In yesterday’s post I drew attention – yet again – to New Zealand’s continued drop down the international productivity league tables. There are all sorts of caveats to the details – PPP comparisons are inevitably imprecise, and the data are subject to revisions – but few seriously doubt that we do much worse now relative to other advanced countries than we did just a few decades ago.
But it is easy to lose sight of what the numbers actually mean for ordinary New Zealanders, so I thought today I might do just a short stylised illustration.
In yesterday’s post – as on various occasions in the past – I’ve contrasted our outcomes with those of a group of highly successful OECD countries (but excluding Norway (oil), Ireland (even their own authorities don’t use GDP as a measure of Ireland’s outcomes) and Luxembourg): Switzerland, Denmark, Belgium, the United States, Sweden, Austria, France, Netherlands and Germany. They can be thought of these days as some sort of “leading bunch”, at least as regards labour productivity.
In 1970, when the OECD data start, our real GDP per hour worked was about 82.5 per cent of the median for this group of countries. By 1990 that proportion was about 64.5 per cent.
In 1990 the confident hope – among officials and ministers, and more than a few outsiders – was that we were on the brink of turning things around. I’ve shown before this photo of then Finance Minister David Caygill’s aspirations/expectations.
Let’s suppose it had worked.
The fall in our performance relative to that OECD leading bunch had taken 20 years, so suppose that over the following 20 years we had steadily improved such that by 2010 our real GDP per hour worked was again about 82.5 per cent of that of the leading bunch, and then held at that ratio subsequently. That wouldn’t have made us a stellar performer, but at least on the OECD’s numbers we’d be doing about as well as Canada and a little better than Australia. Since we’d more or less tracked Australia for many decades earlier it wouldn’t have been an unrealistic aspiration at all.
How much difference would it have made?
There are lots of possible moving parts, but I did this little exercise by taking as my starting point actual real GDP per capita for New Zealand each year over the last 30 years and scaling it up by the ratio of the assumed productivity performance to our actual. Fortunately the official GDP per capita series starts in 1991.
This is what the chart looks like.
By the end of the period, the annual difference – per man, woman, and child – is about $20000.
But what does it add up to? After all, every year since 1991 our incomes could have been higher than they were. And $1000 extra from 1991 invested even just at a real government bond rate adds to quite a lot by now (especially given New Zealand’s interest rates over that period). Applying a (stylised) series of real interest rates – falling over time – and applying them to each year’s difference in real GDP per capita, the total difference came – in today’s dollar terms – to a bit over $500000 per man, woman, and child. For almost everyone in New Zealand that would be serious money.
You could produce a different number with different scenarios. Slower convergence would, of course, produce a lower number. On the other hand, using the sort of discount rate The Treasury requires government agencies to use – rather than just a long-term real interest rate – would value past gains more highly and produce a materially bigger number.
The point also is not to suggest that if somehow economic policy had been run better and produced these stronger productivity outcomes that everyone would have banked all the proceeds and be sitting today on an extra nest-egg of $0.5 million. That wouldn’t have happened at all. In a more productive economy, people would have been able to – and no doubt would have- consumed more. Government revenues would have been stronger, and better public services might have followed even at the same tax rates. Some might have chosen to work less (a real gain to them too). The half million is a way of putting a number to the options that much better performance would have created. And the gains would be mounting further every single year. Another way of putting that is that every single year, the failure of successive governments means a median family of five is missing out on another $100000.
To repeat, this exercise is entirely stylised. Depending on one’s view of which set of policies might have delivered these better outcomes. some other things might have been very different. Perhaps our terms of trade would have been different (since probably a somewhat different mix of products). Perhaps our real interest rates would have been closer to world levels. Perhaps…perhaps. The point is simply that decades of economic failure adds up to really large amounts of income (and potential consumption) just lost. In New Zealand’s case, half a million per capita will do to be going on with, mounting at $20000 per capita with each year we languish so far behind the bunch.
And just think of how much better off our country would be – avoiding all the systematic and deeply unjust redistributions – if over the same period successive governments also had not so badly messed up the land market, in a way that has delivered us such extraordinary house prices.
What might have been……
But what still could be if there were to be a government of courage and vision.