Checking the gap

Back in the very early days of this blog, in a post about the gap between New Zealand interest rates and those in other advanced countries, I ran this chart constructed from OECD data.

int diffs to 2014

There had been no sign of the large gap between our long-term interest rates and those abroad systematically narrowing. These were nominal interest rates, but as another chart in the same post illustrated the gap between our inflation rate and those in other advanced countries had also been quite stable, suggesting that the story held for real interest rates as well. Unless your economy is recording stellar productivity growth year after year, large positive gaps between your real interest rates and those in other countries are usually not thought to be “a good thing”.

In recent months all the focus locally has been on the low absolute level of interest rates. In fact, globally there were stories in just the last few days of some key international real interest rates reaching new long-term lows.

But what has been happening to the gap between our interest rates and those abroad?

The gap between our policy rate (the OCR) and those in other advanced countries has certainly narrowed – New Zealand is just a touch higher than policy rates in the US, UK, and Australia, and even among the countries with negative policy rates the gap to Switzerland (-0.75 per cent) is now only 100 basis points. When I wrote the 2015 post, our OCR was 300+ basis points higher than policy rates in most of these countries.

Of course, if you believe the market economists, those gaps are about to start widening again. New Zealand won’t be the first OECD country to raise policy rates (Iceland and Mexico have already done so this year) but most don’t seem likely to move for some time yet.

But what about longer-term interest rates, which typically embody expectations about future short-term rates?

In this chart, I’ve updated the red line from the previous chart (New Zealand 10 year rates relative to G7 ones) up to June

int rate diffs to 2021

The gap is now a lot smaller than it was for most of this century (albeit quite a bit larger than it was at last year’s lows, when the OCR was expected to stay very low, or be taken lower, for quite a few years to come). At current levels, the gap is a bit higher than it was at the end of 2019 before anyone had heard of Covid.

But what are markets saying about the very long term, beyond Covid and the immediate economic challenges, and focusing on real yields from the inflation-indexed bond markets?

Without a Bloomberg terminal, time-series data aren’t readily available for lots of countries, but here are the yields for New Zealand and the United States (we have two specific bonds, while the US publishes a constant maturity 20 year series). The first chart shows the levels of respective rates, and the second the gap between the yield on the New Zealand 2040 bond and the US 20 year.

real 2021 1

real 2021 2

The absolute levels of all these rates are very low (in the US near record lows), but the gap between New Zealand and US long-term real rates has opened right back up again, and is now around where it was at the start of 2018.

That is just the US of course. But the thing is that, in OECD terms, the US these days is a relatively high interest rate country- highest 10 year bond rates of any of the G7 countries.

Here is a chart of the yields on the German government’s 2046 maturity inflation-indexed bond.

german indexed bond

Even allowing for the fact that the New Zealand government bond matures in 2040 and the German one in 2046, there is gap in yields of something a bit over 200 basis points.

These are really big differences. And they have nothing to do with the policy stances for the time being of respective central banks – which can affect expected real interest rates over the first few years of an indexed bond. but are lost in the wash over 20 years (when people, institutional structures, and central bank mandates change anyway). These differences are about real economy phenomena.

There are, of course, conventional suspects. These are government bonds so what about the respective levels of government debt. But, of course, New Zealand has lower government debt (as a share of GDP) than most OECD countries, including both Germany and the United States. Most probably, we are expected to continue to keep government debt well in hand. If the market were pricing much sovereign credit risk across these economies, the real risk-free gap would be even larger than the numbers I’ve shown here.

Perhaps the real interest rate gaps are now a bit narrower than they were five or six years ago. Even then, however, we should be cautious about welcoming the change without understanding it better. It could, for example, represent (implicitly) a reduction in long-term expectations about relative economic growth and the demand for real resources that business investment gives rise to – and if so we might interpret differently an implicit reduction in expectations about relative productivity growth and an implicit reductions in expectations of relative population growth. As it is, it is simply too early to tell.

Markets tend not to leave free lunches on the table though. And if New Zealand government bonds are offering unusually high local currency yields for a stable low-debt country, the counterpoint is likely to be in the exchange rate. Economists have a model known as Uncovered Interest Parity (UIP) in which the difference in two countries’ risk-free interest rates is equal to the expected change in the exchange rate between those two countries over the period in question. It isn’t a proposition that actual exchange rates (ex post) reflect those initial interest rate differences – all sorts of shocks intervene almost every day – but something like an equilibrium condition ex ante.

If, for example, New Zealand real interest rates for a 20 year maturity are 150 basis points higher than those in other economies, that would be consistent with an implied expectation of a 35 per cent reduction in the real exchange rate over that 20 year period.

Of course, as I’ve shown here, New Zealand interest rates have averaged quite a lot higher than those abroad (even in real terms) for a long time, and although the exchange rate has at times been volatile (less so in the last decade than in the previous couple) we have not seen that sort of sustained fall in the real exchange rate, so there have (ex post) been windfall gains to those who bought and held New Zealand bonds. But that doesn’t change the indications that serious imbalances are still present in our economy (not just this year, not just about Covid, but something deeper and more persistent): persistently higher real interest rates than those abroad, a real exchange rate that has not adjusted structurally lower, weak business investment, low productivity growth, and feeble external trade performance (exports and imports flat or falling as a share of GDP.

(But, to anticipate comments, it has nothing whatever to do with house prices. Repeat after me, over the decades we have built fewer houses – and freed up much less land – than our population growth would have suggested was warranted. It is the commitment of real resources – physical building of houses, subdividisions etc, that (all else equal) puts pressure on real interest rates, not house price developments – lamentable outcomes of other policy choices that they are.)

Thinking about monetary policy

I’m less interested in what the Reserve Bank will be doing at next week’s OCR review, or the one after that (or the one after that) than in what they should be doing. The Bank’s MPC do few/no thoughtful speeches (or really any at all on economic developments and monetary policy), publish little research, and have something of a record at times of lurching unpredictably from one review to the next. Banks employ people who will try to wheedle morsels of information out of Reserve Bank staff and MPC members and read those tea leaves. My interest is mainly in what the Bank should be doing, both absolutely (what is first best policy) and consistent with the mandate they’ve been given by the government of the day. I used to run the line that eventually policymakers will do the right thing (and we will all grope towards knowing what that is, no matter how fervently we champion our individual views), and I guess that is probably still true if avoiding serious outright deflation or runaway inflation is the test. But my confidence has taken a bit of a knock in the last 18 months.

The Reserve Bank went into Covid manifestly ill-prepared. They’d talked up the perfectly normal tool of a negative OCR – used in a variety of advanced countries in the last cycle, regarded as effective by no less than the IMF – only to find just a month or two before the crisis hit that actually banks had technical obstacles (systems issues) that, the Bank concluded, meant they couldn’t use their preferred instrument. It was truly astonishing – not only had they had 10 years’ notice from the rest of the world, and an internal working group that had highlighted to the Governor that specific (work with banks to be ready) issue 7-8 years earlier, but they’d been publishing work and giving interviews on their thinking about the next downturn. And yet they simply hadn’t done the basic operational work to be ready. It was an extraordinary failure, on their own terms – a failure of management (Wheeler, Spencer, Orr, Bascand et al), of the MPC, and of the Board paid to hold the Bank to account on our behalf, as citizens and taxpayers.

Taxpayers? Well, yes, because one of the great things about conventional monetary policy – official short-term interest rate adjustment – is that it costs (and makes) the taxpayer nothing. A key overnight interest rate is adjusted, nothing much about the public sector balance sheet changes, and no material financial risks are assumed on behalf of the taxpayer. The private sector, subject to all the appropriate self and market disciplines, does the substantive adjustments, to spending, investing, saving etc choices. It is one of several reasons to prefer monetary policy as a stabilisation tool – at the other extreme, expansionary fiscal policy just involves writing large cheques with other people’s money.

But unable (so they judged) to take the OCR negative, and unwilling (for reasons they’ve never attempted to explain) to even take the OCR quite to zero, the Bank lurched into the Large Scale Asset Purchase programme (LSAP), in which they have been buying up huge quantities of (mostly) government bonds, heavily concentrated at the highest risk long-end of the bond market where if they affect rates at all they aren’t rates that anyone much in the private sector pays. Short-term rates (out to perhaps a couple of years) are what matter in this market, and the Bank could very easily have managed those rates without (a) many asset purchases at all (market rates respond to expectations of future monetary policy) and (b) without anywhere near as much financial risk (short-term bond prices don’t fluctuate much).

I’ve been running an argument for the last year or more that the LSAP was really little more than performative display (“see we are doing lots, really”), in substance no more than a large-scale asset swap (Bank buys back long-term bonds and issues in exchange short-term liabilities with exactly the same credit risk), in turn exposing the taxpayer to a lot of market/refinancing risk. Of course, the Bank claims otherwise – they claim significant effects on bond rates (but if so, so what) and the exchange rate – but have never provided much supporting analysis. And they have their defenders in the markets – you could read this interesting piece from the ANZ, although you may come away thinking that the ANZ bank thought LSAPs were a good idea as (financial) industry assistance. At best, if there was a case for the LSAP it had long since passed by the end of last year (by when even the Bank recognised that it could have used a negative OCR). And yet they went on – albeit staff (but not the MPC) have been reducing the scale of purchases more recently, partly because there are fewer bonds to buy.

What about that financial risk? The Reserve Bank has about $3 billion of capital, and although capital isn’t a technical constraint on a central bank – it can still run with negative equity – Governors and MPC tend to be reluctant to take on lots of risk for their own institution relative to the amount of capital the institution has. So the Bank persuaded the government to provide an indemnity, covering any losses the Bank ended up making on the LSAP programme. And now there is a line item on the Reserve Bank balance sheet representing those losses, and the claim the Bank now has on the government.

indemnity

The published data are only to 31 May, and as rates fluctuate (down and up) the market value of the losses changes (as of today probably a bit lower than 31 May), and the Bank also continues to buy bonds. But a $3 billion loss looks like a reasonable point estimate. That is about 0.8 per cent of GDP gone and most probably – since there is no reason to suppose rates are more likely to fall than to rise from here over the years ahead – not coming back. Transferred from you and me, to those lucky enough to offload their bonds to the Crown near the highest prices ever experienced. The pedestrian/cycling bridge in Auckland has been a recent benchmark for reckless public spending, but this has cost four bridges – without even the consolation of somewhere to go sightseeing on a holiday to Auckland.

It is almost certainly the most costly (to the taxpayer) Reserve Bank intervention since the devaluation crisis of 1984 – and at least in that case the Bank’s losses resulted from a refusal of the government to follow Treasury/Reserve Bank advice. It swamps the cost of the 2008 deposit guarantee scheme, which some continue to inveigh against to this day. The public sector as a whole could have locked in the long-term debt funding it needed at last year’s low rates. Instead, the MPC, the Governor and the government acted to prevent it, at great and preventable cost to the taxpayer.

Preventable? Recall, they should have been able to deploy negative rates (their preferred option) which would have cost nothing. They could have focused what purchases they did much more heavily on short-dated bonds (on which losses would have been very limited). And they could have stopped the programme eight or nine months ago, once the negative OCR tool was back on the table. (None of this requires second-guessing purely with the benefit of hindsight the Bank’s macro forecasts – this would have been sound advice on their own contemporary numbers.)

Instead, even as recently as the last Monetary Policy Statement they were on record as suggesting

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

In other words, they planned to keep on buying up bonds per the ongoing programme even if economic developments meant overall conditions needed tightening. They’d keep on running up financial risk to the taxpayer and raise the OCR at the same time.

We might hope for a rethink next week, but who knows whether it will happen – there is a often a preference for making significant moves at full MPSs – but what they should be doing is discontinuing the LSAP now (not just letting staff run down new purchases, but winding up the programme completely, and publishing plans to manage – ideally relatively aggressively – the unwinding of their huge bond position). An apology for the losses would be nice too, but instead no doubt we’ll have claims repeated about the great gains the programme has offered with – as is now customary – no attempt to a cost-benefit analysis of this or of alternative approaches.

But, expensive as it has been, no one is probably now arguing that continuing – or discontinuing – the LSAP at current purchase rates is now making any macroeconomically significant difference. So whether or not it is ended isn’t really relevant to the macroeconomic question of what to do about the emerging economic data and the inflation outlook. What should be being done about that?

On balance, I think it is now hard to make a compelling case for the status quo on monetary policy (of things that make a difference, the OCR and the Funding for Lending programme). I’m very conscious of the mistakes the Reserve Bank made in prematurely tightening in the 2010s (on two separate occasions), and the way markets here and abroad often got ahead of themselves in looking to tightenings in that decade. And there is always a risk in using as a reference point rates as they were pre-recession – recall how Graeme Wheeler in particular always used to talk about getting rates “back to normal”.

But there are some important differences this time. Take two (quite important ones): inflation and unemployment.

When Alan Bollard started raising the OCR in 2010 core inflation has been falling sharply , the unemployment rate was about 6 per cent, and the employment rate was well below pre-recession levels.

And when Graeme Wheeler started raising the OCR in 2014, talking confidently on his plans to raise it by 200 basis points, the Bank’s preferred (slow-moving) core inflation measure was around 1.2 per cent, the unemployment rate was about 5.7 per cent, and the employment was still well below (although a bit less below) pre-recession levels. Perhaps the strongest elements in his case for tightening then were the strong terms of trade and the ongoing demand effects of the Christchurch repair and rebuild process.

What about now? Well, core inflation just did not fall during last year’s recession, and the best read now is that it is about 2 per cent (the Bank’s slow-moving preferred measure is up to 1.9 per cent). As for the labour market, the latest official unemployment rate was still a bit above (4.7 per cent) where it was at the start of last year, and the employment rate was a bit below (both gaps being much smaller than in 2010 and 2014). Meanwhile the new monthly jobs indicator tells us that the number of filled jobs is now above levels at the start of last year, even as the number of people in the country has shrunk, suggesting the official unemployment rate now (early Sept quarter) is probably not much different than it had been pre-recession.

Those indicators alone – absent any good reason to think neutral interest rates have fallen a lot since the start of last year – would make a reasonably good, entirely conventional, case for getting some monetary policy tightening underway, all reinforced by stories about the high (possibly record) terms of trade, and the very large government deficit (underpinning demand). And if business confidence surveys don’t often have much pure predictive power there is certainly nothing in them to suggest it would be reckless or irresponsible to see official actions sanctioning the rise already seen in market rates. There is nothing good or bad intrinsically in lower or higher interest rates – they are simply the balancing price, reconciling all the other evident pressures in the economy.

What would be unwise would be for the Reserve Bank – or anyone else – to be uttering views about the economic outlook with any great confidence. There are more than a few big uncertainties out there, and it is always rash – as Wheeler was – for central banks to talk grandly about multi-year interest rate adjustment plans. Events have a way of overwhelming such hubris. The MPC needs to be led by the data, and for now – and given the stance of fiscal policy, which MPC has to take as given – the data probably do sensibly point in the direction of higher interest rates. It might not six months hence, but the MPC simply needs to be led by the data as it emerges.

That shouldn’t mean aggressive moves. Recall that core inflation has been below the target midpoint for a decade or more, and for the entire time (since 2012) when 2 per cent midpoint has been a formal focal point in the target document. Against that backdrop, there is no harm in core inflation going a bit beyond 2 per cent for a while – doing so might help cement in longer-term inflation expectations near 2 per cent (market price indications are still below that, although higher than they were a couple of years back). But a modest tightening now might well see core inflation rise above 2 per cent if the more inflationary/expansionist indicators are for real, while preventing it dropping below 2 per cent if they don’t. “Least regrets” was the mantra the Bank liked to chant.

That also doesn’t mean the OCR should be raised. The first step (other than the performative signalling LSAP) should be to end the Funding for Lending programme. It was an extraordinary intervention that, while second best, worked, lowering retail rates relative to the OCR. But it was a non-neutral operation – only banks had access to it – and runs against the principles of competitively neutral interventions. There isn’t that much FFL lending outstanding – $3 billion or so at the end of May – and of course those who’ve already borrowed get to keep their loans to maturity – but there is no evident need for the facility to still be in place now. For those who worry that early Reserve Bank action might drive the exchange rate higher, using the FFL rather than the OCR is (a) quite a bit less high profile, and (b) retail rather than wholesale focused. Frankly, exchange rate concerns would be better addressed with a tighter fiscal policy.

And, almost finally, if there is a case for higher interest rates now, it is entirely cyclical and says nothing at all about the fundamental strengths (or travails) of the New Zealand economy. Border closures are likely to have reduced potential output a bit, and so have a whole raft of other government interventions (some of which may also have raised the minimum sustainable unemployment rate) . But monetary policy isn’t about potential output; all it can (and should do) is influence things around potential, however good or bad potential may be. As it was in the 1970s – when potential growth slowed but interest rates needed to be raised to deal with inflation – perhaps to some extent it is now.

Should the stances of other central banks be a constraint? I don’t think so. We’ve already seen a couple of OECD central banks move to raise official interest rates this year, and if institutions like the Fed, the ECB, and the Bank of England are more cautious, well the recoveries in each of those places lag a bit behind that here. As for the RBA, they seem an odd mix – their Governor almost seems to be running some sort of 1980s cost-push wage-targeting mental model – but bear in mind that core inflation in Australia was well below their target midpoint going in to Covid, and still is today. Circumstances differ, even if end goals are fairly similar.

School holidays loom and we are heading away so no more posts here for a couple of weeks.

Some economic effects of immigration

Immigration is in the news quite often these days. The government tells us it is planning changes to the rules (in a “having emerged from Covid” world). They’ve asked the Productivity Commission to do a substantial report on New Zealand immigration policy (apparently expected to report after at least some of the government’s policy changes). And, of course, in the short-term while New Zealanders are free to emigrate – to give our government some credit, at least they don’t make departure entirely dependent on the grace and favour of the government as in Australia – it is very difficult for most people who aren’t New Zealanders or New Zealand residents to get into New Zealand at present. There are some compelling human stories (separated nuclear families), but also all sorts of claims about how our individual firms, or perhaps the economy as a whole, might be suffering as a result. Over the last 12 months (to the end of June), there has been a net outflow of 35000 people (New Zealand and foreign) – as a share of the population, the only time there has been a larger net outflow looks to have been in the late 1970s. Quite a contrast to the really big net inflows we’d experienced in the years just prior to Covid.

So it was interesting to see a new research report out from the ANZ economics team looking at “How does immigration affect the New Zealand economy”. As the authors note, it is similar in spirit and technique to a piece the Reserve Bank did back in 2013, which I will come back to later in this post. And has somewhat similar – but probably weaker – results, despite a number of differences, both in data and specification.

It is important to note that (a) these are not highly-detailed structural models of the economy and (b) do not purport to say anything material about the longer-term questions about the economic impact of New Zealand’s immigration policy that are my main focus. The main focus instead is on the impact of some unexpected net immigration over the first two or three years – and the ANZ piece does not even attempt to distinguish between the bits under government control (non-New Zealanders, especially arrivials) and the bits that aren’t (movement of New Zealanders).

Here is how ANZ describes their effort

Net immigration tends to be driven primarily by changes to immigration settings and relative labour market conditions between Australia and New Zealand. At the moment, we can add the pace of border opening. With the
outlook so uncertain, it’s helpful to ask what will happen to the economy if net immigration is stronger or weaker than we expect in coming years. To answer this question we employ a simple model1 that estimates the
relationships between key variables:
 Net immigration
 Growth in residential building consents
 Investment intentions (from the ANZ Business Outlook)
 GDP growth
 House price inflation
 Growth in labour costs
 The change in the 2-year mortgage rate

They use data back to 1998 (not entirely sure why they don’t go further back, but perhaps one of the data series isn’t available further back). Note the problem that bedevils so much of this sort of work. If 20+ years doesn’t sounds too bad (80+ quarters), actually the researchers are trying to distill results from what are really only two events (two complete immigration cycles) and so not too much weight can be put on any particular result.

Note too that the immigration series they are now using (the new 12/16 series mostly) is different in character to the series (the old PLT data) used in earlier work. PLT data used self-reported intentions at the time of arrival/departure, and thus was unaffected by anything that happened after arrival/departure. The 12/16 series – which relies on what people actually did (whether they stayed – here or away – for long) – is importantly different. You might have arrived intending not to stay long, but if conditions while you are here change for the better you may choose to stay. In some respects (but not all) it is (eventually) better data, but the difference is one researchers might want to think about.

I’m also a bit puzzled why – other than advertising their own survey – they used the ANZ Investment Intentions series rather than actual investment data from SNZ.

Anyway, what do the results show? They do a first round suggesting (not very surprisingly) that higher (lower) net immigration is associated with higher (lower) house prices and dwelling consents. Then they attempt to do something a bit more sophisticated and isolate causality. In their words

In this section, we make a few tweaks to the model which allow us to be more definitive about the impact of net-immigration on individual variables like wages.  We can get the answer to the question: ‘what’s the impact of
an X increase in net immigration on house price inflation, holding everything else constant?’
Overall, our findings are consistent with the forecast scenarios – but with the tweaks we’ve made, we can say that our model shows that an increase in net immigration results in higher house price inflation, rather than saying
is associated with higher house prices. That might sound like semantics, but it’s the difference between correlation and causation.

(For those really technically minded there are footnotes on both these model specifications.)

Here are the house prices results

ANZ M 1

They don’t seem to state the size of the shock, but I guess the point they want to emphasise is that the effect is positive. But actually what surprised me was that, on this model and specification, the effect is only statistically significant for a couple of quarters at most (those dotted lines are 90 per cent confidence bands). Even allowing for the fact that the model is looking at house price inflation not house price levels, that seems a bit surprising.

I’m guessing that the results are stronger for dwelling consents, since they say

The results for residential consents showed a strong positive response to higher net immigration. Together, these findings show that higher net immigration generates sizeable upwards momentum in both prices and activity in the housing market.

But they don’t show the results. If so, it would be a little surprising, since the general story has tended to be that immigration shocks boost house prices first, and only later have a large effect on consents.

What about the other variables in the model? They do find a boost to GDP growth, for the first year or so (not at all surprising, since there are more people, whether as workers, consumers, or people needing a roof).

anz m 2

They report no effect (positive or negative on wages). But what about GDP per capita growth?

anz m 3

They describe this is “it doesn’t look like there’s a strong effect”, but given the confidence intervals it would be fairer to say it is no effect at all. And, frankly, that is a surprise (a point I’ll come back to).

The final observation ANZ make that I wanted to pick up on was their observation that they do not find significant impacts on investment intentions. They don’t make anything of it, but if that result were robust – and I’m sceptical – it should be really rather concerning. There is, on this scenario, an unexpected change in the number of people in New Zealand, and there is no impact on firms’ investment intentions, and yet additional workers need additional physical capital (be it a computer, or tools, or a van, or a desk, or an office or whatever?). I’ve shown cross-country data previously suggesting that in advanced countries business investment (as a share of GDP) has tended to be negatively correlated with population growth, so in a way I’m not overly surprised, but the prevailing official New Zealand story surely requires a belief that more people results in more investment, if simply to maintain pre-existing capita/output ratios. I wouldn’t want to put too much weight on this result – which may depend on the specific variable they chose to use, or whatever – but it should be a slightly disconcerting straw in the wind nonetheless.

So what about that 2013 Reserve Bank paper I mentioned earlier? (Disclosure: I was the editor responsible for the paper, and although I asked for some of the specifications in it, all the results are those of the author – now one of the Bank’s key economics managers.)

That Reserve Bank set out to look specifically at the impact of migration on the housing market, as net migration was just beginning to pick up strongly again. In what is described as a “fairly simple model” this is what the author set out to do.

mcd 1

Using the output gap has some attractions and some disadvantages. From a central bank perspective, one is less interested in whether headline GDP rises and more interested in whether migration shocks add to or ease overall resource pressure. On the other hand, output gap estimates are subject to revision, and are actually revised quite a bit (the 2013 series that McDonald used clearly describes the same economy as the Bank’s latest estimate, but with important differences, including that at the time he wrote the Bank’s official view was that the output gap was already slightly positive, while now they think it was still reasonably negative).

These were McDonald’s summary results (noting that the confidence bands here are 68 per cent confidence bands)

mcd 2

In this model, after five years house prices are still 8.1 per cent higher than otherwise after a 1 per cent of population immigration shock.

I guess the key result I always focused on in this paper was the output gap estimates. Immigration shocks in New Zealand over this specific period tend to have added more to demand (including for labour) in the short-run than they add to the economy’s supply potential (but after 3 years and more – recall these are monthly numbers – that effect fades out, leaving the output gap effect basically zero). That has implications for interest rates (in these models the two year mortgage rate, but there is quite a correlation with the OCR). (It is also consistent with at least some initial boost to per capita GDP – see above – since a given pool of resources in being worked more intensively.)

McDonald also looked at arrivals and departures separately (didn’t seem to make much difference) and at movements of New Zealanders and non New Zealanders separately (where there were some differences – notably the output gap effect is zero for New Zealanders, possibly because the comings and goings of New Zealanders are more purely endogenous). There appeared to be some differences by country of origins (arrivals from Europe/UK boosted house prices a bit less, and more slowly, than arrivals from Asia).

The broad thrust of these results should not really surprise anyone. The notion that immigration has added more to demand than supply in the short term was just a standard feature of New Zealand macroeconomic analysis for many many decades (whether historically or in the forecasts/write-ups of places like the Bank and Treasury more recently). That it is so says nothing – nothing at all – about the pros and cons of large scale policy-led immigration longer-term. The short-term effects are more likely to be that way round in a country that mostly imports “people like us” – often people with a reasonable degree of education and skill, often actually New Zealanders – than, say, in a country where a large chunk of migrants are lowly-skilled illegals (again, whatever the long-term case for either sort of immigration).

And yet, if these results shouldn’t surprise, they clearly do surprise many businesses and business lobbyists, operating entirely with a single firm perspective and either unaware of or deliberately choosing to ignore the macro analysis. Here is eminent economic historian Gary Hawke’s take – from a 1981 chapter in The Oxford History of New Zealand.

“Ironically, the success with which full employment was pursued until the late 1960s led to frequent claims that labour was in short supply so that more immigrants were desirable.  The output of an individual industrialist might indeed have been constrained by the unavailability of labour so that more migrants would have been beneficial to the firm, especially if the costs of migration could be shifted to taxpayers generally through government subsidies. But migrants also demanded goods and services, especially if they arrived in family groups or formed households soon after arrival and so required housing and social services such as schools and health services. The economy as a whole then remained just as “short of labour” after their arrival.

Whatever the possible longer-term microeconomic case for access to a wider pool of skills, a new migrant labourer may ease an individual firm’s constraint or problem – perhaps even a sector’s if they can get a disproportionate share of the arrivals – but large scale migration simply does not ease overall macroeconomic resource pressure.

All that is really a protracted intro to a point I have been toying with. I recall writing a post early last year – probably February – suggesting that the building downside risks to the economy were such that I would be very hesistant to then recommend a significant cut in non-citizen immigration, for fear of exacerbating the near-term economic downturn. For much of last year, my comfort with the pessimistic economic forecasts the Reserve Bank and Treasury were publishing was reinforced by this short-run immigration story: demand effects typically exceed supply effects over the first couple of years so a big net outflow (enforced by Covid border restrictions) seemed likely to exacerbate/extend the economic weakness.

And yet, here we are, borders still closed, still monthly net outflows, significant sectoral dislocations but……the economy at more or less full employment (more jobs filled now than there were early last year, even though fewer people are physically here), and business and consumer sentiment really running rather strongly, investment intentions included.

Where does immigration fit with the story? I’m surprised things are running as strongly as they are but so (presumably, if they have thought about it) must be those constantly rushing to ministers and newspapers to claim that the economic costs of not having access to another migrant labourer are very high (on some rhetoric “threatening our entire recovery”. I’m not trying to suggest that all is rosy about our economy – it clearly is not in any structural sense, but in a short-term cyclical sense (the focus of both the ANZ and RB work) you can’t really complain about things here. The market now thinks official interest rates will/should be on the way back up before the end of the year. Core inflation might even get past 2 per cent for the first time in a decade. Workers often find employers competing for their services.

My honest answer to my own question is that I’m still not clear. I’ve put a lot of weight on the swings in the structural fiscal position – the swing from a near balanced budget 18 months ago to huge cyclically-adjusted deficits now is a really big boost to demand – and official interest rates are lower than they were, all in an economy where the net loss of purchasing power from other factors has been pretty limited (to put it mildly, having in mind the strength of the terms of trade). The short-term macro effects of swings in migration seem pretty clear – need for a roof etc hasn’t changed – so I can only deduce that we’ve had a series of factors at play:

  • fiscal policy (really big boost to demand)
  • monetary policy (modest boost to demand –  through the OCR, little or nothing through LSAP)
  • some slight dampening to demand from restrictions on overseas tourism and export education (most NZ offshore tourist spending seems to have been displaced to additional demand for other things),
  • some boost to net incomes and demand from the rising terms of trade, and
  • a significant dampening to demand from the move from a net migration inflow to an outflow.

It would be consistent with a story in which the overall economy might now be running as strong (cyclically) or even a bit stronger than it was early last year, and one which –  all else equal –  a significant reversal in the net migration flow –  would simply exacerbate (forcing higher interest rates or tighter fiscal policy) rather than relieve.

I’ll have a few thoughts specifically on monetary policy tomorrow.

Long-term spending and revenue

The Public Finance Act requires that every four years The Treasury publishes a “statement on the long-term fiscal position” looking “at least” 40 years ahead. Parliament allowed them to defer the report due last year, but yesterday they published a draft – for consultation – of the report they will formally publish later this year. Quite why they have chosen to go through this additional step, of consulting formally on the draft of a report that is likely to have next to no impact even when finalised, is a little beyond me.

These long-term fiscal reports are fashionable around the world. As I’ve noted previously I was once quite keen on the idea, but have become much more sceptical. They take a lot of work/resource – which should be scarce, and thus comes at a cost of other analysis/advice The Treasury might work on – and really do little more than state the obvious. As I noted when the last long-term fiscal report was published.

I was once a fan, but I’ve become progressively more sceptical about their value.  There is a requirement to focus at least 40 years ahead, which sounds very prudent and responsible.    But, in fact, it doesn’t take much analysis to realise that (a) permanently increasing the share of government expenditure without increasing commensurately government revenue will, over time, run government finances into trouble, and (b) that offering a flat universal pension payment to an ever-increasing share of the population is a good example of a policy that increases the share of government expenditure in GDP.  We all know that.  Even politicians know that.  And although Treasury often produces an interesting range of background analysis, there really isn’t much more to it than that.  Changes in productivity growth rate assumptions don’t matter much (long-term fiscally) and nor do changes in immigration assumptions.  What matters is permanent (well, long-term) spending and revenue choices. 

And I’m old enough to remember people lamenting the potential fiscal implications of an ageing population – at least conditional on government choices – well before long-term fiscal reports were a thing.

What’s more, lots of countries have these sorts of reports, and of them some have very high and rising levels of government debt, and others don’t. It isn’t obvious that access to these sorts of long-term reports really makes any difference at all (see, for example, the US, with a rich array of private and public sector analysis – although do note that the US is well ahead of us in raising the eligibility age for Social Security retirement benefits).

New Zealand, to the credit of politicians in both main parties, has been one of the (not so small) other group of countries where government debt as a share of GDP has been kept fairly low and fairly stable. We’ve had recessions and earthquakes, and governments with big spending ambitions but if you reckon – as I do – that low and fairly stable government debt is generally a “good thing”, New Zealand has been a success story. We even ramped up the NZS eligibility age from 60 to 65 (back to the 1898 eligibility age) in fairly short order. For good or ill – and no doubt there is an argument to be had – government health spending as a share of GDP was not much higher last year than it was 40 years ago (recall, 40 years is the statutory timeframe for long-term fiscal statements).

health 2021

At the start of last year I’d probably have put myself in the camp of those saying “we’ve done okay on fiscal management and there is no obvious reason to suppose we won’t adjust as required in future”. Among other things, there is a certain absurdity in paying out a universal state welfare benefit to everyone at 65 as an ever-increasing share of those 65+ are still in the workforce, so change was likely to happen – it had in other countries, it had here previously and actually Labour in 2014 and National in 2017 and 2020 had campaigned on beginning to raise the age of eligibility (to which you might respond that none of those parties then got elected, but National still won 44.4 per cent of the vote in 2017).

I’m no longer so sure.

One chart that didn’t feature in the draft long-term fiscal report was this one from the Budget.

mcl 2

On their own numbers and estimates, the cyclically-adjusted primary deficit for the current (2021/22) financial year is projected to be really large (in excess of 5 per cent of GDP), at a time when – again on their own numbers – the economy is more or less back to full employment, with an output gap estimate close to zero. Note (again) that this is not a dispute about appropriate policy in the June quarter of last year when most of us were ordered to stay home and many were unable to work. It is about now.

In their text, Treasury is at pains to play down the current fiscal situation. They don’t mention these cyclically-adjusted estimates, but they claim that the situation is temporary, the spending is temporary, and will go away quite quickly. Of course, they have lines on a graph that show such an outcome, but that isn’t the same thing as hard fiscal choices over a succession of years. No doubt there are still some temporary programmes – the subsidies for Air New Zealand and exporters, MIQ costs, and vaccine costs – but a cyclically-adjusted primary deficit in excess of 5 per cent of GDP is getting on for a gap of $20 billion per annum. And every instinct of this government appears to be to spend more.

Here is the chart from the draft report

LTFS 2021

The primary deficit for 2060 on this scenario actually isn’t much larger than the primary deficit The Treasury smiles benignly on this year (assuming it will all go away quite easily). There are long-term issues that need addressing, but perhaps a less complacent approach to the current situation – and the poor quality of a lot of the new spending decisions – might be a better place to start.

Ah, but of course we heard from The Treasury a couple of weeks ago – the Secretary no less – that they are now keener on more government debt and a more active use of fiscal policy. Which probably isn’t the best backdrop against which to make the case for adjustment.

More generally, one of the things that has shifted over the last couple of years – and certainly since the 2016 LTFS – is some sense, especially on the left, that lots more public debt is something to embraced or welcomed, coming at little or no cost (so it is claimed). The focus is always on interest rates (low) and never on opportunity cost (when the coercive power of the state is at work in the spending choices). It makes it a bit harder to mount fiscal arguments about NZS if – as is probably the case – New Zealand could have government debt of 177 per cent of GDP without being cut out of funding markets (although note that, in the nature of such scenarios, the debt ratios mechanically explode beyond that 40 year horizon). And that is another reason why I’m sceptical of the benefits of reports like this: The Treasury really can’t offer any useful insights on the appropriate level of public debt, even if they can offer useful technical advice on the implications of various specific measures that might raise or lower the debt. The real debates to be had are political – both about the debt and the numerous progammes and even (to some extent) around the tax choices.

On NZS here were my thoughts from a post a couple of years ago (emphasis added)

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 Treasury can’t help with very much of that. It is what we have politicians, think tanks, and citizens for.

I don’t think enough weight is given to the role that rules of thumb play in disciplining choices. If, in modern floating exchange rate open-capital account economy, many governments can take on almost any amount of debt as they want, and even the interest rate consequences of higher public debt are really quite small, what constrains government choices? No doubt there are a few zealots who think no constraints are necessary, but most people – left, right, or centre – don’t operate that way.

I favour running fiscal policy to two rules of thumb (not legal restrictions, but political covenants/commitments). First, aim to keep the (cyclically-adjusted) operating balance near zero, and second, aim to keep net public debt (all inclusive measures) near zero.

Note that (a) neither rule of thumb would be binding year by year (the state needs to cope with pandemics, earthquakes, or the like), they would be constant aiming points, the standard reference points towards which policy is oriented over several years, and (b) neither rule of thumb says anything about the appropriate size of government (if we conclude we want governments to do more (less) longer-term than adjust tax rates to pay for that. Adjusting tax rates – especially upwards – is a much higher hurdle (and appropriately so) than the Cabinet (commanding a majority in Parliament) simply deciding one morning to substantially alter spending.

There is probably less dispute about the operating balance rule of thumb than about the debt one. Smart people will mount arguments about (a) infrastructure, or (b) the potential capacity of the Crown to capture various high returns. A typical householder or company will, after all, have some debt. But (a) the disciplines on individuals and firms are much stronger, and more internalised, than they are for governments, and (b) much of government activity acts to reduce private savings. I’m not going to pretend there is any great difference between the narrow economics of a 20% debt target vs a -20% one, but zero has a resonance that no other number is ever likely to have. (And if you think this benchmark is demanding, on my preferred analytical measure – the OECD series on net general government financial liabilities – New Zealand has been between 10 per cent and -5 per cent of GDP continuously since about 2004.)

If you want the state to do more, make the case, have the debate for higher taxes – which takes the resources from specific identifiable types of people (tax incidence arguments aside), rather than by monetary policy squeezing out other private sector activity to make way for the government (in a fully-employed economy they are the only two options, there are no free lunches).

This has gotten rather rambly and I’m going to stop here, except to point you to this interesting table at the back of the Treasury report.

LTFS 2021 2

I noted:

  • the sharp drop in the long-term assumed birth rate (largely reflecting recent developments presumably)
  • the reduction in the assumed improvement in life expectancy
  • the significant reduction in assumed long-term productivity growth, and –  unlike the others, substantially a policy matter, 
  • the substantial increase in the assumed long-term annual rate of net inward migration

Inconsistent with the scale of the challenge

A few weeks ago I received an invitation from the OECD to this (Zoom) event

Going for Growth is one of the OECD’s flagship economics publications in which, among other things, they identify for each member country what their indicators and models suggest should be structural reform priorities. As the title suggests, the focus is – or at least used to be – productivity, labour market utilisation and the like. The latest New Zealand note, released in May, is here. There is often a fuller treatment in the OECD’s Economic Survey for each country, which they are working on now, having done the rounds (by Zoom) of New Zealand officials and other people (me included) a couple of months back.

Yesterday’s event had potential. The Director of the OECD’s Economics Department spoke, as did one Productivity Commissioner for each of New Zealand and Australia, and then three non-government economists (two from Australia, one from New Zealand), followed by questions from the audience. I wasn’t able to stay to the end, but heard all but one of the presentations (and the one I missed was by an Australian bank economist, presumably focused on Australia). They said that a recording of the event will be posted on the OECD website but as of this morning it didn’t yet appear to be there.

First up was Luiz de Mello from the OECD. With the New Zealand note having opened highlighting how far behind productivity lags in New Zealand one might have hoped for far-reaching policy suggestions. Instead, we got a boringly familiar list, most of which make sense but – realistically – none (individually or collectively) offer the prospect of dramatic macroeconomic change. De Mello was speaking about both New Zealand and Australia, and given how far behind Australia New Zealand average productivity lags that probably further limited the value. Anyway, his list was as follows:

  • he highlighted a component of the OECD’s Product Market Regulation (PMR) indices, suggesting that for both New Zealand and Australia licences and permits (presumably cost or timeliness) were much more of an obstacle than in the top 5 OECD countries (Australia worse than New Zealand),
  • he highlighted the bad scores both countries get on the OECD FDI restrictiveness index (New Zealand worse than Australia)
  • he highlighted the variance in PISA scores, which is higher in New Zealand and Australia than in most small advanced countries and the UK (having, somewhat to my surprise given our slide down the PISA rankings, noted in the report itself that New Zealand “educational achievement is high on average”.
  • he highlighted how high housing expenditures are relative to the OECD for the bottom quintile, and
  • he highlighted the OECD’s view that too much of greenhouse gas emissions in both Australia and New Zealand were “underpriced”.

Beyond that, they seemed keen on a large social safety net –  addressing “child poverty” directly, and smoothing the income of the unemployed.

Most commentators in New Zealand probably think the government has done little useful structural reform –  with a growth/productivity focus –  but the OECD begs to differ, talking in their final paragraph of the “significant actions” taken in recent years in key priority areas.  Weird housing tax measures, for example, seem to win favour from an organisation that used to favour neutrality in the tax system.

So the session wasn’t off to a great start at this point.  Whatever your view on pricing emissions, increasing those prices is not going to boost incomes and productivity, and the other four items – while each no doubt pointing towards useful possible reforms –  are simply not likely to be game-changers.

The next speaker was one of the New Zealand Productivity Commission members, Gail Pacheco.  She too started with a bow to history, highlighting our decades of languishing productivity performance.  She chose to pick up some points from a couple of the Commission’s recent reports.  From the Future of Work she noted, reasonably enough, that New Zealand probably did not have enough technology and that a successful New Zealand economy would see more technology adaptation and diffusion, but she offered no thoughts on what changes in the economic policy environment might create conditions in which firms would find such investment worthwhile.  She seemed more interested in the Commission’s social insurance idea –  now being picked up by the government –  which would pay more to people unemployed at least in their first few months of unemployment.     There might be a case for such a policy – I’m pretty ambivalent –  but in a country where it is not that hard to close business and lay off staff, it has never been obvious (and Pacheco made no effort to elaborate yesterday) how this had anything to contribute to creating a climate supporting higher business investment and stronger productivity growth.

She then moved on to the recent Frontier Firms report and briefly ran through a list of things she thought would help, including

  • significant (government?) investment in a handful of chosen focus areas/sectors,
  • coordinated effort across government
  • everyone working together across the wider community,
  • transparent and adaptive implementation,

all of which, she claimed, would lead to (the current government’s mantra) a “more sustainable, inclusive and productive” economy.

Now, in fairness, each speaker did not have a great deal of time, but there was nothing in Pacheco’s speech that suggested that she had got anywhere near the heart of the issue, had any real sense of the market and private sector, or saw the answers as anything more than well-intentioned (we hope) ministers and Wellington officials trying more (seemingly) smart interventions, preferably without pesky disagreement or robust accountability (she talked of long-term predictable policies).

Pacheco was followed by one of the Australian Productivity Commissioners, Jonathan Coppel, who seemed to have a rather more robust grasp of the economy.    Interestingly –  to me anyway, it wasn’t his point –  he opened with a chart using new historical estimates suggesting that New Zealand’s decline (relative to both Australia and the US) can be dated earlier than Pacheco suggested or than the previous Maddison estimates suggested.  His point was that Australia has made no real progress in closing their (smaller) productivity gaps to the US –  US 30 per cent ahead of Austraia – repeating a line often heard out of Australian recently that the 2010s were the worst decade for Australia –  growth of GNI per capita –  for six decades.  He seemed keen to stress the importance of building on the reforms of the 80s and 90s, rather than discarding them, but it wasn’t that obvious how his suggestions – reduced reliance on income taxes, good regulatory practice, and a focus in post-school education/training on competition and lifelong learning –  were likely to be equal to the task.   He did stress the idea that economists needed to do more communicating with, and persuading the public, re the case for change, not leaving everything to the politicians. 

The next speaker was an Australian private sector economist, Melinda Cilento who –  she spoke very fast –  had a long list of things she wanted in Australia, almost all of which seemed peripheral re longer-term productivity, and several of which were simply out and out redistribution (for which there may or may not be a good case in Australia).

The final speaker I heard was Paul Conway, formerly of the Productivity Commission and now chief economist of the BNZ.  HIs was perhaps the most promising of all the presentations, even if he seemed implausibly optimistic when he talked of the “once in a lifetime opportunity” to fix the New Zealand economy, end its “muddling along” performance, and (the government mantra again) deliver a more “sustainable, productive and inclusive economy”.  He didn’t point to a single sign that either the government or their Opposition were interested in anything serious along those lines.

But he did highlight the need to think carefully about policies that “fit us here” including taking explicit account of our remoteness. He called for a much deeper understanding of the problem, for a priority on good economic research, for the development of credible narratives that explain our underperformance and ground sold recommendations for policy changes. Much of this reflected Paul’s efforts at the Commission, including the narrative he drove (and wrote) –  which I wrote about here.   In some of his work, Paul has expressed sympathy for aspects of my story around immigration policy, and noted that he welcome the current Productivity Commission inquiry.

Some of his specifics I’m less convinced of, and he noted that his own views have a lot of overlap with the OECD’s Going for Growth proposals (see above for how limited they are) –  while noting that he had been involved in the very first Going for Growth, back in 2005 when he worked at the OECD, and the ideas mentioned for New Zealand then were much the same as those now.

Conway ended with a call for specifics, for work with policy people and lawyers, and for a lot more emphasis on communications and doing the “hard sell” to our “lawmakers”, claiming that as he had got older he was increasingly convinced that the task was mainly marketing good ideas –  “we know what needs to be done” – and building consensus, rather than devising new ideas.

And at that point I had to leave.  Perhaps the follow-up questions generated some startling insights, but probably not (and I have no idea how many New Zealand focused people were even in attendance).  My biggest criticism is for the OECD –  which, after all, put the event on and their ideas on the table –  who seem simply inadequate for the task pf offering serious, analytically and historically grounded, advice to New Zealand authorities (or others here who might want to champion actually doing something about decades of failure) on making a dramatic difference to economywide productivity outcomes here.  It must be more than a decade now since I attended a workship in Paris where OECD staff presented modelling suggesting that on their standard prescriptions New Zealand should be much much richer and more productive, which suggested that there was something quite seriously wrong with their model, at least as applied to (really remote) New Zealand (I’ve long held the view that –  unsurprisingly – the OECD has model and mentality that probably primarily adds value in small European countries (a lot of those in the OECD).   One might argue that it doesn’t matter, since no politician here is serious about change (at least for the better, the current government is pursuing paths likely to worsen things) but that isn’t really the point of the exercise.   As various speakers noted yesterday socialising ideas, persuading people, showing what might be possible are all a significant part of a prelude to action (just possibly one day).   I disagree with Paul Conway that there is consensus about what needs to be done: there clearly isn’t, and may never be, but we might expect an entity with the resources and expertise of the OECD to be offering a lot more insight, a lot more recommendations commensurate with the scale of the failure, than we are actually getting.

As for the New Zealand Productivity Commission, they seem to be on a downhill path, more interested in cutting pies differently than growing them, too confident in politicians and officials, and more inclined to wishful thinking than serious analysis indicating what might really lift our productivity levels back towards the top tiers of the OECD.    I guess there is cause and effect at work, but it is no wonder politicians aren’t serious about change when the advice they get from high-powered official and international agencies is so thin.  It is a lot easier to just cut the pie differently and dream up more announceables, but reversing the relative productivity decline is really what matters for our future material wellbeing –  those at the top and those at the bottom –  ours, our children, our grandchildren.  If we don’t fix it, exit will remain an increasingly attractive option for many.

“Immigration Policy: Economics and Evidence”

That was the title of the presentation at yesterday’s lunchtime seminar hosted by Motu, the economics consultancy/research group. Motu has started up this series of public policy seminars – a laudable initiative, even if the costs mostly seem to be being met a group of sponsoring government agencies. The first such session was a month ago on minimum wages – I never got round to writing about it, but the summary is probably “not as useful or as damaging as is often claimed”. Perhaps it is going to be a theme, since a one line summary of yesterday’s immigration session could be quite similar.

A session on immigration policy is obviously timely, given that the government says it is cooking up changes to various aspects of policy (for which, despite a speech from the minister, there is still no supporting analysis or any details), and in view of the inquiry the government has directed the Productivity Commission to undertake. (On that note, the Productivity Commission recently released an Issues Paper, outlining some of the issues and posing some questions they particularly want submissions on.)

So I went along to the seminar yesterday expecting to be challenged and stimulated by the speaker, David Card from Berkeley (by Zoom). Card has written a lot over the years on immigration, and some of his studies are widely cited. My impression was that he was generally positive about immigration, but then he was mainly writing with the US in mind, and based in greater San Francisco. But clearly a very able guy.

In fact, the seminar was a bit disappointing. I suspect most of that was the fault of the organisers rather than of Card. They’d scheduled the session for 90 minutes, allowing time for some discussion from local panellists and some audience questions, but Card only spoke for at most 30 minutes and was evidently operating to a time slot he’d been given. And although he had made some effort to dig out some New Zealand numbers, none of those numbers would have been news to the New Zealand audience, and he (unsurprisingly) didn’t have much in-depth knowledge of New Zealand or its challenges. But that meant that what he had time to say more generally won’t (I suspect) have added much to anyone’s understanding, whatever one’s view on New Zealand immigration policy. That was a shame.

There were familiar snippets. The stock of foreign born people in New Zealand is high, among OECD countries. There is a lot of variability in net immigration to/from New Zealand (although, oddly, he never touched on the distinction between New Zealanders (not the subject of immigration policy) and others (who are). There were various high-level outcome numbers (employment, incomes) that often don’t look too bad – at least for non-Pacific migrants – but – not stratified by age – often don’t reveal much either.

There was the useful reminder that while there might be a ready (“potentially infinite”) supply of people from poor countries who would move to rich countries if they could, the potential supply of people from rich countries is much more limited. He noted that in the US context – which is quite different from New Zealand – policy settings tend to mean that immigrants are either very lowly skilled (illegals and family reunification) or very highly skilled (“doctors and janitors” – a large proportion of US migrants are apparently in the healthcare sector).

He touched on the perennial question of whether growth in the capital stock keeps up with migrant inflows, and while suggesting that it generally does – especially in the US – he noted that these things needed to be looked at on a case-by-case basis. There is a series of studies in the literature on large shocks to migration – eg French returnees from Algeria, Portugese from Mozambique and Angola, and the influx of Soviet Jews to Israel in the early 1990s. Card talked briefly about the latter case, presenting a chart showing the big surge in investment in Israel in the wake of the influx of people. That is what one would expect – and hope for – but as one of the discussants pointed out, actually it hadn’t tended to happen here (business investment as a share of GDP has been low by OECD standards for decades).

More generally, Israel’s productivity performance has been poor, especially in the 1990s.

israel productivity

But I’m not going to disagree with Card: careful case-by-case analysis really does matter.

I hadn’t known that Card was Canadian, and he did offer some interesting comments on the Canadian experience – they now target about as many non-citizen migrants per capita as we do. As he noted, in the US there is often (correct) talk of the number of Nobel prize winner or entrepreneurs who had been migrants, but experiences different considerably by country, and he noted that Canada had had nothing of that sort of experience, suggesting that Canada’s shift to a skills-based migration approach had, on that sort of metric, been a “failure”. Canada has never been an OECD productivity star – not even 100 years ago when New Zealand and Australia matched the US as richest countries in the world – and the last 30 years have seen their gap to the US widen, despite an immigration policy (a) very similar to New Zealand’s and (b) widely admired.

canada us

And that with all the advantages of proximity (Toronto is closer to New York than Wellington is to Auckland).

(Incidentally, one of Card’s points was about the benefit to migrants themselves, and the question of what weight should be placed on that benefit in national policymaking. Both are fair points/questions. But he noted that his own English ancestors had been dirt-poor when they migrated to Canada in the early 19th century, as an illustration of the gains. I’m sure many of us have similar stories – I like to talk of one particular set of my ancestors who were poor Yorkshire farm labourers when they left in 1860 – but it does rather overlook two things: first, most ancestors of present day English people were also very poor 150-200 years ago, and – at least on the OECD numbers – average productivity in New Zealand, Canada, and even Australia – is now below that in the UK, and that is before getting onto the better of the Latin American countries (Chile, Uruguay and Argentina) in comparison to Spain and Italy.)

He touched on a couple of other aspects that some times pop up in debates around immigration. On fiscal effects, his read of the (limited) literature tended to be that “immigrants contribute a little more than they take out”, but even that result depends on (a) the types of immigrants, and (b) how one allows for the implications of migrants having children, and how well those children do. The fiscal effects of immigration are never an issue I’ve focused on (I don’t think it is a big issue, one way or the other, with the type of migration we’ve mainly had) but did offer some thoughts here on some earlier (too positive) New Zealand estimates (which were done by the firm run by the now chair of the Productivity Commission)

And then there was housing. For me, he got off to a bad start by suggestion that in Wellington “like San Francisco” there was really no more land for building houses – he seemed quite unaware of just how much low value land the Wellington region (and city) has. Card really wanted to play down this issue, and presented some back of the envelope guesstimates suggesting that if our cities allowed development as readily as, say, Houston does, it really wouldn’t make much difference at all to house price inflation in the presence of population growth. It was clear he really didn’t like Houston – even as individuals self-select towards affordable housing in Texas. Believe that if you want, but I suspect it is a guesstimate from a model that takes into account house-building but not land restrictions. (And to repeat, in a first best world the housing market should not be a consideration one way or the other in setting immigration policy, since fresh land would readily and continuously be brought into development at a price not much different to the value of that land in alternative uses.)

Oh, and he observed that across the variety of types of models, the effects of immigration on the labour market (positive or negative) tended to be pretty small.

And that was the end of the presentation.

There were three panellists: Dave Maré from Motu itself who has done various micro studies over the years on immigration in New Zealand, Julie Fry who has written quite a bit in the last 7 or 8 years and was recently co-author of a contentious piece for the Productivity Commission, and Nik Green the director of the Productivity Commission’s immigration inquiry. There were a few interesting snippets in their remarks:

  • Maré noted that for all the research that had been done it was hard to find strong evidence of much good or bad stuff resulting from New Zealand’s immigration. He noted that ideally you really want people who are different from natives – to complement us – but that a qualifications-based approach wasn’t necessarily the way to achieve that. And, on that note, he seemed very sceptical of the “literal and engineering approach” taken to granting visas, with the heavy focus on immediate short-term gaps.
  • Fry noted that she had first worked on immigration at Treasury 30 years ago when the new immigration policy looked like a one-way bet, really only offering upside. Her conclusion was that reality was a lot less clear, noting that although we had attracted “lots of nice people” there had been no dramatic economic gains. But she was at pains to stay on the liberal side of the debate, noting that naysayers needed to be confronted, and wasn’t it a good thing that Covid had shown we could have crazy house price inflation without immigration.
  • Green didn’t say much, but did note questions around the increasing reliance on temporary migrants, as well as explicitly referencing my points around the macroeconomic imbalances New Zealand immigration may have contributed to over many years.

Card’s response was brief, and centred on a chart of GDP per employee for the Anglo countries over the last 10 years or so, indexed to a common starting point. His point seemed to be that immigration hadn’t made much obvious difference to any country’s productivity story – which might possibly be so, but it seemed an odd basis on which to rest such a claim (being poor relative to the other Anglos, we’d have hoped to be catching up, growing faster).

And then he presented a chart of population densities by OECD country, in which – of course – the three OECD countries most focused on targeting high immigration have among the lowest population densities. I’m pretty sure there are good reasons why people don’t live in most of Canada or Australia…….and there seemed to be no reference to economic geography in any of this anecdote.

Then there were questions from the floor.

Eric Crampton tried to get a ringing endorsement of high migration by asking if we shouldn’t just believe overseas research, noting that water flows downhill everywhere. Card – having previously explicitly noted the need to look at experiences case by case – noted that such a question was “a little above my pay grade”. But then he went on to make the weird claim that New Zealand was an “extraordinarily open economy” – when our trade shares are very low for a small advanced country – and that in such an economy wages should simply be set globally (labour supply not making much difference). Nonetheless, actual New Zealand wages are low by OECD standards, commensurate with low rates of labour productivity here.

There was the useful note that – in New Zealand, and the Anglo countries, but often not in Europe – kids of migrants educated in the host country tend to do pretty well.

There was another question from the floor – from a fairly eminent figure – about regional effects, in which it appeared to be suggested that actually rising house prices in Auckland, even if driven by migration, might be a good thing as they allowed natives to sell up and move to nicer places elsewhere in the country (the questioner, raised in Auckland, deemed most places nicer). It seemed a really bizarre question, especially if – as the consensus tends to be – big cities are the cutting edge of innovation and income growth. Card avoided that specific question, but actually seemed quite cautious on the cities point, noting that although incomes in big cities tend to be higher it wasn’t clear how much of that was causal, and suggesting that the true effects might be quite modest (globally, I was a bit puzzled by that given the huge differences – especially in Europe – in GDP per capita in big cities vs the rest of the respective countries.)

That question prompted Julie Fry to throw in the observation – with which I totally agree – that the policy (adopted by the NZ government) of trying to steer migrants regionally does not work and should be stopped. (It also tends to lower the quality of the average accepted migrant, by selecting for willingness to go to the provinces rather than ability.)

The final question was about crime and migration. Here again, Card was cautious and noted that different places had different experiences (noting challenges especially in Sweden and Denmark). He noted that in the US per capita crime rates of migrants were lower than for natives – while noting, in effect, that per capita might not count for much if you are the victim of an individual – with (as in so many other variables) regression towards the mean in the second generation. Eric Crampton added the similar New Zealand experience, noting correctly that it isn’t that surprising since one needs a criminal record check etc to be a migrant to New Zealand.

It was an odd session. Perhaps some people in the audience got something out of it, but I’d be surprised if anyone got much. It was interesting to see the near-complete absence of much enthusiasm – whether from Card or the local panel – for large scale immigration as something economically transformative (recall that not many years ago MBIE was telling us – and ministers – immigration to New Zealand was a “critical economic enabler”). One was left wondering why then the New Zealand government should be running one of the very largest per capita immigration programmes in the world – perhaps the more so when the natives are leaving and governments refuse to fix the housing/land market – when the programme has long largely been economic in motivation.

But – as with the Commission’s Issues Paper – there was a lot missing from the discussion, including a lack of any engagement with the possibility that even though wages in New Zealand have done well relative to producttivity, large scale immigration, in our specific circumstances, may have contributed to the deeply underwhelming productivity and foreign trade performance.

(It was a seminar day. I went on from the Motu event to a presentation at Treasury of the BERL work done for the Reserve Bank on “the Maori economy”. Even the speaker noted that “the Maori economy” is not a “separate, distinct, and clearly identifiable segment” of the New Zealand economy, and so one was still left wondering why they’d spent the money. I won’t extend this post with a lengthy account of a fairly underwhelming session, but will leave you with the data that simply staggered me. According to the report, in 2018 35 per cent of the total income of Maori households came from welfare benefits and other state direct assistance, up from 21 per cent in 2013. For the rest of the population BERL reported that the share was 9 per cent in 2018, down from 13 per cent in 2013. I’d have been reluctant to believe it, but so it appeared to be.)

Public opinion on Covid policy

I noticed over the weekend that the highly-regarded Pew Research Center had released the results of public opinion surveys undertaken in a range of advanced countries on various questions around Covid and Covid policy, and that New Zealand was included among the countries surveyed. Some of the results were totally unsurprising, some interesting even if unsurprising, and for a couple of questions I wasn’t quite sure what to make of the questions or answers.

This was the first set of results reported

New Zealand (closely followed by Taiwan) was the country in which the largest share of respondents reckoned that over the full course of the coronavirus outbreak the level of restrictions on public activity were “about right”. Of the remainder of the New Zealand respondents, opinion was fairly evenly split between those who say they’d have favoured fewer restrictions and those who claimed they’d have favoured more. That split was pretty even in Australia too. But I found a few things interesting: first that for all that one’s eye is first taken to the US results – the 26 per cent favouring fewer restrictions – and one thinks of the political polarisation in the US, actually the percentage favouring fewer restrictions was very similar not just in much of continental Europe but in Singapore. I don’t know anything about Greece, but Greek respondents are the only ones where a net balance favoured fewer restrictions over the course of the outbreak.

New Zealand wasn’t in previous surveys, but Pew also reports results for 10 countries where respondents rate their own country’s handling of Covid. The public has become less satisfied, but only in Japan, Spain and (by a narrow margin) France do more people now rate the handling “bad” than “good”. For what it is worth, in the current survey New Zealand respondents give a higher “good” rating to the New Zealand government’s handling than those in other countries, except Singapore.

The next question was about national unity/division

Of course, other things have happened in the last 17 months, and the greater division reported in the US is unlikely to be mostly about Covid itself. More generally I found the range of responses across countries quite surprising, and the New Zealand specific ones surprised me too. It is easy to see that the results are loosely correlated with how bad the Covid experience has been, and perhaps there is nothing more to it than that. But had I been one of those surveyed I’d either have said “not much difference” (it is astonishing how small those numbers are almost everywhere – Japan and Taiwan are exceptions to some extent) or “more divided” (there have been lots of conflicting interests, governments have spent billions and billions of public money, restrictions (still in place) affect some not others, and so on).

As it happens, there is quite a correlation between those who think their country is more divided and those who think the economy is in a bad way (and that gap is quite wide in New Zealand too).

And what of underlying political ideology (not sure whether this is self-identified or derived from answers to other questions)?

In quite a few countries there is no statistically significant difference, but (with Greece and the US as outliers) the responses for New Zealand seem fairly consistent with those for a range of other countries (and not just an anti-government reaction because there is a mix of left and right wing governments in the countries shown).

This was the question that really puzzled me. I simply can’t work out what I’d have answered.

Our economy is doing relatively well at present, but I don’t see that as reflecting anything about the strengths of our “economic system” – more a reflection of the elimination strategy (which caused deep initial losses, and then a bounceback) and of huge and continuing macro policy support, and that is a discretionary policy intervention not a feature of our economic system. And, of course, as you know I’m deeply negative on our economic policy and performance more broadly. That said, it was somewhat interesting that Australians were a bit more optimistic on this question than New Zealanders – and that the Japanese were quite so bleak on their responses.

At least in New Zealand’s case, there is probably some hint of what is going on in these responses. Those who think there should have been fewer restrictions are a lot more likely to answer negatively on the economic recovery, suggesting that those people may be emphasising ongoing border restrictions.

And how do respondents in the various countries say their life has changed as a result of Covid?

New Zealand respondents are mostly likely to say “not too much/not at all” – although a third still answer the other way (presumably some mix of people who would have travelled, people in directly affected industries, those who had hoped to buy a house, and harried public servants in places like the Ministry of Health and DPMC). On days when New World refuses to pack my groceries I might be tempted towards answering that way too. Even in New Zealand and Australia, the young are most likely to say that there has been quite an effect on their lives.

In some countries – but not New Zealand – those who are more pessimistic on the economy are more likely to say their lives have changed.

This was the final chart in the summary report. The New Zealand responses had me spluttering with incomprehension and astonishment.

As it happens, the New Zealand results do not stand out in response to this question, but these answers – globally and for New Zealand – seem like an extreme example of recency biases. Because – with extreme interventions and restrictions – health care systems in advanced countries did not get totally overrun this time, the public is confident that responses to any future pandemic – potentially with quite different characteristics – would also be just fine.

In the New Zealand case, for example, we went into the pandemic with a small number of ICU beds (per capita). It isn’t obvious that much has changed on that front. I’d have had no hesitation in answering “no confidence” on this question, whether for New Zealand or any other advanced country I’ve read about.

Anyway, it was an interesting set of results and nice to have New Zealand included in a consistently-compiled survey. And – as was my goal – I got through the post without offering any hint of my views on what New Zealand governments should be (or have been) doing this year or this week.

Fiscal policy in the wake of Covid

When the Reserve Bank and Treasury advertised a full-day workshop with the title “Fiscal and Monetary Policy in the wake of COVID”, I immediately signed up to attend. It sounded like a good idea for an event. After all, lots of tools were deployed, some new, some old, some deployed less than usual, some much more. And we’ve had a Budget, and projections from both agencies suggesting that the economy is now getting pretty close to operating at full capacity (albeit a capacity a little diminished by Covid restrictions).

It was just a shame about the execution. Notably, even though monetary policy has been the principal tool for macroeconomic cyclical stabilisation for decades – and not just since 1989 – here and abroad, there was not a single paper looking at the role of monetary policy, past, present or future. The Governor didn’t attend – which is fine – but nothing of substance was heard from any senior Bank figure. Orr’s deputy for macro policy, Christian (“The Future is Maori”) Hawkesby contented himself with opening remarks that had just some bonhomie and his recitation of a Treasury prayer (which, to add to the strangeness, seemed to appreciate “skilled workers” but not the rest of the public), but not a word of substance. There were a couple of technical papers from Reserve Bank researchers in the afternoon session, but one was little more than an early-stage in a research agenda on the distributional aspects of monetary policy (the paper itself couldn’t shed much light when the only asset in the model was bonds), and the other – on dual mandates – didn’t seem to offer any fresh insight.

So the stage was largely left to The Treasury, and particularly a series of three papers (complemented by a presentation from a US academic) that seemed dead-set on making the case for a bigger and more expansive role for fiscal policy and government debt in the new post-Covid world. Bureaucrats making the case for a bigger and more powerful bureau.

First up – and clearly most important – was the Secretary to the Treasury. She spoke for 40 minutes, but then took no questions (and, in an amateur-hour effort, the text of her speech was then not available until more than a day later). The Secretary is still quite new to the country, to the job, and to national economic policy matters. Probably most non-government attendees (of whom there were many, in a well-attended event) had seen and heard little or nothing of her before. So it didn’t speak well of her that she wasn’t willing to engage, despite having made a barely-disguised (“I would stress that we are not making policy recommendations”) bid for quite an upending of the way macro management is done her, in ways that would just happen to favour her agency.

But what of the substance? It was a workmanlike effort (NB with a minor mistake in footnote 2) but hardly persuasive to anyone not already champing at the bit for fiscal policy to do well. For example, there was no serious discussion about the effectiveness of monetary policy. The Governor has previously told us he thinks monetary policy has been as effective as ever. The Secretary seems to disagree, but we can’t be sure – perhaps she just thinks fiscal policy is even better, but she doesn’t make that case either. Much in her case seems to rest on the effective lower bound on nominal interest rates but (a) as the next Treasury speaker acknowledged that is not some immoveable barrier, and (b) she offers no thoughts on the effectiveness or otherwise of things like the LSAP programme. Surely one starting point for thinking about the future might involve some careful diagnostic work reaching a thoughtful view on what roles the various elements of fiscal and monetary policy played in economic outcomes over the last 15 months. But neither she, nor anyone else on the day, attempted anything of that sort. Remarkably no one – from the Bank or Treasury – looked at the options and merits for removing – or greatly easing – the ELB so that at least ministers have effective choices in future severe downturns,

Quite a bit of Treasury’s thinking – or at least their marketing – seems to have been shaped by the success of the wage subsidy scheme. And it was a success – getting money out the door quickly, at a time when the government had just done the unprecedented and (a) shut the borders, and (b) simply compelled most people not to go to work, or do anything much else. It provided immediate income support, and probably had some beneficial effects beyond that (some smart person might attempt to model what difference it has made to outcomes not just last March/April but now). But it isn’t exactly a conventional event of the sort we can expect to see every cycle. And the primary consideration wasn’t really macroeconomic stabilisation at all – the whole point of the lockdowns was to aggressively (but temporarily) reduce activity, including economic activity – but income relief/support (as unemployment benefits have an incidental automatic stabiliser benefit, but aren’t primarily about macroeconomics). There are always going to be one-off events when the the government’s spending capabilities need to come into play – one can think of earthquakes (where fiscal measures and monetary policy will often tend to work in opposite directions, since earthquakes cause real disruptions and significant wealth losses, and but also generate a lot of fresh (reconstruction demand), plagues, wars, and so on. But it is seems like a category error to use such episodes as the basis for some sort of generalised play for more routine use of discretionary fiscal policy with cyclical stabilisation in view, when most recessions are quite different in character.

And even just thinking about the last 15 months or so, neither the Secretary nor her colleagues seemed to make any effort to unpick the effects of the wage subsidy scheme from the rest of the fiscal policy initiatives of the last year. One could easily imagine an alternative world in which the wage subsidy was used much as it was, but otherwise fiscal policy was kept much on the path it had been on at the start of last year, and at the same time the OCR was used more aggressively. How different would the outcomes for the economy have been, in aggregate and sectorally? The fiscal option involves the coercive use of state power, and politicians making discretionary choices playing favourites, while monetary policy adjusts relative prices and then let individuals make choices about how they (personally and individually) are placed to respond. And one thing that was striking about both the Secretary’s speech and the more technical discussion that followed from her colleague Oscar Parkyn is that in all their new enthusiasm for using fiscal policy more aggressively in downturns (and monetary policy less so) is that neither mentioned, even once, the exchange rate – typically a significant element in the adjustment mechanism in New Zealand recessions. New Zealand recessions often see sharp falls in international commodity prices (fortunately not this time) and the lower exchange rate acts as a buffer. But a much heavier routine reliance on fiscal policy will tend, all else equal, to hold up the exchange rate relatively more in downturns. It isn’t obvious – without a lot more analysis – that that would be a good thing.

The Secretary included this chart in her speech

It was apparently designed to show that fiscal policy in New Zealand has generally done sensible things. That might be generally true (although if so why change?), even setting aside the huge pressure loosening fiscal policy put on monetary conditions over 2005-2008, but it conveniently ignores where we are right now. This chart, which I’ve shown before, is from the recent Budget documents.

So with the output gap almost closed, the cyclically-adjusted primary balance (deficit) in 2021/22 year is expected to be almost as large as it was in 2019/20 (when the – sensible – big wage subsidy spending was concentrated. Extraordinarily, in a speech bidding for a more active role for fiscal policy in cyclical stabilisation she never mentioned this situation once – let alone engaged with why, from a macro policy perspective, such big deficits make sense now. As sceptic might suggest that this is the real world outcome when the Secretary’s textbook ideas get given some rope.

One could go on. The Treasury is clearly tantalised by the lower interest rates – although not now lower than pre-Covid – and the “appeal” of taking on more debt. But never once did we hear any serious examination of the typical real-world quality of the marginal additional public spending they had in mind (it wasn’t until the panel discussion late in the day that I heard a Treasury official – a temporary one, so perhaps not well-socialised – refer to the Auckland cycleway bridge). There was a paper reporting some model results suggesting, sensibly enough, that fiscal consolidation is most costly to GDP if done via taxes on capital income, but (symmetrically) there wasn’t a sense in the rest of the day that (say) Treasury was champing at the bit to lower company taxes. Rather they seem keen on public infrastructure – which often sounds good on paper, until we get to the concrete ideas. As it was, a discussant cast considerable doubt on one Treasury paper suggesting high payoffs to more government infrastructure spending.

We also never really heard any serious political economy discussion, or even a discussion of how we should think of the government balance sheet – is it a plaything for politicians or should it be best thought of as operating on behalf of citizens, each of whom have to make their own spending and borrowing choices. There wasn’t much about using coercion and compulsion rather than the indirect instruments of monetary policy. And, on the other hand, it was a little surprising that there wasn’t even a mention of MMT – so that in a floating exchange rate, the level of government debt isn’t really likely to be materially constrained by the market, which doesn’t mean that just any level of government debt is a socially good thing.

It was all a bit unsatisfactory really. Perhaps one could say it was just exploratory, and they are wanting to open the issues but (a) the speech was from the Secretary herself and (b) was making a case more than deeply and thoughtfully exploring the issues. We will have to see what more is in the papers they plan to release next week (a draft long-term fiscal statement and a draft insights briefing) but if the energy is with The Treasury at present, it isn’t really clear that they yet have the depth of analysis and engagement to support their enthusiasm.

And just finally, they arranged for an American professor, Eric Leeper, to speak, via Zoom, on monetary and fiscal issues. Leeper is pretty highly-regarded and has visited New Zealand previously. He is also very keen on a much greater use of fiscal policy and, it would appear, more debt (for various reasons including, he said. “the rise of the right” which didn’t seem quite relevant to New Zealand, let alone a good basis for official advice). Anyway, after the geeky bits of the presentation, he tried to make his case by reference to the Great Depression. He is clearly a big fan of Franklin Roosevelt, and was talking up the fiscal aspects of Roosevelt’s approach (while barely really mentioning the substantial monetary bits). But it was odd. Here he was talking to a New Zealand audience, championing the use of fiscal policy in the US Great Depression, but seemed quite oblivious to the fact that the US was one of the very last countries to get back to pre-Depression levels of output and unemployment. Here is the experience of the Anglo countries.

Those aren’t small differences. And as anyone who knows New Zealand economic history – or have read my past posts on it – New Zealand’s recovery from the Depression (back to pre-Depression levels by the time Labour took office) was barely at all about fiscal policy. The excellent quote from Keynes that our Minister of Finance of the time recorded in his diary, along the lines of: “if I were you I would no doubt seek to borrow, but if were your bankers I should be very reluctant to lend to you”.

When a half-baked loaf is finished cooking it can be a fine thing, but this loaf seems to need a lot more work before New Zealanders should be rushing to embrace a much more active role for fiscal policy or a lot more public debt. That includes a lot more work on what we reasonably can, and can’t, do with monetary policy.

UPDATE: A former RB colleague, now a lecturer at Sydney University, sent me a link to a paper he and a Reserve Bank researcher have written attempting to evaluate the impact of the New Zealand wage subsidy scheme. I haven’t yet read it, but it looks very interesting. Here is the end of their abstract

We then study the impact of a large-scale wage subsidy scheme implemented during the lockdown. The policy prevents job losses equivalent to 6.8% of steady state employment. Moreover, we find significant heterogeneity in its impact. The subsidy saves 17% of jobs for workers under the age of 30, but just 3% of jobs for those over 50. Nevertheless, our welfare analysis of fiscal alternatives shows that the young prefer increases in unemployment transfers as this enables greater consumption smoothing across employment states

Making sense of the national accounts

Doing so is more than usually challenging right now. We had the huge disruption of the draconian national lockdown last year, and some more limited sets of restrictions since then. Some of the economic aspects of that were impossible to measure accurately, although no doubt in many areas SNZ will continue to try valiantly to refine their estimates. Largely-closed borders continue and thanks to the ill-judged decision of politicians and bureaucrats to scrap departure cards a few years ago we are now flying quite blind around recent net migration estimates (SNZ use a model, but – like any model – their model struggles to cope with a dramatic regime shift). Some of the difficulties are amplified by New Zealand’s long-term underinvestment in good economic statistics – a choice of successive governments, sometimes aided and abetted by SNZ management.

New Zealand has two measures of quarterly GDP. The expenditure and production-based approaches are both trying to estimate the same thing (as will the forthcoming income measure) but data collection challenges mean that it isn’t for several years that the two series are more or less reconciled (and even then not always that well).

GDP long term

But if the two series are, eventually, more or less reconciled that isn’t much consolation now.

Here is the more recent period, this time per capita and indexed to 100 in 2016q3, the last date for which the current estimates of the two approaches are almost identical.

nz per capita

Over 4.5 years a gap of 3.7 per cent has opened up between the two series. And there is no good ex ante reason to prefer one estimate over the other.

In per capita terms – using the current SNZ official population estimate – that is the difference between 2.4 per cent and 6.2 per cent growth in real per capita GDP over the period shown. One of those numbers is not too bad, the other is pretty dire. For the Covid period – so since the last pre-Covid quarter in 2019q4 – it is the difference between a 0.9 per cent fall in real per capita GDP and a 0.7 per cent increase. I usually simply average the two approaches, so a best stab in the dark is probably that we are back to around pre-Covid levels, but really who knows.

And it is complicated by the fact that the population estimates themselves are a moveable feast. SNZ’s official estimate – using their 12/16 model-based rule. They estimate that the resident population has increased by 6500 over the year to March on account of immigration. But one of the few hard numbers we know is the number of people coming and going from New Zealand (in total, for whatever reason) and those numbers show a net outflow of 56446 people between 1 April 2020 and 31 March 2021. It is at least possible that as the 12/16 estimate converges to hard numbers (SNZ know with confidence what happened 16 months later) that we end up with a rather low contribution from net migration in the last 12 months or so?

A revision along those lines might sound like a good thing – if the resident population was smaller then given GDP average per capita real GDP was higher. But I doubt it is as simple as that because many of the components of the GDP estimates themselves will have been estimated, from sample surveys, that have behind them a view on the population. Revise down the population and it is likely that the subsequently-reported GDP estimates will also be a bit lower.

One of my favourite charts over the years has been on real GDP per hour worked. My normal approach is to use the two GDP estimate and the two estimates of hours (QES and HLFS), index all the series and simply use the average that results. Here is the chart for the last 10 years

real GDP phw June 21

The decade was mostly pretty bad, but who knows what has gone on in the last 12 months. Some of the apparent noise reflects differences in the two hours series: the HLFS estimates hours worked and the QES hours paid. Usually they are much the same thing, but not in the midst of a lockdown with a wage subsidy. But that was mostly a problem for the June and September quarters last year.

No one is going seriously argue that Covid has been good for productivity, so even if the latest estimate looks quite appealing it is unlikely to endure. Now, of course, you’ll recall the divergence in the two GDP measures, so I could show you are a chart with really big differences in the productivity estimates depending which GDP measure one uses.

Perhaps you think that the lift in productivity shown in the chart is mostly a compositional effect. When hours worked dropped it is often the lowest paid, lowest productivity hours that drop off first. But even there our two surveys report quite different things: QES hours in March were (seasonally adjusted) 1.8 per cent lower than they had been in December 2019, but HLFS hours were 1.4 per cent higher. There is, inevitably, noise in these series, but it does leave analysts somewhat at sea at present. And not even sure where the errors, and future revisions, might be. I’m pretty confident that labour productivity has not really increased by 2 per cent in the last 15-18 months, but what that means for the component estimates I don’t know.

I’ve sometimes shown comparison with Australia, especially for real GDP per hour worked.

Aus GDP 2

There is much, much less volatility than in the New Zealand estimates. Of course, it also seems unlikely that underlying productivity per (stratified) worker has stepped up through Covid, but…..hours worked in Australia are estimated to have been 3.4 per cent lower in the March quarter than in the December 2019 quarter, so there is a a somewhat plausible composition story there. In fact this is what happened in Australia in the 2008/09 recession.

aus 08

And as the labour market recovered, productivity fell back to trend.

Some of the measurement challenges are unavoidable, but it does look as if the (highly regarded) ABS is making a better fist of things than SNZ.

We can be confident that the economy is in much better heart than it was last June, but – per official statistics anyway – that really is about all. Fortunately, we have business opinion surveys because perhaps more than usually we really rest on them for anything much of a sense of where the economy is right now. And for some things that matter longer-term, notably productivity, we really are just flying blind at present, backed perhaps by basic theory that whatever good shutting borders has done for public health (a real gain) it is almost certainly at least somewhat bad for productivity.

Immigration policy for New Zealand post-Covid

It must be quite a challenge for Rotary clubs to maintain a regular roster of speakers. Four years ago someone at the Wellington North Rotary Club had heard about my ideas on immigration policy and New Zealand’s lamentable economic performance and they invited me along to tell my story. The text I used then is here. A little while ago they invited me back and when we discussed what I might talk about I agreed to pick up where I’d left off in 2017 – at the very peak of the then immigration surge – and reflect on a better immigration policy for New Zealand as and when the borders eventually reopen (in the year to April, SNZ estimates a net outflow of about 9500 non-New Zealanders who’d been here for some substantial period of time.

So I spoke to them yesterday. One can’t cover everything – or even anything much in the depth the subject warrants – in 20-25 minutes, but for those interested my text is here.

Sadly, of course, the stylised facts of New Zealand’s economic underperformance haven’t changed for the better over the intervening four years. Productivity levels remain low and growth weak. Business investment has been pretty sluggish around low rates, and if anything the export/imports shares of GDP have probably fallen a bit more (even before Covid at least temporarily cut both further). Our real exchange rate stayed high, and if long-term real interest rates have fallen they were/are still well above those in almost all other advanced countries.

What has changed, for now anyway, is the substantially closed borders, which mean that it is very hard for most non-New Zealanders (Australians aside) to get in. No one envisages, or wants, current arrangements – or anything like them – to be permanent, but it does mean the conversation and debate starts from a rather different place than it might have a few years ago.

Perhaps what hasn’t changed so much is that much of the media debate – and apparently the political interest – seems to be on short-term visa holders. And almost every day now we hear stories from employers complaining about how hard it is to get staff, holding the border restrictions responsible.

It isn’t surprising that there has been some dislocation, disruption, and difficulty for some firms. After all, the borders were basically closed overnight, for public health reasons, and that disrupted a lot. That included typical sources of labour firms had become used to tapping, but it also included changes in the patterns of consumption demand (and the derived demand for labour). Add to the story, of course, the surprising pace of the overall economic rebound – spurred by huge fiscal deficits (not just last year when they were needed, but now when they aren’t) – which has led some economists to conclude that the economy and labour market are now operating at very close to full capacity. At full capacity you would hope it wasn’t always easy, or cheap, to find staff (on the other hand, it might be relatively easier for people to find jobs).

I don’t intend to make this a long post, but before running some quotes from my speech, I thought I’d include a couple of charts with some data that surprised me a bit when I dug it out. The first is the number people here on two of our main short-term work visa programmes – Essential Skills visas (a label that really should be in quote marks, or prefaced by “the so-called”) and Post Study Work visas.

visa 1

I knew the government had offered visa extensions in many cases, but if you’d asked I’d have guessed that total numbers would have dropped anyway as a reasonable number of people went back home. But, in fact, the numbers here – in these two most skills-focused categories – are almost the same as they were at the start of last year. And numbers on both visas are a lot higher than they were even five or six years ago.

Now, there have been material drops in the numbers here in a couple of other categories (both series quite seasonal).

visa 2

And those patterns are pretty much what I’d have expected. People have gone home as they’ve finished courses of study, or working holidays, and few/no new people have arrived. But on the working holiday front remember the counterpart – not too many New Zealand young people will have been heading off on their OEs over the last 15 months or so. The types of jobs (here) the two groups might have been looking for may have been a bit different – so some real mismatch issues in some places/roles – but it isn’t as if there are fewer potential workers overall.

As I noted in my speech – bearing in mind the rapid growth in short-term visa numbers in the run-up to Covid.

No doubt some firms have specific difficulties from the sudden dislocation. But there is something wrong with the story when it is seriously claimed – and this is the implication of what so many of these businesses are saying – that a low productivity economy, achieving underwhelming productivity growth, needs more and more immigrant workers each year just to function effectively.   Such a story might – just might – have a modicum of plausibility if this was a dynamic fast-growing economy where more and more firms were finding more and more opportunities to successfully compete on a world-stage.  But that is nothing like New Zealand’s story.  

And, as I’ve noted previously, most OECD countries are not only more productive than New Zealand they are also less reliant on migrant labour. Many business concerns reflect – understandably so – the (sometimes quite legitimate) perspective of a company, but economic policy management is about a country, and the two are quite different.

All that said, one of the points of my speech was to argue that the longer-term immigration settings, around residency approvals, matters far more to economic performance than the rules around limited period work visas. At 45000 residency grants a year, in 22 years the population will be heading for a million more than otherwise (by contrast, at peak there are about 100000 people here on Essential Skills and Post-Study work visas). If you believe in the enabling economic power of immigration, or think that in New Zealand’s case large-scale non-citizen immigration has been quite damaging economically, that is really where one should focus. Open borders people do – in principle, they’d allow (almost) anyone in, to stay. And so do I.

Here is the text from the last couple of pages of my speech on the way ahead

A couple of weeks ago the Minister of Immigration gave a speech foreshadowing changes to policy settings around immigration, apparently with a focus on the limited period visas.  There were no specifics, and there was no supporting analysis.   There are probably some sensible changes that could be made, but like their predecessors, this government seems all too fond of having officials and ministers decide who should be able to use migrant labour, where and when.  I’d rather go in the opposite direction and get officials out of things as much as possible. 

I would favour two main changes.  First, I would reverse the decision a few years ago to allow students to work while here. If you are here to study, study, don’t compete at the low end of the labour market.   And I would get governments out of approved lists, or even salary thresholds, and replace it all with a model in which any employer could hire a person on a temporary work visa but that visa would be

  • Subject to a fee, payable to the government (perhaps $20000 per annum or 20 per cent of the employee’s annual income, whichever is greater). That sets a clear and predictable test for whether non-New Zealand recruits are really required, and a genuine incentive on employers to search for and develop New Zealanders (especially for less well-paid positions).
  • Subject to a term limit (no individual could be here on one of these visas for more than three years, without at least a one year return home)

But despite the headlines these short-term work visas are still the second order issue.  Much more important is whether the government is willing to make any significant changes to the residency programme, or whether business as usual will shortly be resumed.

Neither the government nor the Opposition seen willing to engage on that issue.  And if the government deserves a little credit for very belatedly asking the Productivity Commission to report on the New Zealand immigration model, strangely they seem to be proposing to make policy before the Commission reports.

What should they be doing?

First, we need to explicitly recognise that the residency programme (the driver of medium-term policy-led population growth) itself comprises several different types of people. 

It includes people we are never going to restrict.  If your daughter does an OE in London and finds a British man to marry, he’ll be entitled to move here permanently.  No one would want to restrict those numbers, and there is no quantitative limit. 

It includes those we take in as refugees.  There is no economic motive for the refugee quota, it is all about humanitarianism.  

But the bulk of the programme is purely discretionary.  And the numbers involved have borne no relationship to the rather limited (highly productive) economic opportunities here.

There are all sorts of myths about migrants to New Zealand.  By international standards the skill levels mostly aren’t too bad – being a distant island means you really only get in legally, and it is an economics (rather than family) driven programme.  But the skill levels aren’t spectacular.  And why would they be?  Much as New Zealand is a pleasant enough, and peaceful, place to live it is (a) remote, and (b) now not very prosperous, and (c) small.   The smartest and most ambitious and most driven of the potential migrants are much more likely to go to other migration-welcoming countries if they can get in.  A country whose own people leave en masse isn’t a great advert for abundant economic opportunities.

And we aren’t even ruthless about demanding highly-skilled people.  We run specific programmes for people from Pacific countries who don’t have the skills/education to qualify as skilled migrants.  And we give extra points to people who are willing to live outside the main centres, even though the main centres are where most of the economic opportunities and higher paying jobs are.  We structure the system to subsidise NZ universities, by favouring applicants with NZ degrees and work experience even though NZ universities are nowhere near best in the world, and NZ’s economy is a low productivity beast.   And so on.  There is talk from time to time about attracting the best tech people, but why would they come here – small, remote, not very wealthy, no great universities, no relevant centres of expertise or funding, and so on? 

And so we bring in lots of pretty-average people, adding nothing systematically to NZers’ prospects   There is nothing wrong with being “pretty average” – that’s most people – but it isn’t going to do anything to transform our productivity performance.  Hasn’t so far, and no reason to suppose it will any decade soon.

New Zealand’s economy could do such much better.  But all the signs are that it probably can’t match the best with a population that is growing rapidly – much more rapidly than the productivity frontier countries.  Distance hasn’t been defeated and if anything may have become more important.  There is lots of wishful thinking around the New Zealand debate, but any serious confrontation with the stylised facts of New Zealand’s experience, augmented with the experience of other former settler societies, is that large-scale immigration just hasn’t helped for a long time.  You might think the US is an exception, but it isn’t really.  It was – like us – one of the handful of richest countries in the world 100 years ago, and despite having had much more rapid population growth than European countries (and no ravages of war or communism) the gaps have narrowed.     Denmark is probably the standout performer today.  

If political parties were serious about reversing the decades of relative productivity decline – and there is no sign of it – there is a variety of things mutually reinforcing things that should be done, which together would prompt much more business investment and a more outward-oriented economy: 

  • We should take a much more open approach to foreign investment – I’d remove all controls in respect of investors from OECD countries.
  • We should be lowering the tax rate on business investment – our company tax rate (which matters a lot for foreign investors) is in the upper part of the OECD range, and what you tax you get less of.
  • We need to free up land use, within our cities and across the country.

One could list other things (GE issues for example).

But most importantly, we need to end the delusion – for that is what it is – that a very remote country, which lots of its own people leave, which has fallen steadily behind an increasing number of other countries, and where foreign trade is shrinking as a share of GDP, is a sensible place for government policy to promote large scale immigration.  It wouldn’t make sense for Taihape; it doesn’t make sense for New Zealand.    Immigration policy is one of the largest structural policy interventions in our economy.    And now – before we reopen the borders – is the time to act.

So let’s not go back to granting huge numbers of residency permits.  Cut out the Pacific quotas – no reason to favour people from those countries any more than those from (say) Britain and Ireland (that we once favoured), and cut back the total approvals to, say, 5000 to 10000 really highly-skilled people (if we can find them) with no preferences given to NZ qualifications and experience, simply looking for the best and most energetic.  Add in refugees and the spouses/partners of New Zealanders, and you’d be looking at an overall number of residency approvals each year of 10000 to 15000.  In per capita terms that would be a similar rate to the US. 

Successful countries make their economic success primarily with and for their own people.  We can again do it here. We have talented and fairly well-educated people, we have reasonably open markets, we have a history of innovation, but distance really works against us and we will mostly prosper by doing better and smarter with (and investing more heavily in) the natural resources we have – things that really are location-specific.  Lots of other bright ideas are, and will be, dreamed up by people here.  But if those ideas work well, they’ll typically be much more valuable abroad.   You may not like it – neither do I really – but it is what experience shows.  We’d be foolish to simply start up the same old model and expect better results in future.