Australia’s foreign trade

In the wake of the upset Australian election result on Saturday, I thought it might be a good day for a quick post on some Australia/New Zealand economic comparisons.

I often bang on about New Zealand’s atrociously poor longer-term economic performance, but if Australia’s longer-term performance is less bad by comparison, we are about the only country that makes them look less bad.

At present, for example, average real GDP per hour worked in Australia is about 15th in the OECD, with quite a gap to 14th.   To New Zealand readers that probably doesn’t sound too bad, said quickly, but in 1970 –  when the OECD series starts – Australia ranked 8th.   A hundred years or so ago, on the eve of World War One, Australia’s real GDP per capita –  the only measure for which there are long-run historical estimates –  was 1st equal among the countries that now make up the OECD (with New Zealand and the United States).

But my particular focus this morning is exports, as a share of GDP.   There is an old mercantilist sort of view –  which at times seems to be held by Donald Trump –  that somehow exports are a superior form of economic activity, and that whereas exports are in some sense good, imports are bad.  That isn’t my story at all.   Exports and imports are both good –  gains from trade and all that.  In many respects, at least at a national level, one doesn’t go too far wrong in saying that we export so that we can import.  Of course, firms export not countries, but over time and in the aggregate, our appetite for cars, jet aircraft, overseas holidays or Hollywood movies is only able to be met if we find other products and services we (firms based here, employing us etc) can successfully sell to the rest of the world.  And since, especially for small countries, there is a lot bigger market in the whole world (even just the whole advanced world) than at home, export success often tends to go hand in hand with wider economic success: it isn’t that the exports, per se, make you prosperous, but that you’ve been able to generate (or even dig up) products and services that other people will pay for: you’ve passed the (demanding) market test.   Empirically, countries that have sustainably caught up –  in GDP per capita or GDP per hour worked terms –  almost without exception have had strongly performing export sectors.

But what about New Zealand and Australia?

Here is the (nominal) share of exports in GDP for the two countries for the period since our quarterly data starts in 1987 (as the paeans to Bob Hawke last week remind us, at the time both countries were doing fairly far-reaching economic reforms).   This is simply the nominal value of exports over nominal GDP.

aus exports

That gap has closed, a lot, over the decades, perhaps especially over the last 15 years or so.

It is worth remembering two stylised facts:

  • remote countries tend to trade less internationally than do countries close to lots of other countries/markets (distance really does reduce economic opportunitites), and
  • small countries tend to trade internationally more (share of GDP) than large ones.

In economic terms, New Zealand and Australia are almost equally remote (arguably they a bit more so than we, since Australia is big relative to New Zealand).  So, all else equal, one wouldn’t really expect a country five times the (population) size of the other to be exporting a similar share of their GDP –  New Zealand should be well ahead.

There is another possible exports/GDP measure. This chart uses deflated (“real”) series for both exports and imports.  Statisticians tend to frown on it –  and I mostly don’t use it –  but it does strip out the direct effects of terms of trade fluctuations, which (for Australia in particular) can be large.

aus real exports

In New Zealand, there has been no increase in the volume of exports as a share of GDP this century.  In Australia, by contrast (and after a flat period) there has been a substantial increase this decade, primarily as the newly-exploited mineral resource projects have come on stream.   In both countries, the real volume of exports has increased – in New Zealand’s case by about 50 per cent since 2002 –  but in New Zealand trade with the rest of the world is a smaller share of GDP now, and in Australia it is larger.

Of course, even this story has its complexities.  Much of the mineral sector operating in Australia is foreign-owned, so that a chunk (but by no means all) of the benefit of the export surge is accruing to foreign shareholders rather than to Australians.  But without the surge in mineral exports –  a windfall to a considerable extent (although with a policy framework that allowed developments to proceed) –  it is hard not to look at Australia and conclude that on the present suite of economic policies –  much the same as prevail in New Zealand –  their relative productivity and income performance would have deteriorated even further over the years.

Perhaps the gaps between New Zealand and Australia would have narrowed a bit, but from the wrong direction.  Much better would be if both countries were doing something that credibly might move them back up the advanced country rankings.   If the re-elected Coalition is less likely to further damage Australia’s economic prospects than Labor, no party on either side of the Tasman really seems to have serious analysis or ideas –  or to particularly care – about reversing decades of relative decline.

 

Perhaps the politicians are content with this record

I’m on deadline trying to finish a chapter for a forthcoming book, but was checking some numbers and noticed that the OECD now has 2018 labour productivity estimates for most countries.

This is the company we keep these days (comparable levels of real GDP per capita, in PPP terms).

e europe.png

(For the two countries with asterisks the numbers are for 2017).

And here is total growth in labour productivity over the period 2012 to 2018 for each of those countries.

e europe 2

(On my reading of SNZ data, the OECD’s New Zealand numbers looks a little low: probably something between 0 and 1 per cent looks to be a better estimate).

It wasn’t that 2012 was particularly exceptional in New Zealand –  so that we were coming off an artificially high base –  just that since then productivity growth has vanished.

GDP phw may 19

I do hope our political leaders –  both main parties –  and their business and media cheerleaders are happy.

Citizens shouldn’t be.

Where in the world is inflation?

According to the IMF these are the countries that will have an inflation rate in excess of 20 per cent this year.

Turkey 20.3
Liberia 27.2
Yemen 30.0
South Sudan 40.1
Zimbabwe 42.1
Argentina 47.6
Islamic Republic of Iran 51.1
Sudan 72.9
Venezuela 1555146.0

I’m guessing there is some margin of error around that curiously specific estimate for Venezuela.

In most of these countries, inflation is forecast to be higher this year than it was last year.  Here is one stark example.

arg infl

It can be done –  although one might well wish to avoid the Argentine experience.

On the other hand, the IMF also forecasts that there will be 13 countries with 2019 inflation rates of 0.5 per cent or less.    (The median inflation rate across all countries this year is expected to be 2.4 per cent.)

In the advanced economies there isn’t much sign of any rebound in (core) inflation

core inflation 19

What about expectations?    Bond yields are falling again, and not all of it seems to be falling real rates.  Here is a chart I saw yesterday showing implied five year forward expectations for average inflation in the euro-area.

euro infl swaps

That is a long way below 2 per cent.

Things aren’t as bad in the US.  Here is the latest chart for 10 year inflation breakevens.

US breakevens may 19

And in both Australia and New Zealand the gap between indexed and conventional government bond yields is not much more than 1 per cent.  That is a long way from the 2.5 per cent and 2.0 per cent targets respectively.

This was a bit of context for the last IGM survey of economics academics that I saw the other day.

IGM Fed

I guess the question was asked in the specific context of the aborted nominations of Stephen Moore and Herman Cain, but it is posed more generally.

I’d probably have answered the same way, especially bearing in mind the way the question is phrased (note that “primarily”).  Apart from anything else, choosing anyone for anything primarily based on their political views is a recipe for trouble (even in Cabinet or the organisational side of a political party one usually wants competence as well).

And yet, and yet.  It is hardly as if the actual monetary policymakers in much of the advanced world have done such a great job in the last decade that things couldn’t have been improved on.  Arguably, the US Federal Reserve has done better than most central banks, but even then it was hardly a record to write home about (slow to recognise the recession in the midst of it, constantly champing at the bit to tighten afterwards, nothing done to prepare for the next serious recession etc).

When I was young the predominant narrative around central banks was that one needed to keep politics and politicians clear, because otherwise high inflation would be a recurring –  perhaps permanent –  problem.  I’ve long been fairly sceptical of that view, even as an explanation for history during the Great Inflation, but look at where we’ve been for the last decade, with inflation sitting below target in most advanced countries even as unemployment was (for a long time) slow to fall.    It isn’t impossible that in those specific circumstances (even if not generally) monetary policy decisionmakers with a stronger political focus might have done less badly than the actual decisionmakers did.   That, at least, should have been the out-of-sample forecast of the more vocal champions of technocratic rule if this argument had been run a decade ago.   (Of course, political bias can cut both ways: there have been both technocrats and politically-attuned people on the right in the last decade championing the case for higher interest rates, arguing that if anything raising interest rates pre-emptively might assist in rebalancing the economy.)

I’m not arguing to junk professional expertise when it comes to monetary policy, any more than one should in any other area of policy, but in and around monetary policy the limits of technical expertise are pretty real and substantial (or we’d have easy compelling and generally accepted answers to the issues of the last decade) and it isn’t obvious that professional experts are necessarily the best final decisionmakers.  In the face of great uncertainty, I’m increasingly inclined to think that the decisions should rest more squarely with those who are electorally accountable –  drawing on professional expertise to the extent it can help, but recognising the need for contest, scrutiny, and considerable scepticism about the best insights of institutional “experts”.  In that world, central bankers provide analytical inputs, and operational implementation of policy choices, but have less weight in the policymaking itself.

In a New Zealand context, it was sobering to read the other day that the UK statistics office had just announced that the British unemployment rate had fallen to the lowest rate since 1975 (and the US unemployment rate is the lowest since 1969), without inflation having become an obvious problem.    In New Zealand, the unemployment rate in 1975 was about 2 per cent.  Just to get back to the lowest unemployment rate this century in New Zealand we’d need to see a drop of another 0.9 percentage points.   In view of our central bank’s statutory mandate around “maximum sustainable employment” it would be interesting to see their analysis of why we can’t manage something like that.  Perhaps there are regulatory or welfare obstacles (eg high minimum wages relative to median wages) –  and if so, central banks can’t do much about those – but with inflation still persistently a bit below target, it sure looks as though New Zealand’s unemployment rate could be a bit below 4.3 per cent without creating inflationary trouble.

 

Submitting on bank capital proposals

It probably isn’t a great look for a powerful government agency, avowing its desire to hear from anyone and everyone on its radical proposals, to have its spam filters set so that a vocal critic’s submission couldn’t be received (that was my experience last night).  But I did get a friendly response when I enquired what was going on, and no doubt they will get it sorted out today.

My submission is here

Submission to RBNZ minimum capital ratios consultation 15 May 2019

The Governor’s consultation document was released in December. It was the culmination of a review of aspects of the bank capital framework that had been underway for several years, but as the documents the Bank subsequently released made clear, much about the central proposal –  the large increase in minimum core capital ratios – had come together only at the last minute, none of the supporting analysis had been critically reviewed before the Governor adopted it as his cause, and the analysis started weak and never really improved.  No decent analysis has ever been presented about the transitional effects, including distributional effects and possible changes in the structure of the financial system.

In a mark of all that is wrong with the governance of financial regulatory functions in New Zealand, having signed on to the cause of much higher capital ratios, the Governor will now be judge and jury in a case he himself is prosecuting.  And there are no rights of appeal.   Good government has to mean something better than this.

The Reserve Bank’s December 2018 consultative document proposed three main changes:

·       Much higher minimum ratios of capital (CET1) to risk-weighted assets than previously,

·       Higher minimum capital ratios for systemically-significant banks than for other locally-incorporated banks, and

·       A significant narrowing in the gap between the calculation of risk-weighted assets as between the big banks using internal models and the remaining locally-incorporated banks using the standardised approach.

In my submission I supported the third of these proposals (which itself would be expected to lead to a reasonably significant increase in capital for the big banks) and opposed the other two.   Higher capital ratios for similarly-risky large banks might make some sense if the minimum requirements were themselves modest, but they aren’t (and rating agencies generally reckon that our larger banks are safer than the small ones –  which makes sense for various reasons, including the strong parents who own the larger banks).

The focus of the submission was on the proposal to increase substantially the minimum core (CET1) capital ratios.  Combined with the higher floor proposed for calculating risk-weighted assets, this proposal would –  it appear, but we could never be sure because no serious benchmarking was presented –  have made New Zealand regulatory minima among the very highest in the world.  No case was made in the consultation document for why that was appropriate, including why it was appropriate for New Zealand requirements to be so much more demanding than those in Australia.

Most of the material in the submission has probably already been covered in a succession of posts here over recent months, but here it is in summary form.

I started by noting that there seemed, at best, a scant prima facie for further large increases in minimum capital requirements.

Relevant context

An unbiased observer, looking at the New Zealand economy and financial system, would struggle to find a case for higher minimum capital ratios.   Among the factors such an observer might consider would be:

  • The fact that the New Zealand financial system has not experienced a systemic financial crisis for more than hundred years (and to the extent it approximated one in the late 1980s, that was in the idiosyncratic circumstances of an extensive and fast financial liberalisation which left neither market participants nor regulators particularly well-equipped),
  • Our major banks – the only ones that might pose any serious economywide risks – come from a country with very much the same historical record as New Zealand,
  • Despite very rapid credit growth in the years prior to 2008 (increases in the credit to GDP ratios among the larger in the advanced world, spread across housing, farm, and other business/property lending), and a severe recession in 2008/09 and afterwards, the banking system emerged with low loan losses,
  • Since then, banks have not only increased their actual capital ratios (and been required to calculate farm risk-weighted assets more stringently) but have also substantially improved their funding and liquidity positions (under some mix of regulatory and market pressure).
  • Over the decade, bank credit growth (relative to GDP) has been pretty subdued and there has been little or no evidence (in, for example, Reserve Bank FSRs) of any serious degradation of lending standards.
  • The balance sheets of the large banks remain relatively simple, and there has been no sign (per FSRs) of the sort of financial innovation that might raise significant doubts about the adequacy of existing models.
  • In terms of the wider policy environment, government fiscal policy remains very strong, we continue to have a freely-floating exchange rate, and there has been neither legislation nor judicial rulings that will have materially impaired the ability of banks to realise collateral.
  • And the Open Bank Resolution option for bank resolution has been more firmly established in the official toolkit (note that if OBR were fully credible then, in the absence of deposit insurance, there would be little case for regulatory minimum capital requirements at all).
  • And repeated stress tests – over a period when the regulator had no incentive to skew the tests to show favourable results –  suggested that even if exposed to extremely severe adverse macro shocks, and associated large price adjustments for houses, farms, and commercial property, not only would no bank fail, but no bank would even drop below current minimum capital requirements.
  • Consistent with this experience – also observed in Australia, the home jurisdiction of the parents of our major banks – the major banks operating here continue to have strong credit ratings (consistent with a very low probability of default), and the ratings of the parent banks are even higher.
  • There has been no change in the ownership structure of our major banks, or in the implied willingness of the Australian authorities to support the (systemically significant) parents of the New Zealand banks were they ever to get into difficulty.

Add into the mix indications that New Zealand banks CET1 ratios, if calculated on a properly comparable basis, would already be among the highest in the advanced world –  in a macro environment with more scope for stabilisation (floating exchange rate, strong fiscal position, little unhedged foreign currency lending) than in many advanced countries –  and there would be a fairly strong prima facie case for leaving things much as they are.

But the Reserve Bank’s consultative document – and associated material, including speeches and interviews – engages substantively with almost none of this context.

There is little evidence the Bank has thought hard about financial crises.

…there is a strong (implicit) tendency in the document to treat financial crises as exogenous shocks, events arising out of the blue, which a decently-managed bank (or financial system) will face every once in a while, (be it once a century, or two).     But a moment’s reflection is all it should take to realise that that is simply the wrong approach to be using (especially when, as in this consultation, you are talking of proposals designed to reduce already-low risks to extremely low levels).     You could look at the Irish crisis, the Icelandic one, the US crisis, the Korean crisis of the 1990s, the Nordic crises of the early 1990s (and even the New Zealand and Australian experiences in the late 80s and early 90s) to appreciate that the system-threatening problems didn’t arise from exogenous shocks, but from several years of very degraded lending standards.     Exogenous shocks may have played some part in determining the timing and nature of the crystallisation of the problems, but they weren’t what determined that there would be a costly re-adjustment at some point.  If the Bank believes differently, the onus should have been on it to make its case.  There was no sign of such a case in the consultation document. 

Linked to this point, there is very little recognition (none in the main document, and very little in subsequent papers) that many or most of the output losses associated (in time) with financial crises have to do with the misallocation of resources (bad lending, bad borrowing, bad investing) in the preceding boom years.  Your documents recognise that one cannot simply measure output losses from a pre-crisis peak (typically a period with a positive output gap) but do not go anywhere near far enough to recognise the significance of this, rather larger, point. In such circumstances, estimates of potential GDP itself may be materially overstated.  As far as I can tell, the research papers you quote are open to the same criticism (which is not a defence for the Bank, but – probably – an indication of the predispositions of many of the chosen researchers and their institutional sponsors).

When an economy and financial system has gone through several years of badly misdirected lending, borrowing, and investment, not only is there an inevitability about output losses because of the bad prior choices crystallising, but there is a near-inevitability about both lenders and borrowers being hesitant about doing new business in the wake of the realisation of past mistakes.  Prior assumptions and business models prove invalid, and it takes time for risk appetite to revive, and to identify like projects that would prove profitable.  That is likely to be so whether or not banks emerge from the crystallisation phase with ample levels of capital.       At best, it is only the marginal additional output losses from banks falling into “crisis” (however defined) that is likely to be eased by much higher initial capital ratios – and yet you made no attempt to distinguish this effect.

The Bank has made no effort to provide a proper cost-benefit analysis, with key assumptions and sensitivities documented, but even what on has been presented the numbers just don’t seem to add up.

In his speech in February, the Deputy Governor indicated that the Bank’s own analysis suggested that the output cost of the proposed higher capital ratios would be “up to 0.3 per cent” of the level of GDP.  In other words, the annual insurance premium society would pay – even on your assumptions – might be 0.25 per cent of GDP.  As you note, the standard Treasury discount rate is a bit larger than what is used in many of the papers you cite, and applying such a discount rate to this expected annual cost gives a present value of lost output of perhaps $15 billion.    That is a high hurdle to get over when the gain on offer is the reduced (from already low levels) probability of output losses resulting (narrowly) from a financial crisis expected in, on average, 75 or 100 years’ time (your claim is that you want to keep the probability of crisis to no more than once in 200 years).   On plausible estimates of those marginal additional output loss savings, the cost-benefit simply would not stack up.  (And as Ian Harrison notes, none of these numbers appear to take account of the income loss to New Zealanders from imposing higher capital requirements on – and thus requiring higher expected equity returns to shareholders of – foreign-owned banks.)

There has been no attempt to adequately benchmark the Bank’s proposals against those of other regulators, and no sign that the Bank engaged closely with APRA in bringing them together.

It is grossly unsatisfactory that throughout months of consultation the Bank has made no effort to illustrate how its proposals for minimum CET1 ratios and the associated floors around the calculation of risk-weighted assets, compare with those planned by APRA for the Australian banks.

Such an exercise should have been relatively straightforward, especially if the Reserve Bank had done what most New Zealanders might reasonably have expected, and worked closely together with APRA in formulating its proposals.  Of course, New Zealand is a sovereign nation and the Reserve Bank (regrettably) has final decision-making powers in New Zealand but:

·       APRA has a considerably deeper pool of expertise, including at the top of the organisation, than the Reserve Bank of New Zealand,

·       The nature of the risks in the two economies and markets is quite similar (including similar legal institutions, and similar housing markets),

·       If anything there is a case for thinking that APRA minima would be ceilings below which New Zealand requirements for our large banks should be set (since we have the benefit of strong parent banks, and well-regarded supervisor of those banks, whereas the parents  – and parents’ supervisors – themselves are on their own, and we have also chosen to have the OBR as a frontline resolution option),

·       For the institutions that might pose potential systemic issues in New Zealand, any substantial increase in capital requirements can reasonably be seen as an attempt to grab group capital for New Zealand.  Why not work these things out together?

The onus should, surely, be on the Reserve Bank of New Zealand to demonstrate – make the case in detail – why the New Zealand subsidiaries of Australian banks should be subject to more onerous capital requirements than the parents, and banking groups as a whole, are subject to.  But not once has the Reserve Bank attempted to make that case.

The arms-length (or worse) approach re APRA seems hardly consistent with the spirit of the trans-Tasman banking regulatory accords that were reflected in the legislation of both countries some years ago, even recognising that New Zealand interests are not always identical to those of Australia.

And there has been no analysis published on the transitional effects, the distributional effects, whether any disintermediation might worsen the soundness and efficiency of the financial system.

The only estimates we’ve seen have been those for possible changes in lending margins for institutions affected by the proposed higher capital ratios. There has been no serious analysis published of the extent to which banks might become less willing to lend. And there has been no discussion about the extent to which business may migrate from regulated banks to either unregulated (i.e. not locally incorporated) banks here or abroad, or to finance companies, or of the possibility of disintermediation (such that more of society’s demand for credit is met without the direct interposition of a financial institution’s balance sheet). There has been no analysis of which economic sectors might be most severely affected. Large corporates for example will have plenty of alternative providers, probably at a price very similar to what they pay now, and many housing mortgages could be relatively easily securitised if necessary, but SMEs and rural borrowers might be more likely to bear the brunt of any price or capacity adjustment. Similarly, there was no analysis of where the brunt of any adjustment to deposit and wholesale funding interest rates might fall, but it seems reasonable to posit that wholesale creditors will not bear most of the burden.

Perhaps more concerningly still, there is no sign of any analysis of whether a financial system in which more business has gravitated to institutions not locally-incorporated or to disintermediated markets would be (a) sounder, and (b) more efficient. There is a risk that the core banks (already low risk) become somewhat safer, but that those institutions in future have a diminished role in the system. Most of the Bank’s analysis appears to, in effect, treat locally incorporated banks as the sum of the financial system, which is less likely to be the case in future if these proposals proceed. Failure to address these issues does not instill confidence.

And

… there was no discussion at all of the macroeconomic context in which these proposals would take effect. The proposals involved a transition over five years. Nine years into an economic recovery, with slowing domestic growth and growing global risks there has to be a fairly significant chance that the next significant recession will occur in the next five years (i.e. during the proposed transition period). That means a significant risk that regulatory policy would be exacerbating any downturn (through tighter credit constraints, reduced credit appetite, and potential higher pricing), in a downturn in which monetary policy is likely to be hard up against conventional limits (the Bank’s own analysis has suggested the OCR might be able to be cut only to around -0.75 per cent). Of course, if bank balance sheets were looking shaky it would be prudent to move ahead anyway – better ten years ago, but if not then now – but nothing in the Bank’s published analysis (past FSRs, stress tests, consultation document) nor in the credit ratings of the relevant institutions suggests anything like that sort of vulnerability. Without it, you will – with a reasonable probability – make economic management over the next few years more difficult (additional upfront potential economic costs), in exchange for the modest probability of making any real difference to (already very low) financial system risks over that period. It isn’t a trade-off that appears to be worth making – at least not without much more supporting analysis than we have had to date.

I also commented briefly on the signs of anti-Australianism that have emerged from senior Bank managers

We’ve also seen it in rather glib comments that perhaps the Australian banks might sell down their stakes in their New Zealand subsidiaries, in a tone which implies that Reserve Bank senior managers think this might be quite a good thing.    Anti-Australianism is a recurring theme in New Zealand political debate around banks, but it should have no place in the assessments or public comments of officials operating under the Reserve Bank of New Zealand Act.

In my view, New Zealand benefits considerably – in terms of financial system soundness and efficiency – from the fact that the major banks are all part of much larger banking groups, each headquartered in a friendly country with good institutions, and strong record of financial stability.   The Reserve Bank should not lightly jeopardise that situation with proposals that simply aren’t backed by robust analysis of the risks they are supposed to mitigate or of the costs of adjustment.

Before concluding

Serious recessions are things to seek to mitigate.  That is primarily the role of discretionary monetary policy, made possible by a floating exchange rate.  Serious misallocations of resources are likely to be costly, but the misallocations arise in the good times – when credit is growing strongly – not in the subsequent bust.  The marginal additional losses arising from financial crises themselves appear to be (typically) small, and these proposals in any case involve only a further modest reduction in an already low risk of serious problems (in a country with little history of serious systemic financial problems).  

There are limits to what any regulators and officials can do about initial misallocations, but my recommendation to the Bank would be to abandon the push for higher minimum capital ratios (while proceeding to level the playing field between advanced and standardised model banks) and to focus its energies instead on sharpening its ability to recognise, and respond vigorously to, any sharp deteriorations in lending standards promptly when and if they get underway.  Complement that with robust championing of  (a) the importance of the floating exchange rate regime –  especially in a country with neutral interest rates higher than the rest of the world –  and (b) of keeping the government out of the business of directing credit and, together with existing demanding capital standards, you are likely to best serve the interests of New Zealanders.  Better that approach than the (probably costly) steep increases in capital requirements proposed in the consultation document without anything like adequate, carefully and independently scrutinised, supporting analysis.    New Zealanders deserve better than they have had in the poor process and weak substance that together made up this consultation.

We can only hope that the Reserve Bank will be proactive and publish all the submissions shortly, not wait (as they often do) until the Governor has retreated to his high castle and contemplated for months.

There have been all sorts of unsatisfactory aspects to the process around this consultation.   There was no good reason why extensive socialisation, and testing, of the Bank’s analytical material –  such as it is –  could not have been undertaken well before the Governor signed up to one particular option.  In a system where the Governor is also the final decisionmaker, with no rights of appeal, that would have been even more useful and appropriate.  When they did publish the consultative document, they should have all the supporting material already available and published simultaneously, not released (as it was written) over several months subsequently.   And the quality of the material they have put out –  whether or not one agrees with the proposed bottom line –  just isn’t up to scratch.

That is the Governor’s responsibility, personally (although his Deputy, the Head of Financial Stability, presumably shares a lot of responsibility).   The Bank’s Board exists largely to hold the Governor to account, on behalf of the public and the Minister of Finance.  They really should be asking hard questions already about the substance and (in particular) the process, and insisting on a proper ex post review, including (for example) a survey of submitters and other stakeholders.   Early last year the New Zealand Initiative published a major report highlighting how poorly the Bank was regarded as a financial regulator.  Perhaps the particular failings that concerned people have changed a little in the transition from Wheeler to Orr, but it is difficult to believe that the Bank is any more highly regarded as a regulator now than it was then, and all the structural weaknesses –  which underpin the cultural problems – are still as they much as they were: too much power rests with a single individual, with little effective accountability.   It isn’t helped by the fact that neither of the key senior individuals has a strong background in financial stability or regulation.   New Zealanders deserve better.

 

 

Advanced countries with flat/falling populations seem to do just fine

In my post on Monday I was critical of various aspects of Liam Dann’s Herald pieces in praise of New Zealand’s high rates of immigration.  Part of his story was that we simply had to keep on with high rates of immigration or our population would stop growing and……well, there lies dragons, or at very least “economic stagnation” and some existential threat to “New Zealand’s economic and social wellbeing”.

A casual reader might have supposed that there were no examples of countries with flat or falling populations, no straws in the wind we could look at and see how likely it was that a stable or even modestly falling population would represent a serious threat to the living standards (material and otherwise) of New Zealanders.

There was a new wave of Conference Board Total Economy Database data out a couple of weeks ago.  It has wider coverage than the OECD databases and the economic estimates are a bit more timely too.  I’ve used Conference Board data in numerous posts over the years, with a particular focus on the 40 or so advanced countries (OECD members, EU members, plus Singapore and Taiwan).

Over the last 20 years, 10 of those countries have experienced a fall in the total population, and another two have had almost no population growth.

population falls.png

If one takes a more recent period –  just the current decade –  all the countries with falling populations are still falling, and they’ve been joined by Portugal. Spain’s population is also now flat.

Of course, the economic performance of one of these countries –  Greece –  has been truly atrocious.  Real GDP per capita is still about 20 per cent below 2007 levels, and even the average level of labour productivity has fallen.  But no one supposes that Greece’s economic woes are because the population is flat or falling: if anything plummeting living standards and high unemployment have prompted Greeks to look for better opportunities elsewhere.

Here is the productivity growth (real GDP per hour worked) performance of those countries with flat or falling populations, again over the 20 years to 2018.

population 2.png

A flat or falling population is, of course, no guarantee of economic success (Greece and Portugal are what they are), but it certainly doesn’t seem to have been a major roadblock in the way of strong economic performance over the last 20 years.   Even Japan –  already rich 20 years ago, and often a poster-child for the alleged economic problems of a falling population – has had productivity growth outstripping that of the median advanced country.

Where would  New Zealand fit in that picture?  New Zealand –  with rapid population growth – managed 24 per cent productivity growth over 20 years, better than Greece and Portugal, but well below the median, let alone the median of the flat/falling population countries.

20 years ago falling populations really were a new phenomenon.  And 20 years ago, many of those countries really were rather poor, just a few years out of Soviet domination.  Perhaps one needs to look at more recent periods to really see the (alleged) crippling effects of a flat or falling population?  So I had a look at the period from 2007 to 2018 (choosing 2007 so as not to start my comparison in the middle of a severe recession), and over that period the median country with a flat or falling population also did materially better than the median advanced country (or the median of the countries with fast population growth).    New Zealand, once again, underperformed each of those medians.

But the focus of Liam Dann’s article had been on the population/immigration surge New Zealand has experienced since 2012.    I’m very reluctant to put much weight on short-term comparisons (even across a pool of other countries there can be other cyclical factors that muddy the water), but….what the heck, here it is.

You’ll recall my chart showing an estimate of labour productivity growth in New Zealand.

GDP phw may 19

That was basically no productivity growth over the last five years, and perhaps 1 per cent total productivity growth over the period since 2012.

There are various ways of getting an estimate of labour productivity. Mine (in the chart above) averages the two measures of GDP (production and expenditure) and the two hours measures (HLFS and QES).  I’m not sure quite what the Conference Board uses, but their numbers aren’t inconsistent (if perhaps a touch lower) than what is in my chart.

Here is productivity growth for the countries with flat and falling populations from 2012 to 2018, with numbers for New Zealand, all advanced countries, and the median of the flat/falling population countries also shown.

popn 3

Using slightly different estimates, we might have done better than Portugal but that is as far up the ranking as you can get New Zealand over this period, one when we have –  on the Dann telling –  been blessed by such a beneficient immigration policy (and associated rapid population growth).  Of these countries, Japan and Slovakia already have higher average labour productivity than New Zealand does, while many of the countries are now also close.   The convergence story in defence of New Zealand (others are just catching up) has long since lost most of its salience: we were supposed to be one of the countries catching up, but we just haven’t been.

For what it is worth, over this particular recent six year window, New Zealand’s productivity growth was not just second lowest on this chart, but second lowest among all the advanced economies.

My main interest is in New Zealand, an incredibly remote set of islands. Over decades now there has been no sign that rapid policy-driven population growth has been helpful to our medium-term economic performance.  But there is no necessary reason why issues that might be relevant to our economic underperformance should also be relevant for countries much closer to major markets, supply chains, networks and opportunities.

On the other hand, there is no sign that countries with flat or falling populations are doing particularly poorly.  In fact, in economic terms, most seem to have been doing just fine.

Simple cross-country correlations can always only take one so far.  After all, the countries with flat or falling populations will include those where people are fleeing underperformance (Greece say) and countries with rising populations will include some of those where people are attracted to economic success (Singapore say): in neither case is it likely that the main direction of causation runs from population growth to economic success.

But, for what they are worth, here is a scatter plot showing population growth and productivity growth across those 40 or so advanced countries over 1998 to 2018 (one dot per country, New Zealand is red).

popn 4

It isn’t a tight relationship, but it is there (and was there is the economics literature decades ago) and isn’t obviously skewed by a single outlier country.  And New Zealand isn’t an outlier either – our productivity growth over 20 years was only a bit less than one might have expected from this crude relationship.

For the much shorter more-recent period (2012 to 2018), the negative relationship is still there but, as one would expect (with other stuff going on), is weaker.    But New Zealand more starkly underperforms.    Perhaps that underperformance –  little or no productivity growth for years –  will eventually be revised away.  Perhaps.

I’m not one of those with any generalised aversion to population growth.  Most population alarmism, at least at the macro level, is misplaced.  Technology, ideas etc keep on allowing for rising material living standards for more people.  But equally, there is little evidence that rising populations –  beyond some critical low thresholds –   themselves work to boost material living standards, and some signs that advanced countries with rapid population growth do less well (in material terms) than countries with less rapid population growth (even with all the sometimes conflicting chains of causation at work).

But across advanced countries as a whole even if all that was simply false, we’d still be left with a picture of New Zealand where policy has fuelled rapid population growth for most of the last 70 years, even as our relative economic performance has kept on declining.   Whatever the situation in Japan or Slovakia, there is decent prima facie reason to be intensely sceptical of the alleged economic gains to New Zealanders from continued high policy-induced immigration to this extremely remote corner of the world.

And few/no signs that countries with flat or even falling populations need to worry about economic underperformance stemming from such population changes.

Bank capital again

Just a quick post today, as submissions close soon on the Reserve Bank Governor’s plans to require banks to fund much more of their balance sheets with equity capital, and I still need to write mine.  The Governor stated last week that the Bank has already received 50 or so submissions.  I hope that, in the spirit of open government and genuine consultation, the Bank will put those submissions up on their website pretty promptly –  and not, as is more usually the case with them (but not, say, with parliamentary select committees), only when the Governor has made his final decision.

I’ve seen a few submissions, none of which seemed very positive on what the Governor was proposing.   It remains striking that, five months on from the release of the initial consultative document there has still been no serious attempt at a cost-benefit analysis, and only the promise that they will eventually do one –  conveniently aligning, no doubt, with the final decision the Governor makes, and too late for any challenge or scrutiny of the analysis or numbers to make any difference.   It is quite an extraordinary democratic deficit that a single unelected official, himself appointed by other unelected officials, gets to make decisions of this moment on his own whim, with no rights of appeal or review.  And the Minister of Finance sits by claiming it is none of his business.

That lack of any cost-benefit analysis is one of the central points in BusinessNZ’s submission.   I noticed interest.co.nz’s Gareth Vaughan attacking BusinessNZ for not offering support to the leg of the Reserve Bank proposal which will improve somewhat the competitive position of the small New Zealand banks (by narrowing the differences between the risk-weighted assets calculations between the big banks using internal models, and the rest using the standardised rules).   I happen to support that leg of what the Reserve Bank is proposing but –  sensible as it is –  it isn’t going to be of much benefit to anyone other than the small banks themselves, unless those banks are able to raise materially more capital themselves and take a larger share of the credit market.  As I noted in my post on this issue a couple of weeks ago

Sure the competitive position of the small banks is going to be improved, relative to what it is now, but –  as noted earlier –  only one of those smaller banks is a listed vehicle, and neither TSB, SBS, or Coop have means of raising lots more core capital without dramatically changing their ethos or ownership structure.    Perhaps Kiwibank might manage to wrangle lots more capital out of NZ Post, NZSF, and ACC….or perhaps not.  And how confident could we be that New Zealand would be better off with a very fast-growing government-owned bank, subject to few effective market disciplines.  That sort of entity has often been on a fast road to something very nasty.

The big issue around the Reserve Bank’s plans is the proposal to greatly increase minimum capital ratios, and that is the focus of comments and submissions should probably be.

I’ve devoted a couple of posts here to the sterling work of my former colleague, former RB risk modeller, Ian Harrison in reviewing in depth the succession of documents the Reserve Bank has put out over the months to try to buttress its case.   Most recently, there was this post on the lecture Ian did at Victoria University late last month (and earlier there was his paper “The 30 billion dollar whim”.

Ian has now released another paper, “Third Time Lucky?”,  in which he reviews at some length the latest paper the Reserve Bank published (last month) in support of its proposals.   That Reserve Bank paper was described to me last week by a reader with considerable experience and expertise in these and related fields as simply not up to the standard one should expect from an advanced country central bank.

The short answer to Ian’s question is no: a compelling case still hasn’t been made. In fact, when I read a near-final draft of Ian’s paper last week I found it a pretty complete –  if sometimes quite technical –  evisceration of the Bank’s work.  I get the impression that he would regard the comment about this paper not being worthy of an advanced country central bank as being unfair to other central banks: it simply isn’t up to an acceptable standard for any powerful regulatory body, much less one where decisions are made by a single unelected official.

Here are his key conclusions

1. Capital increases unnecessary.    The Bank has failed to support its case for a substantial capital increase in the information document. The best evidence and logical analysis shows reasonably strongly that increasing banks’ capital ratios will reduce welfare. We stand by our previous assessment that the costs could be very large. Estimates of the net present value costs in the tens of billions would not be alarmist.

2. Risk tolerance approach a backward step. The risk tolerance approach is not an advance in thinking about bank capital ratios. It tends to muddle the issues and can, conceptually, result in suboptimal decision making. Other supervisors have similar mandates to the Reserve Bank’s, but none have attempted to quantify it, and define ‘soundness’ in terms of the probability of a financial or banking crisis. Bank crisis is too subjective a notion to be a useful hard metric for bank capital policy. The Bank is trying to solve ‘a problem’ of its own making. On any reasonable assessment the banking system is sound. We do not need the Reserve Bank to ‘make New Zealand sound again’.

3. Modelling analysis is embarrassingly bad. There has been a corrosion of the quality of the Bank’s policy analysis. Some of the analysis of the inputs into the capital model is an embarrassment for New Zealand and a risk to the Bank’s credibility. APRA, which can understand the analytics, must be worried about the quality of the analytics decision making in an institution they may have to work with if there is a financial crisis some time in the future.

4. Bank missed a double counting in the capital requirement. The Bank missed the fact that they have already increased bank capital by 20 per cent by requiring advanced bank capital to be 90 percent of that required under the standardised approach. Even if the Bank’s analytical modeling of the optimal capital ratio was robust (which it definitely is not) it should be wound back by about a third to correct for this double counting.

5. Impact of foreign ownership continues to be ignored. The Bank has continued to ignore foreign ownership of the New Zealand banking system. It has ignored: the possibility that Australian owned subsidiaries will be sometimes supported by their parents, reducing the probability of a crisis; that there is little point in a subsidiary having a higher capital ratio than its parent; and the cost to New Zealand of increased profits to foreign owners.

6. Economic cost of crisis substantially overstated. The direct economic costs of banking crises have been grossly overstated. The Bank’s preferred estimate appears to be 63 percent of GDP. A more realistic assessment of the marginal cost of a banking crisis, for New Zealand as opposed to the underlying economic shock, would be no more than 10 percent of GDP.

7. Misrepresentation of the social costs of crises. The Bank has grossly misrepresented the literature it extensively quoted from, on the social costs and longevity of banking crises. The World Bank and the UN did not say that financial crisis have long lasting effects as the Bank claimed. The relevant message from the papers the Bank quoted from is that the social costs in any economic downturn are substantially mitigated in countries, which, like New Zealand, have robust social safety nets. We found no evidence of long lasting ‘wider social costs’ in some relevant New Zealand data. Suicide rates, divorce rates and crime rates did not deteriorate during the GFC recession.

8. Fiscal risks benefits overstated. Higher capital will have a limited impact on governments’ fiscal risks, which are already limited and manageable. Higher capital may not reduce governments’ gross fiscal costs at all if a government feels obliged to top up a banks’ capital to the new higher level after a crisis. Anything less could mean the banking system would continue to be ‘unsound’.

And from his Introduction

However, the Bank still didn’t seriously engage on the following critical issues.

• The need to adjust for the difference between New Zealand and foreign capital calculations when using foreign data on the relationship between capital and the probability of a banking crisis.

• The need to consider the use of the Open Bank Resolution (OBR) option, which is a partial substitute for capital, as part of the capital review process.

• The need to consider the impact of foreign ownership of New Zealand banks on the probability of a crisis.

• The need to take into account foreign ownership on the cost of additional capital. The Bank has only considered the impact of interest rate increases on economic output. It has ignored the fact that there will be a transfer to foreign owners because of higher lending rates/or lower deposit rates.

• The need to explain the gap between its assessment of the ‘soundness’ of the New Zealand financial system and that implied by the rating agencies’ assessments and the Basel advanced model results.

• The need to explain why the Bank now considers the New Zealand financial system is unsound, when it had determined that it was sound in fifteen years of financial stability reviews.

There is a new Financial Stability Report out in a couple of weeks.  It will be fascinating to see how the Governor has attempted to draft around that final point.

As a reminder, there is every indication that what the Bank is proposing will involve putting in place the highest effective minimum core capital ratios anywhere in the advanced world, despite a near-complete absence of supporting evidence or analysis, despite twenty years of championing the role of the OBR mechanism, and despite the complete lack of any open engagement on the question of why our Reserve Bank is so confident that it is appropriate to impose much higher core capital requirements here than those being imposed on the parents of most of the same banks in Australia.  There has been no serious benchmarking undertaken, or if it was undertaken none published.

And, of course, there has been no serious or sustained analysis of the transitional effects or the distributional effects.    Without something of that sort there is even less reason to have confidence that the Reserve Bank really understands, or perhaps cares much, about the gubernatorial whim they are pursuing.

Championing high immigration

The strongly pro-immigration political and business establishment must have been very grateful to the proprietors of the Herald for making so much space available for lengthy unpaid advertorials for high –  perhaps even higher – rates of immigration to New Zealand.  They even provided a journalist to write these paeans.

First, there was a double-page spread in Friday’s newspaper and then yesterday there was a further gung-ho column (under the heading “New Zealand leading the way on immigration debate”), both by Liam Dann.  When I saw yesterday’s column my first reaction was “yes, and the Pied Piper of Hamelin also found followers –  much good it did them”.

The double-page spread on Friday purported to be journalism: Dann had gone out and talked to various people, but every single one of them seemed to be either keen on high rates of immigration to New Zealand or wanting even more (wanting rules changed to be even more employer-friendly).  He even gave an uncritical platform for Statistics New Zealand, the agency which –  unable to conduct a competent Census – has now delivered us permanent and long-term net migration data that is so bad (in the short-term) that even the Reserve Bank the other day indicated that they were now reduced to forecasting flows starting nine months prior to the publication date of their forecasts (whereas previously they had good indicative data available on a timely basis).

Much of the initial story seemed to be built around a premise that the parties in government had not delivered on promises to lower net migration.     But then whenever he has been in government Winston Peters has never done anything material to make a difference to immigration numbers.   There is no sign he has ever regarded the issue as particularly important.  And, if you check out their 2017 manifesto they didn’t make such promises then either –  there was, for example, no suggestion of cutting residence approvals numbers.  Sure there was some loose talk of net migration numbers falling, but then official forecasts (eg those by the Treasury or the Reserve Bank) also had large cyclical falls projected back then.

What about Labour?   Despite attempts to suggest otherwise, they did not promise to reduce the net migration inflow by 25000 to 30000 per annum.   I wrote about their immigration policy proposals here, prior to the election.   What Labour promised was a series of changes around study and temporary work visas which, if implemented, might have had the effect of reducing the net inflow by those sort of numbers, for one year only.   Nothing Labour proposed would have affected residence approvals numbers at all, and thus nothing would have affected the projected net inflow over, say, a 5 to 10 year period.

Of course, none of this is to deny that both Labour (at least under Andrew Little) and New Zealand First might have been happy to try to create the impression that things would be materially different under them.  But nothing they promised would ever have done so, and (unsurprisingly) nothing they have delivered has.

And yet, amid all the breathless gung-ho stuff in the article, there is no mention at all of the substantial decline in the number of residence approvals granted over the last couple of years, no mention of the recent cut in the target rate of residence approvals, and nothing about the plans the government is now working on to managed residence approvals streams differently in future.  For anyone interested, I wrote about them here last week.

There are lots of small points I could pick up on.  There was the weird statement that “policy plans and population outlooks continue to assume that New Zealand’s net migration will fall back into negative territory”, which simply isn’t true: neither SNZ population projections, nor (say) Reserve Bank or Treasury forecasts assume the net flow turns negative, just that it slows.   Or the odd comparison that noted that our peak population growth rate (in 2017) “was more in line with sub-Saharan African countries like Sierra Leone” than with other advanced countries –  which might have made for some interesting comparisons (eg around economic performance) but was just left hanging.

But I was more interested in two lines in Friday’s article.  First, we had the prominent and doughty academic champion of high rates of immigration, Massey’s Paul Spoonley. who ran this line

More recently we’ve seen issues such as Auckland property prices and the Crafar farms sale. “There are distinct issues that trigger highly negative responses,” says Spoonley.

“What equalises that is the positive economic story and a relatively strong understanding of the role migration plays in that.

“We came through the GFC quite well and have done relatively well since … and what is important in that is the contribution that migration makes.”

I guess if you repeat nonsense often enough some people will believe you.  As a reminder:

  • New Zealand’s economic performance is among the very worst in the OECD, whether one looks back 70 years (about what the post-war immigration surge got going), 50 years, or 30 years,
  • There was nothing particularly attractive about New Zealand’s record in the (so-called) GFC, at least if one compares us to other countries with similar sorts of economic management (floating exchange rate, own monetary policy etc),
  • And, as even the economists who will champion New Zealand immigration policy will concede, there is no evidence specific to New Zealand that our immigration policy –  the most aggressive in the OECD over the last two decades –  has contributed to (an imaginery) economic success, or even mitigated our relative failure.

As for the most recent wave of immigration –  which Spoonley himself (rather exaggeratedly in my view) describes as unprecedented –  here is the chart showing New Zealand labour productivity growth (or near complete lack of it) from Friday’s post.

GDP phw may 19

On matters economic (and he is sociologist not an economist) Spoonley is making stuff up, which Lian Dann happily channels for him.

And then there was the population issue. On Dann’s telling

One thing is for sure: if New Zealand wants to maintain a growing population it needs positive net migration.

and he even gets Statistics New Zealand’s chief demographer in to try to buttress his case

There are other places such as Korea, China and western Europe where the natural rates of fertility are much lower than New Zealand’s.

“In some ways they’re a harbinger of where we’ll be in future decades,” he says.

New Zealand’s total fertility rate has been below replacement for decades now (since about 1980) but with no trend apparent for further drops (the rate is pretty stable at about 1.8 children per woman) –  nothing to suggest that our birth rate future is that of Korea or Italy.

But even if our fertility rate were dropping, what of it?  Such a drop would presumably be the result of voluntary choices by New Zealand couples.    What is it that leads Liam Dann to be so sure that we need, or want, continued population growth?  He doesn’t say.

(And doesn’t, for example, mention that –  all else equal – more people mean more emissions, not just in New Zealand but (since our emissions per capita are quite high) probably at global level as well.)

And what of Dann’s rather shorter (and thus probably more widely read) column yesterday?

He begins with the tired rhetorical trope

New Zealand has always been a nation of immigrants.The good news is that most of us understand that.

I’m not sure about his background, but I certainly don’t count myself as an immigrant.  But even if in some sense his factual statement was true, what of it?  It tells us nothing about appropriate immigration policy now (any more than, say, it might have in 1840, had Captain Hobson suggested to the Maori chiefs “you know, this land has always been a nation of immigrants”).

But then he tries to get into substance

However even if numbers ease it seems unlikely that we’ll see a return to the migration outflows we regularly experienced through the past 100 years.

The New Zealand story in the 21st century is very different to the 20th.

For starters our economy is more robust. The peaks and troughs have mellowed.

There are concerns about the fairness of the economic changes made in the 1980s and 1990s but they created a more flexible economy that is less vulnerable to external shocks.

There is so much wrong with this it is hard to know where to start.   First, these “significant outflows” were not common at all in our history: net outflows to Australia happened towards the end of the great Australian boom (shortly to be followed by a very nasty bust) in the 1880s, and there were small net outflows in the 1930s (the UK’s experience of the Great Depression was much worse than our own).   Significant outflows have only become a feature in New Zealand since our economic performance started lagging so far behind Australia’s.  Once we and they had similarly high incomes: these days we are very much the poor relation, and if net outflows to Australia are now not what they once were, it isn’t because those productivity or income gaps have narrowed, but because Australia is much less substantively welcoming to New Zealanders (who can still go any time they like) than they once were.  That is probably a wise choice by Australia, but it has further reduced options for New Zealanders.

Second, what about that spin about our economic cycles. Certainly, any boom this last decade has been very (very) subdued –  basically not a thing –  but perhaps Dann has forgotten that rather severe recession that occurred only 10 years ago.  And there is a certain incoherence in the suggestion that the 1980s reforms reduced the likelihood of migration outflows, when many of the large outflows of New Zealanders have occurred in the decades since the reforms.

Ah, but it is not just the economics. We are now such a with-it place that who (decent human beings anyway) wouldn’t want to live in New Zealand.

Then there is New Zealand’s cultural rise on the world stage.

We’re still a minnow but we are visible and our international media stereotype is of a cool, progressive sort of place – rather than a backwater.

The internet and cheap air travel have removed the tyranny of distance. The immigration boom has turned our largest cities into more cosmopolitan places.

New Zealand has become a place that young people are in less of a hurry to leave, a place that those who do leave are more inclined to return to.

It is also a place that potential immigrants are more likely to be aware of.

It is a place those wanting to escape the madness of the wider world aspire to – whether they are Middle Eastern people fleeing war zones, or Brits and Americans seeking more progressive political landscapes.

And yet, as even the Minister of Immigration’s Cabinet paper –  discussed last week – noted, we have struggled to attract many really high-quality immigrants.  There will always be many poor people happy to move to a relatively prosperous country, if that country will let them in, but not many really able people would have a really remote country, with a poor record on incomes and productivity, as their first choice.   Not inconsistent with that, the number of residence approvals has been dropping not rising.

And then Dann returns to the big-New Zealand rhetoric

That’s just as well. New Zealand’s population growth in the 21st century will be tied to immigration.

Our natural birth rate is falling and our population is ageing, following trends in Western Europe and demand.

Without a steady flow of migrants our economy faces stagnation.

With unemployment at historic lows, an international labour pool prepared to drive trucks, pick fruit and work tough, low-paid shifts in factories, rest homes and hospitals is now crucial to New Zealand’s economic and social wellbeing.

As a factual statement, of course immigration policy will have a huge bearing on New Zealand’s population future.  It has almost throughout modern New Zealand history (when immigration was less expansive –  between the wars, and from the mid 70s to the late 80s –  as well as when the doors are fairly wide open).

But the idea that with a flat, or even modestly falling, population we face economic stagnation, or an inability to manage “economic or social wellbeing”, is –  quite simply –  unsubstantiated rhetoric that (for example) pays no heed at all to the experience of other advanced countries with fairly flat, or even falling populations.    One could add in that unemployment isn’t at historic lows, and that countries with little or no immigration still manage to get the jobs done.    It isn’t clear why we should aspire to having more “low-paid shifts in factories” in the first place, but even setting that to one side,  economies have ways of adjusting to differing patterns of population growth: some activities just don’t need to be done as much if the population is flat (housebuilding is a good example), and changing relative prices (wages) will draw people into service roles. Unless, of course, immigration policy – as it seems to around, for example, the rest home sector – acts to stymie such adjustment.

I wonder if Liam Dann has any idea how the dozen OECD or EU countries that experienced falling populations in the last decade maanaged?

Central planner to the end, Dann ends his column this way

There’s room for more people in this country. We just need to invest realistically for population growth.

As a matter of geography, there is room for more people. There is physical room in almost country.  So perhaps “investment” is the operative word here, and yet we know that rates of business investment in New Zealand (share of GDP) have been towards the bottom of the OECD range for decades even though our population growth rate has been at the upper end of the OECD range.  Sure, there are issues about government infrastructure keeping pace with population growth, but the rather bigger issue is that private businesses have not seen the remunerative opportunities to invest here in ways that might have generated the sorts of incomes and material living standards our peers in leading advanced economies –  most of them with rather modest rates of population growth –  have come to take for granted.   That failure –  not just this year or last year (although very obviously through this particular immigration surge) –  is the market test that the boosters just never grapple with.    And before any comes back with a “but housing….New Zealanders invest too much in housing”, recall that (a) conventional wisdom is that there is a shortage, not a surplus, of houses, and (b) that without rapid population growth a much smaller proportion of scarce resources would have to be devoted to building houses.

Recall that the government’s new immigration policy objectives were about improving the wellbeing living standards of New Zealanders.  Current immigration policy is failing on that count.   In Friday’s article, the Minister of Immigration was running the party line

What we’re interested in is having an immigration system that supports the economic transition to an economy that is more inclusive and more productive.”

Sounds like a worthy goal. Just a shame that productivity growth has been so poor, and exports and imports have been shrinking as share of GDP.    Current policy –  and whatever tweaks the Minister has in the works –  seem unlikely to change that for the better.  The policy, in much the current form, has been tried for decades now and has failed.

Big New Zealand –  a sentiment championed by too many all the way back to Vogel at least –  is a costly delusion.  It is past time it was abandoned, and we concentrated on doing much better for the New Zealanders we already have in our remote and unpropitious corner of the world, far from markets, networks, supply chains, and (most)opportunities.