (“A Note on Language”) about how uncomfortable he is with the term “retirement”, but is constrained by the Act and has to use it to some extent.     It seems never to have occurred to him that an age benefit might originally have had in mind people who were doing exactly that –  retiring –  generally because they had got to the point where it was physically difficult to work.   The fact that “retirement” might not describe the experience now of many 65 year olds should probably be a hint that we shouldn’t be paying a universal welfare benefit to everyone at 65.  But Mr Cordtz shows signs of being keen on a UBI, so I guess that thought didn’t cross his mind.

Then we are told that “NZ is good value”, and with a dig at his predecessors, Corditz claims to offer “a more nuanced point of view” than they did –  this despite earlier suggesting himself that he limited expertise in this area.   He quotes a net fiscal cost of NZS, and then a few lines later goes on to claim that there is a significant offset to the NZS cost because NZS recipients pay tax on their NZS (hint: that is how you get to net numbers).

The benefits abound apparently

NZS also enables many NZ Superannuitants to undertake unpaid, voluntary work in their community. This is a huge contribution relied on in many communities and which should be accounted for in considering the costs and benefits of NZS.

Well, no doubt, except that as he noted lots of people  in their late 60s are still in paid work, and more would be if the NZS age was raised.  There are benefits in paid work too, including in the additional tax revenue.  And the relevant debate isn’t whether we should have an NZS but whether it should be all-but universal at 65, even as life expectancy has increased a lot.   And there is no hint from the Interim Retirement Commissioner that he recognises that NZs universal at 65 also helps to pay for more than a few European holidays in New Zealand winters (probably quite a few good quality European cars as well).

I”m pretty sure that not once in the report did I see any mention of the trend in so many other OECD countries to raise the age of public pension eligibility beyond 65.  And while there are repeated references to how NZS lifts the material living standards of quite a few people who transition onto it (NZS is paid at higher rate, and with fewer conditions, than other benefits), this is presented as a good thing, rather than as incidental feature of a universal system.  You get the impression that Mr Cordtz would be a champion of higher benefits all round.

Now, I’m not suggesting that are no useful –  if unoriginal  –  lines in the report.  Ruinous land use and housing policies are making things ever harder for a ever-larger proportion of the population, including now the newly-old. But it isn’t as if the Retirement Commissioner has anything useful to add to debate around the best policies in that area, other than more roles for government.   And there is little or no rigour in what is there. The report touches on growing life expectancy, but offers nothing on (for example) ideas for sharing the gains of life expectancy increases by progressively (but not necessarily fully) raising the state pension age.   And it barely mentions at all issues around the easy eligibility for NZS of people who haven’t spent much of their working lives in New Zealand (whether migrants or New Zealanders working –  and paying taxes –  abroad).

And, as it happens, I don’t totally disagree with Mr Cordtz that fiscal considerations alone do not compel us to change our NZS policy.  We could afford to keep the system as it is.  But we shouldn’t do so.   Here was the last few paragraphs of a post on these issues late last year

As for NZS itself, personally I’m not overly interested in arguing the case for reform on fiscal grounds but on a rather more moral ground.    Even if we could afford it, even if there were no productive costs from the deadweight costs of the associated taxes, there just seems something wrong to me in providing a universal liveable income to every person aged 65 or over (subject only to undemanding residence requirements).    45 per cent of those 65-69 are now in the labour force –  suggesting they are physically able to work –  which is substantially greater than the 30 per cent of those aged 60-64 who were in the labour force 30 years ago when NZS eligibility was at age 60.

I don’t consider myself a welfare hardliner.  I think society should treat quite generously those genuinely unable to work, especially those who find themselves in that position unforeseeably.  Old age isn’t one of those (unforeseeable) conditions, but personally, I have no particular problem with something like the current flat rate of NZS, or even of indexing it to wage movements (which would be likely to happen over time anytime, whether it was the formal mechanism from year to year), from some age where we can generally agree a large proportion of the population might not be able to hold down much of a job.  I don’t have a problem with not being overly demanding in tests for those finding work increasingly physically difficult beyond, say, 60.   But what is right or fair about a universal flat rate paid – by the rest of the population – to a group where almost half are working anyway?  It is why I would favour raising the NZS age to, say, 68 now (in pretty short order) and then indexing the age in line with further improvements in life expectancy, and I’d favour that approach even if long-term fiscal forecasts showed large surpluses for decades to come.    At the margin, I’d reinforce that policy change with a provision that you have to have lived in New Zealand for 30 years after age 20 to be eligible for full NZS (a pro-rated payment for people with, say, between 10 and 30 years of actual residence).  Why?  Because in general you should only be expected to be supported by the people of New Zealand, unconditionally, in your old age, if most of your adult life was spent as part of this society.

Reasonable people can, of course, debate these suggestions.  But they are where I think the debate should be –  about what sort of society we should be, what sort of mix between self-reliance and public provision there should be, even about what mix of family support and public support there should be, or what (if any) stigma should attach to be funded by the taxpayer in old age –  not, mostly, about long-term fiscal forecasts.

And it doesn’t seem as though the Retirement Commissioner –  interim or otherwise –  has much to add to those inherently political, even moral, debates.   The latest report seemed particularly poor, but I guess it (those headlines) will have been welcomed in the Beehive.

In truth, the Treasury’s Long-Term Fiscal Statement –  due, I think, in March –  is also not likely to add much new, but it is at least likely to be a bit more rigorous.  And if there is an opening comment from the chief executive, the title is more likely to be Foreword.


An intriguing possibility raised by the RB

I was chatting yesterday to someone about what might be in the Reserve Bank speech today on “The Global Economy and New Zealand” . I noted that whatever else the Assistant Governor might have to say we could be pretty confident that he would be repeating the line that changes in the world economy typically affect New Zealand trade – as a commodity exporter –  more through price changes (adjustments to the terms of trade) than through volume changes.  That is particularly so for dairy –  cows are still milked –  but it makes us somewhat different from economies whose external trade is heavily manufacturing in nature, often as part of multi-stage international supply chains.

Sure enough, there it was in the speech

When considering global influences on New Zealand exports, we have historically focused more on export prices than volumes.  This reflects that in the past New Zealand’s exports have been dominated by primary sector products whose production volumes are relatively insensitive to fluctuations in short-term demand.  Export prices tend to fall in tandem with the global economy—low global demand should lower prices. 

While waiting for the speech to be released I had been playing around with some numbers to illustrate the point, at least with reference to the last significant global downturn, the recession of 2008/09.   Here is a chart of the percentage change in the volume of goods exported from each OECD country from peak to trough over the 2007 to 2009 period (both peak and trough quarters differ from country to country).   Disruptions to trade finance was also a material factor in some countries during that particular period.

goods x 08

And here, by contrast, is much the same graph for the volume of services exports

services x 2008

Our services exports –  concentrated in discretionary items notably tourism and export education –  actually dropped slightly more than those of the median OECD country (as did that other commodity exporter Norway, and even Australia had a reasonably material fall in services exports).    Note how different the Japanese and New Zealand goods exports experience were but how similar the services exports outcomes.

To illustrate the price effect I’ve chosen to use the terms of trade rather than export prices.   Here is the peak to trough fall in the quarterly terms of trade for each OECD country over the 2007 to 2009 period,

TOT 08

Most of the countries with the largest falls in the terms of trade over this particular period were primarily commodity exporters.  But although our terms of trade did fall by more than the median country New Zealand’s fall was not that severe (much less so than Chile and Norway, or even Australia), and was slightly smaller than the fall Japan experienced.  (I suspect that if we could break out goods and services terms of trade separately, we might find that the services terms of trade improved (often happens, especially around tourism, when the exchange rate falls) while the goods terms of trade fell quite sharply.)

Some of these results will be idiodyncratic to the particular event, so I wouldn’t want to make too much of them, but the services chart in particular is a reminder that for some –  quiter labour-intensive – components of exports, the volume channel is just as important here as in many other advanced economies.

What of the Assistant Governor’s speech itself?    There wasn’t really that much there, and one can’t help suspecting that anything of interest was in the Q&A session afterwards, especially given the potential short-term disruptions from the coronavirus.  Recall that whereas the RBA makes available recordings of Q&A sessions after speeches by its senior managers, the Reserve Bank of New Zealand does not.  That is not very satisfactory.

I was, however, struck by a few errors and what looked like government-aligned spin.

Hawkesby asserted that 

Another development worth noting is the increasingly diverse nature of our exports, with the growing importance of our service exports and the growth in the technology sector.

Well, here is the data from the latest annual national accounts

services x annual

As a share of GDP, services exports peaked in the year to March 2003, almost 17 years ago now.  Even over the last few years, there has been a slight shrinkage.  Who knows what the Reserve Bank had in mind, but these are the official data.

Oh, and then there was the misleading statistic that will not die, because it keeps getting run out by ministers, industry advocates, journalists (who perhaps know no better), and now (apparently) the Reserve Bank.  

While our exports are still dominated by primary goods and tourism, technology is now New Zealand’s third largest export sector, with exports growing 11% to $8b 

There is a footnote on that statistic to the TIN Report.  But even the TIN people will concede, if you dig deep enough in their reports, that this simply isn’t an apples for apples comparison. It might be quite interesting to know how much New Zealand owned companies sell globally, but that is quite different matter/statistic from New Zealand exports (which are about production here, whether by foreign or domestic-owned companies).    I highlighted some of the problems in this tech story in a post a couple of years ago (when the underlying picture didn’t look flattering at all). I don’t expect the Reserve Bank to read my posts, but I do expect the Assistant Governor for economics to know what exports actually are.    As it is, his is an apples and oranges “comparison”.

In fact, if he’d wanted to give his audience a fairer picture of New Zealand the global economy he might have mentioned that overall exports as a share of GDP are weak (well below peak, well below what one might expect for a country our size) and that tradables sector output has long been similarly subdued.

And then there was the final piece of spin

Climate change is also likely to impact New Zealand’s economy in a number of ways in the future.  Growing environmental regulation of the primary sector, for example, could result in an acceleration in the diversification of our export industries.  

No doubt that final sentence is some part of the story, but it seems to rather ignore the main event: whether or not one agrees with policies the government is adopting in this area, the overall effect seems more likely to be a shrinkage in the path of primary sector production, at least relative to the counterfactual.  But I guess the Governor and the government wouldn’t have been too keen on him mentioning that.    (I’m not really suggesting he should have –  these long-term issues don’t have anything much to do with the Reserve Bank, but playing parts of the story that suit political masters wasn’t necessary either.)

But then on the final page there was another longer-term reflection that caught my eye

There are uncertainties, for example, about the future openness of international trade and labour markets.  There has been a growing geopolitical trend globally towards protectionism and lower migration.  Rising global protectionism could reduce our export opportunities and lower migration into New Zealand could dampen our growth, but might spur investments in domestic productivity.

I’m not sure that second sentence is empirically well-supported, at least as regards the migration bit.   I’m curious which countries the Assistant Governor has in mind, and noted only the other day achart highlighting the significant increase in work visas being granted in the US in recent years (and governments in other big recipient countries, notably Canada, Australia, New Zealand and Israel, don’t show much/any sign of reduced enthusiasm for immigration).  But what interested me was the final sentence and the suggestion that (structurally?) lower migration to New Zealand “might spur investments in domestic productivity”.   I think so –  it is a key element in my story, about reducing pressure on the real exchange rate, narrowing the gap between New Zealand and world real interest rates, reducing the need to focus investment (including public) simply on keeping up with population growth – but was (pleasantly) surprised to see the Reserve Bank saying so.  Intriguing, to say the least.

Perhaps unsurprisingly, there was only passing mention in the speech –  no doubt mostly finalised last week – of the coronavirus.  There was a reference to the SARS experience providing some possible parallels –  at least if the virus ends up being contained.  But it is worth remembering that the PRC is a much larger share of the global economy than it and/or Hong Kong were in 2003, that the shutdowns already seem much more extensive than happened then, and that tourism from the PRC –  almost entirely a discretionary item, much already interrupted by the PRC –  is a much more important share of the New Zealand economy than it was then.   And in 2003 SARS was one of the factors the Bank cited to justify cutting the OCR that year.

A speech from the new Secretary to the Treasury

Early last month the new Secretary to the Treasury, Caralee McLiesh, gave her first on-the-record speech in the new role.    The Treasury was a bit slow to release the text, but it is now available here.     It wasn’t a long speech, but it was to a fairly geeky audience –  the Government Economics Network’s annual conference – most of whom wouldn’t yet have seen much of the new Secretary.  With not much else to go on yet, it seems reasonable to look at what she said for any indications of whether/how The Treasury is changing for the better under new leadership.

I’ve been uneasy about the new Secretary for several reasons:

  • first, because she isn’t a New Zealander and has no background or experience in New Zealand issues or people, no domestic networks, and (most probably) little in-depth understanding of the idiosyncrasies of New Zealand, including its longrunning economic underperformance, and
  • second, because she has no work experience in a national economic agency/ministry, dealing with national economic issues (financial crises, monetary policy, exchange rates, immigration, trade, or even very much exposure to fiscal or tax policies), and yet is now the principal economic adviser to our government (itself light on economic expertise or experience).

On the other hand, she has some fairly good academic qualifications and may well be quite capable as the sort of generic public service manager favoured by the current State Services Commissioner.   Whether she can bring to the table more than that –  and New Zealand economic policy, and The Treasury (weakened over the previous 10-15 years) needs more than that –  remains to be seen.

The topic for the GEN Conference was “the role of regional and urban development in lifting living standards”. It is fair to say that my response to the title was along the lines of “there is no such role”, but it was still going to be interesting to see how the Secretary chose to respond to the topic, and perhaps to nest any specific insights on regional/urban issues in an understanding of the much bigger national productivity failings.

Of course, there are distinct limits to what serving senior public servants can and can’t say.  One could argue they mostly shouldn’t be doing public speeches –  their job is primarily to advise ministers, not to spin government PR (or to explicitly challenge it).  But successive Secretarys have chosen to give speeches.

Here is McLiesh running spin for the government

The theme of today’s conference is how well-performing regions and cities can contribute to our wellbeing and raise living standards for all. Those of you familiar with the Government’s Economic Plan will know that the Government has identified ‘strong and revitalised regions’ as one of the key economic shifts it is working towards. And work on government’s urban growth agenda and resource management reforms is well underway.  So this is a significant and substantial topic for New Zealand.

She, if no one else, I guess has to take the government seriously, at least in public, when it says it has a (30 year) Economic Plan.

But in the rest of speech there really wasn’t much substance.  There was the best part of two pages recounting the Living Standards Framework – in text that is fine, but which offers nothing fresh.  At least it ended with a reminder that economic performance matters

The Treasury always has an important role to play in advising government on how to lift economic productivity and performance, and this remains a core part of our LSF thinking. A roomful of economists doesn’t need to be told, but I will say it anyway, that high living standards depend on strong economic performance, and that markets that operate well – and I emphasise, “well” – can, and do, powerfully lift living standards. They enable people to participate in labour markets, earn higher incomes, and apply those incomes towards whatever wellbeing means for them. The story of development is basically a story about investment in the institutions and mechanisms that enable people to flourish in deep and complex markets – that is, to grow.

But really that should be “motherhood and apple pie” stuff to an audience of economists.  And sadly, there hasn’t been much sign of rigorous or systematic advice on lifting productivity and economic performance in recent years.

She moves on to highlight that there are regional differences across New Zealand.  There is quite a nice graphic drawing on OECD data, but she conveniently omits to highlight that (according to the graphic) not one New Zealand region has incomes in the top third of OECD country regions.  Productivity is a huge failing in New Zealand, and that failing just isn’t region-specific.  If anything, the gap between highest and lowest income regions within New Zealand is unusually small by OECD standards.

And thus when the speech says

Regions may contribute more to national economic development if we can tap unrealised economic potential.  A policy approach that emphasises strengthening regional comparative advantage means we may be able to lift national economic performance rather than just shifting economic activity around the country.

it has the feel of someone who is stuck with the Provincial Growth Fund, rather than someone who has thought hard about New Zealand (and what does that counteractual –  “just shifting economic activity around the country” – mean: who has been doing that?)

The next paragraph isn’t any better

There can be a role for government in helping communities to identify strengths and opportunities or strengthening local governance. There can be a role in working across agencies, local authorities, local people, and the private sector to coordinate and facilitate private investment. Or in investing in infrastructure where this directly unlocks economic opportunities. And can we do more to coordinate between social interventions and economic opportunities to ensure these approaches are complementary?

I guess bureaucrats would like to think so, but is there any evidence of governments being able to specifically catalyse regional economic development in a useful and sustainable long-term way, other than by getting the overall national policy settings right, and understanding the national failings?

There are some strange observations

More than a third of New Zealanders live in Auckland, a city with house prices vastly in excess of the marginal cost of supply.

But house prices aren’t “vastly in excess of the marginal cost of supply”, rather national and local regulatory policies have driven the marginal cost of supply –  especially the land component –  well above where it would otherwise be, so that there is no huge gain on offer to people developing new houses.

It was encouraging to see the Secretary allude to Auckland’s longer-term economic underperformance

Between 2000 and 2018 our national population grew by 26 percent, but all of the above-average population growth has been from the Bay of Plenty northwards, with Auckland the fastest growing at 37 percent. Contrast that with population growth of 7 percent in Southland, 5 percent in Gisborne and 4 percent on the West Coast.

This population growth is despite the fact that Auckland’s GDP has grown at only 82 percent of the national average in the 2000 to 2018 period.  In contrast, GDP growth was well above the national average in every region of the South Island, while Bay of Plenty and Northland had above-average growth too.

But there isn’t much sign that she or her department have thought hard about a compelling narrative that explains what has gone on.  Instead we get this rather confused paragraph

Other cities and regions may have plenty of available land.  However, they will need to improve their quality of business and quality of life attributes too if they are to significantly ease pressure in Auckland. And worldwide we see that agglomeration into major cities continues despite congestion and high property prices. Clearly, both employers and employees often see better long-term prospects in these major cities, despite efforts to develop other regions.

In both New Zealand and Australia, we certainly see more people in major cities, but little evidence of the vaunted productivity gains from continued concentration of people in these places.  Natural-resource-based economies tend to be like that, but there is no hint of that as an issue in the Secretary’s story.

And from there the speech heads downhill again

Central government has created more capability through urban growth functions in HUD, and appointing senior regional officials to lead engagement and coordinate government across regions.

Of course lifting wellbeing across the regions is not just up to central government, which is why we see more partnering with local government and regional economic development agencies over recent years to develop action plans.

Lots of busy bureaucrats, lots of meetings for ministers and officials to open and attend, but not much sign of any understanding of quite why the overall economy has performed so poorly over so long (when almost all the tools of economic policy are controlled at the central government level).

Of the final page, I could commend her sense of humour, including this old Tom Scott cartoon (if memory serves from back in the late 80s or early 90s)


But then it is straight back to the self-congratulatory stuff

In closing, I want to acknowledge that being an economist working in public policy is incredibly rewarding, but it can also be challenging. We are a community of professionals that sometimes has to be loud to be heard. When people want the comfort of policy that is simple, certain, and swift, we can find ourselves the sometimes uncomfortable voice of technical rigour, nuance, and realism.

I guess that it might have been music to the ears of some in the audience.  But we don’t –  or shouldn’t –  hire senior public servants to tell people (including ministers) what they want to hear.   Sadly, there has been little consistent sign of The Treasury offering that “uncomfortable voice of technical rigour, nuance, and realism” in recent years, especially on these big-picture economic performance failings.  They seem to have been content to just go along, to maintain access (perhaps) by not addressing the hard issues, and playing distraction with the fluffy stuff while the economic prospects – the living standards prospects –  of New Zealanders, regional or urban, drifted further behind.

It is still early days for McLiesh.   I have heard a few positive things about the new Secretary, including hints of renewed emphasis on rigour. I hope this particular speech isn’t a foretaste of the standard we can expect, but that the Treasury really does begin asking the hard questions, doing robust analysis, not simply going along with conventional political verities (eg regional development).   Perhaps there isn’t a political demand for such advice and analysis –  are there any politicians who really care? – but shouldn’t stop The Treasury being a voice, perhaps at times crying in the wilderness, pointing to how things might be such better here.  As a hint, regional economic development agencies aren’t likely to be any substantive part of the answer.


Free up housing by shaking up politics

No one much thinks that either National or Labour-led governments are going to do anything serious about freeing up land use and markedly lowering house prices (and price to income ratios).  A few individual figures in the two parties occasionally talk a good game, but their governments don’t do what is necessary to make a difference.  All indications are that the parties don’t really care that much –  sure, they seem to need to be seen to show a bit of concern from time to time, but affordable housing across the board seems to be rapidly becoming one of those things our political leaders would prefer people just forgot about.  Get used to living in expensive dog-boxes on tiny sections or in apartments – all this in a country with abundant land.

Graeme Farr isn’t willing to give up.  He’s launched House Club, a club and political party in one, designed to make affordable housing an option again.  As the website puts it, the gist is

House Club does not want to change any of the crazy number of rules and regulations that affect housing – it just wants it’s own areas where none of them apply! 

House Club creates its own “Club Zone” which is outside the RMA, the Building Act and council zoning rules and can have from 5 to 5,000+ houses.

Here is the fuller text on what a “Club Zone” is

A Club Zone is land where building does not have to comply to the RMA, the Building Act or local council zoning. This is nothing new – until the 1980’s the Government and its departments like the Post Office, Railways and Ministry of Works did not need to get building or resource consents for anything they built on Government owned land. In some US states such as Texas there are no town planning rules. This was the same in NZ until 1953 and the Town and Country Planning Act – yet houses build before this act are equally sought after and valued than later ones – often more so!

House Club decides solely on where a Club Zone is created. The land can be bought outright by House Club or it can award a group or private landowner a Club Zone – or a combination of both. Each Club Zone site can determine it’s own rules or convenants to suit its purpose, but these will need to be approved by House Club if it is not a partner or owner.

He is planning to have House Club become a registered political party –  for which he needs at least 500 members ($3 for three years’ membership) –  contesting the party vote in this year’s election, aiming for 5 per cent of the vote and the balance of power, with a single issue they’d be looking for action on.  In concrete terms,

House Club will provide houses for UNDER $300K for a 100m2 three bedroom home on a proper section within 30 minutes drive of the centre of Auckland, Wellington or Christchurch and even closer in other cities and towns. 

“Proper section”?  Well, according to a Westpac survey last year, 90 per cent of New Zealanders wanted a backyard.

More generally on the House Club model

House Club will contain many Sub-Clubs who want to do their own thing – House Club55 for low cost seniors housing, Tiny House Club for tiny house villages, Eco House Club and Co-House Club for eco and co-housing schemes and Private House Club for selected private developers who want to provide low cost housing to Club members.

When Graeme first told me about this idea a few months ago it was in the context of retirement villages

1. I am thinking large scale ones – say 200 to 2000+ houses like they build in the US. They are super cheap there and most are freehold titles. I can send examples – you would not believe the prices they can achieve using economies of scale.

2. Dairy factories and timber mills are usually permitted activities in rural zones – so a retirement village will most likely have less affects

3. Retirement villages are better than standard fringe housing as they do not need things like jobs, schools, public transport, wastewater pipes, roads etc. Residents don’t travel at peak hours – they have their own buses. The councils do not need to provide infrastructure like a standard subdivision.

As I noted then, I couldn’t imagine wanting to live in such as village, but it is clear that lots of people do.   And as the website indicates, the model generalises.

The vision is for developments of the fringes of existing cities/towns

Developing in the fringes is not only cheaper but faster too. If the density is kept low then the rural road network and infrastructure that exists around most cities will be sufficient for the intial Club Zones. Modern self contained wastewater plants can service the zones if trunk connections are not nearby. Freshwater and stormwater can be collected and disposed of on site if need be and most rural roads have a power network.  

What about building standards?

Do Club Zone houses need to comply to standards likeNZS3604?

A:   No they don’t as long as they are only one or two storeys.  There would be well over a million houses in NZ which come nowhere near to complying to standards like NZS3604 and you can legally buy these – often at very high prices.  Builders will probably choose to use some standards as a selling feature but making them not compulsory means you can import a house kit or building materials from overseas without restriction. This undermines the local materials supply cartels which contribute to the very high building prices here.

Members buying in the Club Zones will accept they are paying much less for having a house which may contain building products which are not made in New Zealand or made to a ‘special’ NZ standard. Most imported mass production materials are made to adequate or better standards than we have here anyway. At present aluminium windows made for Australia do not comply to the NZ standard NZS4211:2008 – yet they have hurricanes in Australia. The current review of the Building Act will tighten importing rules – supported of course by the NZ Building Industry Federation who represent the local suppliers and manufacturers.

In other words, seeking to address both the land and construction cost elements of our current house prices.

And in a telling, if more lighthearted, response to a suggestion that there might be 2500 rules governing building a house

It is hard to add up all the rules and regulations the Government and councils have made for building a house but it is true pleasure craft in New Zealand need to comply to no construction rules at all, irrespective of size. You can build a 100 metre boat and unless you are using it for commercial use or charters there are no regulations at all – you can build it out of blotting paper if you like. This applies to around one million boats in New Zealand and could of course equally apply to basic housing.

There is even a, perhaps tongue in cheek, plastic bag policy.

It isn’t a first-best policy option by any means, but no significant party shows any sign of championing first-best reforms, and local governments are mostly the enemy of anything that would seriously liberalise market (the mayor of Wellington – sworn enemy of the backyard – is quoted on the front page of this morning’s paper talking of “if you can squeeze twice as many houses on the same land why wouldn’t you?” –  this about privately owned land, for privately-owned houses).

But as a second-best option I think it has a lot going for it and, at very least, deserves some serious scrutiny and debate.  I don’t need a house myself, but I’ve just signed up (to support a good cause rather than deciding, at this stage, to vote for them).  I don’t suppose it is likely House Club will get to 5 per cent –  it is hard – but it would be much better, for members and for wider New Zealand, if they did manage to do so, or even if they just managed to put some more pressure on National and Labour to take seriously the plight of our younger generation – including my kids 10 years or less hence –  for whom the elite message seems to be that home ownership is for the especially fortunate, the abnormally determined etc, not a normal and everyday part of life for people across the economic spectrum.

Here, again, is the link to the website.

Pandemics and the economy

Who knows quite what will happen with the current coronavirus.  But experts in such matters seem pretty confident (resigned?) that one day there will be virus that really takes hold and causes significant infection, disruption, and probably loss of life across a wide range of countries.  The 1918 flu outbreak is the (relatively) modern best known case –  estimated to have infected 500 million people worldwide and killed anything up to 50 million people.  In New Zealand, with a population then of little more than a million, almost 9000 people died.    Rather milder flu outbreaks in 1957 and 1968 also feature in the literature, and the memories of older people.

I got interested in pandemics when there was a major ongoing whole-of-government focus on the risk last decade.  I was the Reserve Bank’s representative on various fora, including specific multi-agency working groups focused on economic issues and risks, and led our own consultations with banks (where the head of risk of one major bank memorably assured me, when we pursued the issue, that wholesale funding markets just could not dry up –  this just a year or two before they did in 2008).

The prime focus in much discussion around pandemics is (understandably) on the potential loss of life, but in a modern economy a serious pandemic could have major economic consequences, less because of the loss of life itself (although the loss of 1 per cent of the population would, all else equal, lower potential GDP semi-permanently by around 1 per cent) than because of the disruption, the fear, and the voluntary or semi-compulsory social distancing that would be put in place to try to minimise the risk of the virus spreading or of particular individuals contracting it.  In a quarter in which an outbreak was concentrated, it is quite conceivable that GDP could fall by as much as 20 per cent  (if every worker was off work for just a week –  whether sick themselves or caring for others –  and that was the only adverse effect –  it wouldn’t be –  that alone would be a loss of almost 8 per cent).   Even if the outbreak was quite concentrated in time and normal economic activity resumed in full very quickly, in such a scenario GDP in the year of the outbreak would be 5 per cent less than otherwise.

What are the sorts of disruptions I have in mind, in the event of a major pandemic (although events like 1957 were also estimated to have non-trivial economic effects)?

  • think of schools being closed to reduce risk of infection spreading, and the associated time off parents would have to take to care for even well children,
  • let alone the losses of production as successive waves of individuals (children, parents, aged parents or whoever) got sick and needed to be nursed,
  • and even if cafes, movie theatres etc remained open –  and they might be closed, either voluntarily and pre-emptively, or compulsorily – people would become reluctant to go out more than strictly necessary,
  • and if the borders weren’t closed, how many people are likely to be keen on holidaying in a New Zealand experiencing serious pandemic flu outbreaks.  Fewer New Zealanders will be interested/able to travel abroad either,
  • plenty of deliveries just won’t get made (drivers sick, production staff sick, and so on).   And perhaps the single most sobering statistic I heard in the various economic working group discussions was that big supermarkets typically hold stock equal to only about 48 hours or so of sales.   You could expect people to stock up early, and then for deliveries/sales to be patchy at best –  a real reluctance to venture into crowded places more than strictly necessary.   Unlike 1918, few people now vegetable gardens.  Unlike 1918, many businesses (including those supermarkets) now rely on just-in-time deliveries, and things working smoothly, which they are unlikely to in the presence of potentially deadly virus spreading among a lot of the population.
  • the housing market would seize up (not many would be keen on open homes, and a potential loss of population would lead to uncertain downward revisions in expected future prices),
  • and in all this a lot of people are losing their jobs (eg staff in tourism or entertainment sectors), further reinforcing the downturn in demand,
  • and also raises issues around income support (could MSD cope?) and ability of borrowers (commercial and residential mortgage) to service their debts,
  • assume this hypothetical event is pretty global in nature and one can also assume that financial markets will be adversely affected (bankers get sick too, but uncertainty and risk aversion, with tightening credit standards, would be the much bigger issue).  Investment decisions would be postponed, including because no one would know what the post-pandemic world might look like (the difference between say a 0.5 per cent and a 1.5 per cent population loss would make quite a difference to infrastructure needs over the following decade.

And in all that I haven’t even talked about potential disruption to parts of global trade that aren’t mainly about the movement of people.  But will the cows all be milked, the milk collected, foreign consumers be looking to buy as much, and so on?  Global supply chains (often crossing multiple border) for products that we import are also likely to be disrupted.

Many of these effects would wash through quite quickly on some scenarios: the outbreak comes quickly, strikes hard, and passes almost equally quickly.  But presumably there are other scenarios, in which some countries are initially affected much more severely than others, and so some countries look on for time in anxiety and unease –  bearing many of the costs of precautions/fear, even before much of the illness has struck.  Or perhaps there are resurgent waves over several quarters.  In those sorts of scenarios, the accumulated economic costs (and social dislocations) could mount rapidly.

In the years since I was involved in thinking about these issues in the public sector, some things have changed.  For example, remote working is more feasible, generally accepted, and widespread than it was in 2006/07.  More business can go even if people aren’t able to work in central city office space, in close proximity to lots of other people.   But people caring for a seriously ill or dying family member, or caring for little kids not able to be in daycare won’t be producing much (GDP).    And much of the reduction in economic activity will the result of a reluctance to go out, disruptions to tourism, perhaps closure of public places.  Netflix should do well –  and I guess Uber Eats, if restaurants have staff and there are drivers willing to deliver –  but the scale of the potential disruption, and losses that can’t be recouped, would still be huge.

To repeat, all this is a discussion of a hypothetical extreme scenario, but the sort of event highly likely to face us one day, and the sort of scenario officials took very seriously in thinking about risks and options last decade.  For anyone interested in some of the economic issues in a New Zealand context, there is a 2006 Treasury working paper here, and some advice to the Minister of Finance in 2009 at a time when there were fresh worries about emerging risks.   Other papers we wrote at the time, with contingency planning thoughts, don’t seem to have been released.  Here is a 2009 UK academic paper with some similar-sized estimates to those NZ officials were using, and here is a 2013 Reuters story looking at some related issues.  Pandemic risks were a big issue in the mid-late 00s, but I can’t see much more recent that has been written on the economic issues.

Finally, three points:

  • it isn’t easy to see huge macro effects in 1918, but that is probably because of a combination of three things; the end of the war, the paucity of high-frequency data, and a less highly-interconnected economy,
  • the standard assumption in planning in the 00s was that interest rates could be cut as much as was helpful, to at least buffer some of the adverse economic effects (not prevent most of them).  That mostly isn’t an option now for advanced countries including New Zealand, where the OCR (or equivalent) is already very low or (in some places) even negative,
  • and, the single most sobering line I heard in all the discussions in the 00s came from Geoffrey Rice the historian who wrote the book on the New Zealand experience in 1918.  In a public lecture he noted in 1918 much food had been distributed to sick families or individuals by groups like the Boy Scouts.  How many middle class parents now, he asked, would be willing to have their children delivering food to potentially highly infectious households at the height of a disease outbreak (when all public services will be stretched very thin).   It is a question I’ve never forgotten.  The institutions of civil society aren’t mostly what they used to be.



It is January, still the school holidays, and I can’t bring myself to read Reserve Bank background papers on bank capital issues (although I recommend Kate MacNamara’s piece on Stuff, drawing on some of those papers) so I thought I might do a post on an off-topic issue –  fines – that has bugged me for a long time but which I didn’t used to be free to write about (while my wife was at the Ministry of Justice).

There are two things that bother me about our system:

  • the way that maximum fines, set out in all manner of bits of legislation, are not indexed for inflation,
  • the way that fines are not systematically varied with the financial means of the offender (unlike the financial effects of a prison sentence or even community service).

As is right and proper, Parliament sets maximum fines for various offences when the legislation creating the offence is passed (or amended).    Legislation isn’t often revisited –  parliamentary sitting time is scarce –  and some legislation creating offences will have been passed very recently but some was passed decades ago. But inflation is thief of the value of money, particular as a reasonable amount of time passes.   A maximum fine set at, say, $10000 in 1990 would have to be set at about $18000 now just to be the same in real terms, and even that wouldn’t keep pace with real income gains.

For offences where there is both an imprisonment and a fine option open to the judge the problem is particularly egregious.  Take a piece of legislation passed 30 years ago that provided for a year in prison or a $5000 fine.   Parliament presumably set those two numbers with some sense of the relative value of time and money 30 years now.  But time has got more valuable and money has got less valuable.

Back in the days when I first became aware of this issue, perhaps there was an argument that in future it wouldn’t matter much: the Reserve Bank was required to target 0 to 2 per cent annual inflation, and there was a consensus that there was an upwards bias in the CPI of perhaps as much as 0.5 to 0.7 per cent per annum.   But over time any biases have been reduced as SNZ improved the index, and the inflation target was revised upwards.  As a matter of policy, we ask the Reserve Bank to reduce the purchasing power of money by around 2 per cent per annum.  In 36 years, the real value of any nominal sum (eg a pre-set maximum fine) will halve.

Inflation has been a systematic issue for decades and yet nothing has been done to index our maximum fines for inflation.     Sure, formal indexation isn’t a big thing in the private sector (although we –  sensibly enough –  index our welfare benefits), but (a) there are few nominal contracts that last anywhere near as long as the gap between Parliament reviewing and updating penalty levels, and (b) citizens have no redress or avoidance mechanisms –  the fixed nominal fines are Parliament exercising its sovereign power and we (and the judges for that matter) just have to live with it.  Offenders cannot be fined as heavily –  in real purchasing power terms –  as Parliament intended in passing the law.

This issue should be relatively easy to fix, and should not be enormously controversial if some MP or government were to pick it up.    For all new legislation/fines, the maximum fine could be set in terms of “fine points” (eg a $10000 maximum fine might be expressed as 10 fine points where a fine point is defined as equal to $1000 as at (say) 31 December 2019).     The value of those fine points in today’s dollars could be adjusted every quarter with the CPI, with the resulting nominal values readily available to anyone on a table maintained on the Ministry of Justice website.  For existing legislation (and fines) where fines have been set in nominal dollar terms,  once the date that fine came into law in known the nominal value of the fine could be adjusted each quarter (much the same table) with changes in the CPI.   If one wanted to be more far-reaching –  and I would –  one could index fines to changes in some index measure of wage rates.  That would maintain better the intended relativity between the cost to the offender of a fine vs that of a prison sentence. But just addressing the inflation indexation point would significantly improve the situation as it stands now.

The bigger issue –  and frankly the one that exercises me more –  is what appears to be a fairly deep injustice that fines are not consistently or systematically adjusted for the financial means of the offender.    Consider a sentence for a particular offence that would have someone imprisoned for a year.   Whether you are on the minimum wage or earning $250000 a year you are out of the private labour market for a year, unable to earn more than the small amount prisoners get paid for their labour.    A prison sentence costs (in dollar terms) a higher income person more than a lower income person. But a fine is a quite different matter.  For someone on the minimum wage, a $5000 fine might be almost ruinous while for the person earning $250000 they’d pay it readily enough without materially constraining any other choices.  Many cases in our court system result from unpaid fines.  Sometimes that will be pure choice by the offender, but not always by any means.

To be sure, under the Sentencing Act judges may decide not to impose a fine if they believe an offender does not, or would not, have the means to pay it.  But that is (a) a discretionary choice of a particular judge, (b) does not seem to allow (formally) a diminished fine (rather than simply not levying one at all), and (c) does not, of course, allow for a higher fine –  above the statutory maximum –  for a higher income (or wealthier person).  And as an old piece of Ministry of Justice research I found put it, drawing on a survey of judges

Lack of adequate information, particularly regarding the means of the offender, was considered to be an important factor limiting Judge’s ability to adjust the amounts of fines imposed.  About two-thirds of the Judges said they would never or only seldom ask for a written statement of means.  Time pressures were clearly one of the main reasons why this was the case.

Perhaps things have changed since then, but the basic issue hasn’t.  A nominal dollar penalty falls far more heavily on a poor person than on a wealthier person.   That probably offends most canons of justice  –  including perhaps the idea that “from whom much is given, much is expected” –  and is quite inconsistent with the way we treat imprisonment (where time is the standard unit, not dollars).

It would seem to me to be fairer –  albeit more complex to set up and administer in a fair and equitable way – if Parliament were to specify a maximum fine in terms of units of time equivalent, which would be translated into dollar terms for a particular offender by reference to the income and/or wealth of that individual (or company, where the fines apply to corporates).  One could think of a (relatively minor) offence that might have a maximum fine of seven days.     Subject to some de minimis (so having no income doesn’t enable you to escape punishment altogether, or leave prison as the only option), the specific amount an offender could be liable to face would be adjusted by income: for a student earning $100 a day (say) it would be a $700 fine, while for a highly-paid public servant earning $1000 a day, it would be a $7000 fine.

This isn’t a novel idea at all.  It is the way they do things in Finland for at least some offences (and have apparently for a long time).  This article notes various other examples, including the UK, where there is an income-adjustment formula for traffic fines.  And here a scholar looks at the possible constitutional obstacles to such a system in the US and concludes that they are not insuperable.  In our political system there are, of course, no constitutional obstacles –  Parliament can pretty much do what it wants –  but the real issues might be whether the additional administrative costs were worth it, and how severe the evasion opportunities might be.  Then again, when we sentence people to prison we have to go to a great deal of effort and expense to keep them there.

Of course, one might deal with this by having very much higher maximum fines and allow judges lots of discretion to reduce the actual fine according to the means of the offender.   Judge love discretion, and need to have some, but it isn’t obvious why a formal linked to wealth/income would not be more transparent and predictable and, frankly, fair.

Justice would be better served if potential fines were calibrated to the income/wealth of the offender, in much the way they (effectively) are for custodial or community service sentence –  where time (the common unit) is much more financially valuable to a (erstwhile) high income person than to a low income person.

Housing unaffordability

The annual Demographia report on housing affordability across a range of English-speaking advanced countries was released earlier this week.

If you are a New Zealander who cares at all about efficiency, fairness (especially to the rising generation), functioning markets it makes pretty bleak reading.   The focus of the analysis is on the ratio of median house prices to median household income.   Here is ratio for the median urban market in each of the countries they look at

demographia 2020 2

(They also look at the two city states Singapore  (which is in the middle of the pack) and Hong Kong (which is off the charts, see below).

And here is a chart focused just on fairly large cities (>1 million people).  I’ve shown the ten cities with the lowest price to income ratios, the ten with the highest ratios, and a selection (every ten or so rank places) of those in-between.

demographia 2020 1

and here are the New Zealand cities in the wider sample

demographia 2020 3

You’ll see people sometimes talk about Christchurch house prices being affordable again but it is worth keeping that claim in perspective –  and, in fact, rubbishing it lest anyone think that the Christchurch outcomes are in some sense good or acceptable.

The Demographia reports looks at just over 300 urban housing markets.  In 46 of them, mostly in the US but not exclusively, the estimated price to income ratio is three or less (what the Demographia authors regards as a normal longer-term level), and 103 have ratios of 3.5 or less.   There are large cities and small cities. Fast-growing places and stagnating ones.  A house price to income ratio of 5.4 (Christchurch at present) mightn’t be the worst in the world, but by no stretch of the imagination is it good.   We –  and people in Christchurch –  shouldn’t be settling for it.  Only 60 cities in the entire sample are worse, on this count, than Christchurch.  And Christchurch is a fairly small city with abundant land, and yet its house price to income ratio is the same as those for Miami and New York.

This particular isn’t perfect by any means. No indicator is.    Among other things, median household income is likely to be partly endogenous to house prices: more people working (particularly both parents of young children) and for longer hours to attempt to afford a house.    And if house sizes are probably fairly similar across New Zealand, Australia, Canada, and the US as a whole, the typical house in the UK is considerably smaller than in those other markets, and no attempt is made to adjust for this difference –  whether across countries or across major cities.   Auckland might be in the top 10 most unaffordable ‘major markets’ but on average you will be getting more house and land for your money in Auckland than in London (let alone Hong Kong). But while it is fair to recognise this latter point, to make very much of it is simply a cop-out.  You won’t be getting more house for your money –  and quite possibly less – in Auckland, Wellington or Tauranga than in Lincoln, Nebraska (ratio 3.3) or Louisville, Kentucky (3.2) or the dozens of other affordable cities across the United States.

One of my slight frustrations with the Demographia report is that it does only focus on English-speaking countries.  While they are often the ones we like to compare ourselves to, it would be more reassuring if there was data on a range of continental European countries and Japan/South Korea. Russia wasn’t one of the countries I had in mind  but in this year’s report, they have a snapshot on Russian cities.   Across Russia, population growth certainly isn’t a factor in driving house prices, although some individual cities (including Moscow and St Petersburg) are growing. Most of the 17 cities have price to income ratios of three or less (and while Russian houses/apartments are probably fairly small, Russian incomes are fairly low even by New Zealand standards).  But both Moscow and St Petersburg have price to income ratios of 4.2.  That’s above the Demographia threshold, but well below Christchurch, Wellington, Auckland (or Tauranga).

There was a little media coverage of the Demographia report.  But just a few months out from another election, where is the sense of scandal, of outrage, of a commitment to produce very different outcomes in the future?  No significant political party is willing to talk in terms of dramatically lowering house prices, or of making the structural changes (mostly to land use policies) that would bring it about, or about supporting in the transition people caught out by the rigged market our central and local government politicians have delivered in the last 30 years.  The scandal –  the sheer unaffordability –  that is so recent now seems to be taken for granted as something normal, inevitable etc.  It is highly abnormal. It is a disgrace.  The burden falls most heavily on the youngest and most marginal parts of the population.  It is indefensible.  And yet neither National nor Labour (nor NZ First nor the Greens) are interested in serious change making a serious and sustained difference.  Oh, they’ll tweak things at the margin, but none of them will talk about aiming for price to income ratios of three, or of rendering incredible the notion that small houses on tiny sections in Berhampore would sell for $1million.


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

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 ( 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


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.