Author: Michael Reddell

A problem awaiting the new government

Michael Reddell Exports, New Zealand economic performance

Whichever party, or group of parties, gets to form the next government will face the same facts about our disappointing economic performance.  As I noted a few weeks ago, based on the recent PREFU projections, not even Treasury seemed to rate very highly the chances of meeting the National-led government’s export objective.

Here is the share of exports in GDP, showing actuals for the last decade or so, and Treasury’s projections for the next few years.

x to gdp

By the end of that forecast period, there will only be four more years until the goal of a much-increased export share of GDP was to be met.  On these numbers, exports as a share of GDP would by then be at their lowest since 1989, 32 years earlier.  So much for a more open globalising economy.

One of the indicators I like to use is a rather rough and ready decomposition of real GDP into its tradable and non-tradable components, first developed by an IMF staffer looking at New Zealand a decade or so ago.    It assigns the primary sector and the manufacturing sector components of real production GDP, and the exports of services component of expenditure GDP, to the tradables sector –  the bits where New Zealand firms are competing with the rest of the world.  The rest of GDP is classed as non-tradable.    It isn’t a precise delineation by any means: some local manufacturing isn’t really tradable (due to high weight and low value, and thus transport costs) and, for example, the electricity generated for Comalco is, in effect, tradable.   But, broadly speaking, it seems to capture something meaningful about the New Zealand economy.  In the early days of the National government, then Minister of Finance Bill English was quite keen on it.

All economies need firms in both tradables and non-tradables sectors.  So one sector isn’t inherently better or worse than the other.  But countries that are catching up with the world-leading economies tend to be ones in which the tradables sector (exports and import-competers) lead the way.  In such economies, firms are finding more and better, more lucrative, ways to tap the much larger global market.  Of course, we also gain when the non-tradables sector is becoming more productive –  both directly as consumers, and as a reduction in the input costs of tradables sector firms.    But there is a limit to how many cafe meals we can serve each other.  There isn’t really a technical limit on, say, how many smart ideas, translated into appealing products, that firms in a small country could sell to the rest of the big world.

As well as dividing real GDP into tradables and non-tradables components, I’ve also expressed both components in per capita terms.    Over long periods of time, most real economic series trend upwards, and actually it is something like per capita production or value-added that matters most in looking at gains in material well-being.   Here is the latest version of my chart, updated for last week’s GDP release.

t and nt components to jun 17

The series do bob around a bit.  The tradables sector, for example, had a very good June quarter on the back of a couple of tourism one-offs (the World Masters’ Games and the Lions tour) but then it had had a poor year last year.   But what I try to draw attention to is that (a) the peak in the tradables series was as long ago as 2004, and (b) real per capita tradables sector output is now no higher than it was at the end of 2000, almost 17 years ago.  Across the whole terms of two governments, one National-led and one Labour-led, there has been almost no growth at all in the real per capita GDP of the tradables sector. None.

Some economists really don’t like the chart.  So lets look instead at each of the components that make up the tradables sector measure.

tradables components 2

Services exports, in real per capita terms, did very well in the 1990s, growing quite strongly until around 2002.  But, overall, almost no growth since.   The mining sector briefly did very well around 2007/08 when a new oil well came on stream.   And, in per capita terms, the agriculture, forestry and fishing component of production GDP, and the manufacturing component, have gone almost nowhere over 25 years, again in real per capita terms.

What changed 15 years ago?  Well, one of the things that has changed a great deal is the real exchange rate.  Here is a chart of the Reserve Bank’s index, showing an average for the last 15 years (as well as one for the previous few years).

rer to july 17

It is unlikely –  all but inconceivable in fact –  that if we keep on doing what we’ve been doing for the last 15 years or more, in terms of economic policy settings, that we’ll see any sustained per capita growth in our tradables sectors.  It is that old line about a definition of insanity being doing the same stuff over again and expecting a different result.

Even to sustain those sectors at the sort of flat levels –  no growth at all – we’ve had over the last 15 years or more has involved the significant subsidies of (a) unpriced pollution externalities especially around water, (b) significant direct subsidies (to, most notably, the film industry) and (c) significant effective subsidies to the export education industry (by offering a bundled product where students can pay for an education –  in some cases an “education” –  and get preferred access to work and residence visa entitlements too –  that benefit being provided free to the providers by the New Zealand government).

I’d be very happy for a new government, of whatever stripe, to deal directly to any or all of those distortions.  But they, and their advisers, need to bear in mind that exchange rate chart.   Unless the real exchange rate falls quite materially, it is difficult to envisage much growth in other tradables industries to replace the shrinkage in the subsidised industries.  (It was exactly the same issues policy advisers faced when we started liberalising, and stripping away earlier subsidies, in 1984.)   Real exchange rates can’t be managed directly, but they can be materially influenced by removing the sorts of other policy distortions that put intense pressure on domestic resources, and drive up the prices of non-tradables relative to tradables, skewing the economy away from the tradables sector.

I’m not optimistic about prospects, but the good thing about pessimism is that one can, just occasionally, be pleasantly surprised.

 

Productivity and employment

Michael Reddell labour market, New Zealand economic performance, Productivity

With 30 seconds thought it is pretty obvious that if the least productive 10 per cent of our workforce simply dropped out and stayed home, then across the whole economy average GDP per hour worked would increase, all else equal.   All else equal, the productivity of any particular individual still employed wouldn’t change –  in practice it might well, as someone would still have to do the filing or the cleaning –  but the average would.

So far, so uncontroversial.  No one thinks it would be a sensible policy approach to lifting productivity to, say, bar such low productivity people from working.  Doing so would not only be inhumane, but it would make us, on average, poorer (output is still output, even if productivity of the marginal worker is below average).    In practice, of course, high minimum wages (relative to the market median), as in New Zealand, have exactly that effect –  pricing some low-productivity people (who couldn’t, at present, command a wage in the market at least equal to the statutory minimum.

But every so often in the last 20 years, as people have tried to grapple with New Zealand’s continuing poor average levels of GDP per hour worked, and the failure to achieve any convergence to the (now) richer members of the OECD, someone pops up with line “ah, but we are more effective than most in drawing in the low productivity members of our community, which will bias our measured average productivity (and productivity growth) downwards.

The latest example was in the Sunday Star-Times business section yesterday.

New Zealand’s track record on labour productivity may look worse than it is because a growing number of Kiwis are in work, the Productivity Commission says.

In fact, this wasn’t reporting any new Productivity Commission work.  Rather, one of the Productivity Commission’s senior staff had pointed the journalist in the direction of some interesting work done by able researchers at Motu a couple of years ago.  And, despite the implication readers (like me) may have taken from the headlines and the lead sentence (above), the research work related to a period 2000 to 2012, not to the period of nil productivity growth over the last five years.

It suggested annual productivity growth would have been about 70 per cent higher, averaging 0.24 per cent, between 2001 and 2012, instead of 0.14 per cent, were it not for a decline in skills associated with higher employment.   Motu estimated last year that the skill level of the average Kiwi worker fell by 1.8 per cent over the period as more people joined the workforce.

Again, despite the hyped lead-in (“70 per cent higher”) do note that the difference in these two (multi-factor) productivity growth rates cumulates over 11 years to a total difference of around 1.1 per cent.  Welcome, but not exactly game-changing.

Motu provided a nice non-technical summary  (page 3f) on what they’d actually done, using detailed data from the Longitudinal Business Database (LBD).

Productivity estimates are typically based on the quantity of labour used by firms to produce output. However, the characteristics of a firm’s workers also have an important influence on productivity, with different types of labour impacting differently on the technologies that firms adopt and their performance more generally. Because data on individual workers are linked to the data on firms in the LBD, it is possible to construct a measure of the quality of a firm’s labour force and measure the impact of this on productivity.

The measure of worker quality – which is derived from earnings data – reflects the bundle of skills, qualifications and experience of individual workers. As such, it picks up a broader range of worker attributes beyond qualifications.

Based on this measure, the average quality of the New Zealand work force declined slightly by 1.8% from 2001-2012…..

This somewhat surprising decline in the average quality of New Zealand workers reflects the net result of two opposing forces. First, average skills increased due to ageing (ie, greater experience) and rising qualifications. For example, the share of tertiary qualified workers grew from 15% to 25% while the share of workers with no qualifications fell from 19% to 14% between 2001 and 2013. At the same time, full-time equivalent employment increased strongly by around 15% (Figure 1). The large number of new workers who came into the labour market had, on average, lower skills than existing workers. This lead to a dilution in worker quality that more than offset the improvement in qualifications and experience.

They look like nice results.

But since many of the concerns around productivity growth in New Zealand relate to cross-country comparisons –  how have we done relative to the rest of the advanced world, and relative to common underyling global trends –  it might be worth looking at what has happened in other countries.    It would take a pretty big study to replicate the Motu project across, say, the OECD.   But we do have readily accessible data on employment to population ratios across the OECD, and we have that data for a longer period of time than just 2001 to 2012.

Our HLFS goes back to 1986.  Here is how New Zealand’s employment to population ratio has behaved since 1986.

employment to popn 25 Sep

Over the entire 30 year period, our employment to population ratio increased by 2.4 percentage points, which isn’t a lot.  It seems quite plausible that the effect Motu identified was present in the data as the employment to population ratio increases, from the trough in 1992 through to 2007.  But most of that effect will have been reversing the opposite effects resulting from the really sharp fall in the employment to population ratio (disproportionately low productivity workers, almost by construction) from 1986 to 1992.

And what about the international comparison?  Here is the gap between New Zealand’s employment to population rate and that in the median of the 22 OECD countries for which there is data for the whole period (almost all the “old” advanced OECD countries, and not the former Soviet bloc countries).

employment 2

In all but one year, our employment to population ratio has been above that of the median OECD country.    That doesn’t automatically mean we have been employing more low productivity people –  some systems make labour force participation of both parents of small children easier than others, and some systems penalise older people staying in workforce less than others –  but lets grant that some part of the difference may be that we manage to employ more of the less productive groups.   At the margin, that might explain a small part of the levels difference between our average productivity and that of these, mostly richer, OECD countries.

But two things to note:

  • the gap is smaller now than it was thirty years ago.  In other words, even if this “employing the less productive classes” story is some part of the levels explanation, it is almost certainly less of an explanation than it was 30 years ago.  And yet the real puzzle people have been grappling with is why, after all the reforms, we haven’t made any progress in closing the gaps over the last 30 years.   These compositioneffects don’t look as though they can help over the post-1984 period as a whole (useful as they might be for interpreting data for some individual sub-periods).
  • there has been no material change in the gap at all over the last decade, suggesting that this compositional story doesn’t offer any explanation for why from 2008 to 2015 we did no better than middling relative to other OECD countries (not closing the gaps), and since 2012 we’ve been among the very worst productivity performers, with no labour productivity growth at all.

As I’ve pointed out in several posts recently, average real GDP per hour worked in Germany, Netherlands and France is now around 60 per cent higher than that in New Zealand (even though historically all were poorer and less productive than New Zealand).  In 2016, employment to population ratios in New Zealand and Germany were identical (while those in Netherlands and France were lower).  But here is the chart showing New Zealand’s employment to population ratio less the average of the ratios of each of those three countries.

employment 3.png

Over the period for which observers have been struggling for an explanation of our poor productivity growth, our employment to population ratios have been falling relative to those in several of the leading, and most productive, European economies.

Compositional effects (around the skill levels of the labour force) just don’t look like a credible part of an explanation for why the level of productivity here is now so much below that in the leading OECD economies, or why no progress has been made in closing the gap, over the last 30 years or the last five.

 

Fossicking in election statistics

Michael Reddell NZ politics, Uncategorized

Well, that was a fascinating election outcome.

Listening to the coverage on Saturday night, I was interested in comments about how strong National’s performance was vying for a fourth term in government.  There didn’t seem to be many statistics behind the talk.

But it is worth bearing in mind that since 1935 –  when the domination of New Zealand politics by our  current two main parties really began – we’ve had 10 governments.  Two have lasted a single term, one two terms, four completed governments last three terms, and two governments lasted four terms. It seems to be an open question whether National will now be able to lead a fourth term government.  That means there really isn’t much data.  And, to some extent, MMP changes things –  minor parties are more important, and MMP governments have so far always involved multiple parties.

There has been talk that National’s (provisional) vote share this time (46.0 per cent) is higher than it was when they first took office in 2008 (44.93 per cent).   But ACT has never had anywhere to go but National, and never had any desire to go elsewhere anyway.  So at very least one should aggregate the National and ACT votes to look at the centre-right performance.

But I’d argue one should really go a bit beyond that.  The Conservative Party has come, came close in 2014 to entering Parliament, and then has largely gone again.  Not only did the Conservative Party campaign in 2014 as another potential support party for National, but realistically most of their voters in 2011 and 2014 are people (in many case conservative Christians) who would have otherwise, naturally or reluctantly, have voted for one of the other centre-right parties.

In this chart, I’ve shown three different ways of looking at how the centre-right vote has changed:

  • National + ACT party votes as a share of the total vote,
  • National+ ACT party votes as a share of the “used” vote (ie excluding the “wasted” party votes for parties that didn’t get into Parliament), and
  • National + ACT + Conservative party votes as a share of the total vote.

centre right 2

On each of those lines, the centre-right vote share has fallen quite a bit.  If anything, what the chart highlights is how well the centre-right did (and, I guess, how disastrously the left did) at the 2014 election.  In this election, the centre-right vote share –  the grey line –  has (on the provisional results) fallen by a full 5 percentage points.

And then I wondered how it had been in the 1960s.  The 1969 election was the last time a a party secured a fourth term.

national 60s

Now that looks more like a genuinely impressive performance – the governing party lifting its vote share in the election in which it gained a fourth term.   There had been industrial action at the time of the election which had hurt the Labour Party, but the previous three years had been a very tough time to govern.   Wool prices had collapsed (and with them the overall terms of trade), the New Zealand government had been forced into a devaluation in late 1967, and had borrowed from the IMF under a pretty stringent domestic austerity programme.  Things here had been tough enough that over the three calendar years 1967 to 1969 there was a small overall net migration outflow (the first such outflows since the end of World War Two). People can counter that the third party – Social Credit –  saw its vote share fall away, and both National and Labour gained. But in a sense that is the point: tough times like that are often when third parties, and main Opposition parties do well.  But National increased its vote share.

The other fourth term victory since 1935 was in 1946, when Labour secured a fourth term.  And here is how Labour’s vote share changed over its time in government.

Labour 1946

Again, going for a fourth term Labour managed to increase its vote share.   They’d seen off John A Lee’s rebel party in the 1943 election, and no doubt won back most of that vote, but again…that is the point.  Going for a fourth term after crises, war, and post-war controls and inflation, Labour increased it vote share (to 51.3 per cent).

I was also playing around with some other of the provisional results.  For all that the Greens have done pretty badly nationwide, it was striking how strongly they poll in the neighbourhoods I live and move in.    In (booths in) Island Bay itself 16 per cent, and in next door Berhampore 26 per cent (no wonder the new local Labour MP, and current Wellington deputy mayor, avoided answering questions about his approach to the cycleway).   In the whole Rongotai electorate  the Greens scored 17 per cent, and in next door Wellington Central (where James Shaw ran) 20.8 per cent.    Both those percentages are lower than in 2014 ( 26.2 in Rongotai and 29.5 in Wellington Central) but are still huge –  and conventional wisdom seems to be that the Green vote share will rise on special votes.  No wonder that, despite the fact that 70-80 per cent of submissions from residents favour scrapping the dreaded Island Bay cycleway (and certainly don’t want to spend millions more on it), the Wellington City Council seems set to pursue its green agenda anyway.

Finally, I was interested in whether there were any material differences in the party vote shares between advanced votes and those on the day.  I only looked at two electorates (again, Rongotai and Wellington Central) but this is what I found.

Rongotai

Rongotai

And Wellington Central

wgtn central

The differences aren’t huge, but they are there – at least in these two electorates, and in particular between the Greens and National shares. Given that advanced votes of those who enrolled at the same time as they voted still haven’t been counted, it would presumably offer some encouragement to the Greens.

Various views on Reserve Bank reform

Michael Reddell Monetary policy, Reserve Bank, Uncategorized

Undecided to the end, earlier this afternoon I went out for a walk resolved that I wouldn’t come home until I’d voted.  With guests to cook dinner for, it was an effective constraint.

The other day, the Herald ran a Bloomberg column by journalist Tracy Withers headed “RBNZ could be in for a shake-up”.  Much of the column is familiar ground, and complements my own post the other day on the coming reform of the Reserve Bank –  whichever party forms the next government.    But there were a couple of interesting snippets, one of which wasn’t in the version the Herald used but is now in the updated column the link will take you to.

The first is an explicit comment from the Secretary to the Treasury, Gabs Makhlouf.  It seems quite unusual for a neutral public servant to be commenting in public –  in another country as it happens – on any matter of possible new policy just a few days out from an election.   Save it for the post-election briefing to the incoming Minister of Finance, would surely have been the stance of most senior public servants (all the more so when it is an issue on which at several parties have explicit public policies).

Anyway, what does Makhlouf think about Reserve Bank reform?

Gabriel Makhlouf, head of New Zealand’s Treasury Department, said he favors formalizing committee-based decision making at the central bank but doesn’t have a view on whether the committee should include external members.
“I can see why people may be concerned about that, and I can also see the value of having externals, and the different perspective they bring,” he said in an interview in Singapore Friday. “It’s something we are definitely going to study quite carefully before we decide what to recommend to the government.”

Treasury has long-favoured a move to formalise a committee-based decisionmaking structure.  They unsuccessfully attempted to interest the then Minister of Finance, Bill English, back in 2012 before Graeme Wheeler was appointed.  But it is surely a little surprising that, after all these years, and five months after Iain Rennie’s report on such issues was finalised, that Treasury still doesn’t have a view on a key aspect of possible reform.  Or are they simply waiting for the election results to come in, and will then tailor their advice to the proferences of their new masters?  I’d like to think not, but is there good reason to do so?

The other interesting snippet –  and maybe it wasn’t new but I hadn’t seen the specific quote previously –  was about the views of the current Minister of Finance.

If a National-led government is returned to power, Finance Minister Steven Joyce has said he’s open to formalizing the existing committee structure but doesn’t favor outside members.
“We should have a look at it,” Joyce said in a July interview. “I wouldn’t see radical change. I think the Reserve Bank model serves us very well.”

I’d certainly disagree with his final sentence, but of course he is welcome to his view. But it does tend to confirm the suggestion I made in the post earlier in the week that the Rennie report must have proposed quite far-reaching reforms.  After all, if Rennie had concluded that the current governance model “serves us very well” and that no change was required, or only some minor changes such as formalising the current Governing Committee, surely the Minister of Finance would have released the report by now.  Rennie may not command enormous respect beyond, say, the current occupants of the Beehive, but had a former State Services Commissioner and former Treasury deputy secretary for macroeconomics concluded that no material change was appropriate –  and certainly nothing like the changes (still modest themselves) that Labour and the Greens have campaigned on – it would have been modestly useful to the National Party, who have attempted to argue that Labour and the Greens simply don’t have what it takes to be economic managers.

Given that the Rennie report to Treasury was paid for with public money, was finished five months ago, and is official information, it is pretty inexcusable that it has not yet seen the light of day.

(I should note that neither the Joyce comments nor those of Makhlouf comments seem to address the Reserve Bank functions other than monetary policy.   In those regulatory areas, reform is even more vital, given the relative lack of constraints on the Governor’s personal freedom of action –  nothing like the Policy Targets Agreement exists.)

The other thing that prompted this post was the Herald’s editorial on Thursday, prompted by the Bloomberg column, and headed “Meddling with OCR carries risks”.  The text doesn’t appear to be online.

Over recent years, the Herald has been a useful mouthpiece for the Reserve Bank, and for outgoing Governor Graeme Wheeler in particular.  By not asking any awkward questions, they’ve been given preferential access to soft interviews and profiles, and have reliably backed up the Governor’s choices –  even when hindsight proves those choices weren’t always the best.

The editorial is somewhat overblown, and lacking in any serious supporting analysis. It asserts

This country has no need to copy any country’s conduct of monetary policy.  New Zealand pioneered inflation targeting by an independent central bank and it served this country will through the global financial crisis whatever mistakes were others may have made.   The divergent targets of the US Federal Reserve possibly contributed to the crisis.

We certainly pioneered formal inflation targeting, although independent central banks had been around in several other countries for decades –  on that count we followed an international lead.  Actually, I’d agree that inflation targeting served us reasonable well through the crisis, as it served well a bunch of other countries.  The US only formally adopted inflation targeting after the crisis was over.  Some would argue that different rules (nominal GDP, price level targeting, wage targeting) might have led to even better responses, although I’m a bit sceptical of that claim.  And any suggestion that the “divergent targets” of the Federal Reserve may have contributed to the crisis probably rests on claims by US economist John Taylor that interest rates were held too low –  below the Taylor rule prescription –  in the early 2000s.  There may be something to that specific point, but…..the Reserve Bank’s own published analysis shows that we did much the same thing during that period.  It is one thing to argue that New Zealand’s monetary policy isn’t much different than that in countries with differently expressed statutory goals (including the US and Australia), but another to argue that our monetary policy is somehow superior to that of those countries.   There is just no evidence for that latter proposition.

Then there is a weird paragraph about the Labour Party’s proposal to add an employment/unemployment dimension to the monetary policy goal.  There are certainly some questions Labour needs to answer if they do happen to form the next government, but to conclude (rhetorically), “could a Labour Party bear a target of 0-4 per cent unemployment”?  one can only suppose the answer must be “yes, but they probably wouldn’t suggest being that prescriptive”.   Only a few people –  some able ones among them –  think full employment in New Zealand at present is lower than 4 per cent.

In the end, the editorial writers seem to conclude that adding an unemployment dimension might not do much harm after all (although they can’t conceive of it doing any good), and what really worries them is the governance proposals.

Labour’s proposed changes to the way the Bank operates may be more damaging.  The Governor would no longer be solely answerable for the key interest rate, the official cash rate (OCR) set eight times a year [isn’t it seven now?].  Labour would give the decision to a committee with some appointees from outside the bank.  Already the Governor consults widely. But sole accountability can produce better decisions. A committee allows blame to be dispersed.

I was pretty gobsmacked. As I noted in my post the other day, I criticize Labour`s proposals as excessively timid, and leaving too much effective power in the Governor.  But quite what is the Herald concerned about?  That we might have a decision-making structure for monetary policy a little more like those in

  • Australia,
  • the United States,
  • the United Kingdom,
  • Norway,
  • Sweden,
  • the euro-area
  • Israel (which had a single decisionmaker until a few years ago, but changed)

They are correct that we don’t need to follow what other countries do.  But there is often wisdom in the choices those other countries make, and when the current Reserve Bank Act was written few countries had reformed their practices in recent decades.  We were (so we thought) pathbreakers, but no country has followed us along this particular path.

Or perhaps the Herald is concerned that monetary policy might be governed the way the rest of the country is?  For example,

  • the Cabinet (actually a committee of people who aren`t technical experts),
  • most companies, while final decision-making power typically rests with a Board,
  • the governance of most or all other Crown entities, from the Board of Trustees of the local primary school, to that of powerful regulatory agencies like the Financial Markets Authority, or
  • our higher courts –  both the Court of Appeal and the Supreme Court decide each case with a panel of judges.

But perhaps New Zealand monetary policy is uniquely suited to single (formal) decision-making? It is possible I suppose, but frankly it seems unlikely.

And do notice the careful wording “sole accountability can produce better decisions”.  In theory perhaps it can, if we have as Governor someone uniquely talented and gifted with insight and judgements far beyond those of mere mortals.  But this is a real world.  If such people existed, it would be very hard to identify them in advance –  or perhaps even persuade them to serve.   And if those responsible for appointing a Governor thought they`d found such a superstar, only for reality to turn out a bit differently, that would be a recipe for worse outcomes than under a (much more robust) formal committee-based decision-making model. It is why in most areas of life we choose governance models of that sort, rather than beating on supermen (or women).

And today, I`m not even getting into questions of the actual judgements or track record of accountability of Graeme Wheeler.     That can wait for next week.

The editorial concludes that

our system of monetary management is working well. Labour should hesitate to meddle with it.

Actually, not many people would really agree.  Even Steven Joyce says he is open to some change. It is a risky system, out of step with international practice and New Zealand practice in other areas of public life.  It has gone hand in hand with a progressive weakening in the quality of the institution, and if one does wants to talk about relatively uncontroversial specific failures, bear in mind that the Reserve Bank of New Zealand is the only central bank in the world to have launched two tightening cycles since the 2008/09 recession, only to have to quickly reverse both of them.  Those were choices made by individuals given too much power by Parliament. Whoever forms the next government, it is time for a change at the Reserve Bank.

A story of two Attorneys-General

Michael Reddell China, NZ politics, Uncategorized

On Wednesday evening I wrote about the despicable conduct of our Attorney-General, senior National Party Cabinet minister, and minister for various intelligence agencies, Chris Finlayson.

Asked why it was appropriate for a (past and –  experts say –  probably present) member of the Chinese Communist Party and former member of the Chinese intelligence services (both acknowledged facts, neither of which was disclosed to voters when he was elected) to be a member of Parliament in New Zealand, Finlayson simply refused to engage or answer, other than to suggest the journalists raising the issue –  journalists from serious outlets including the Financial Times – were simply attempting to destroy the man’s political career and in the process were engaged in singling out a whole class of people for “racial abuse”.

Asked about the claims in an important new paper by Professor Anne-Marie Brady (of Canterbury University and the Woodrow Wilson Centre in Washington DC) on the efforts of the People’s Republic of China (state and party) to influence politics in New Zealand and about the close ties of various past and present National Party members to interests of the People’s Republic of China, our Attorney-General’s only response was to simply make stuff up.  He asserted that Professor Brady didn’t like any foreigners, only to have an audience member –  a former student of the professor’s –  point out that not only was Brady fluent in Mandarin, but that her husband was Chinese.

That account has received a bit of coverage –  although not, of course, that there was any sign of the New Zealand media following the issue up with, say, Mr  Finlayson, or his boss the Prime Minister, let alone with the Leader of the Opposition.  It might have been awkward all round I guess.

My own readership numbers yesterday were more than twice the normal level.

Senior Wellington lawyer and former MP, Stephen Franks wrote about the story on his blog,   He’d predicted this sort of response only a week or so earlier on Radio New Zealand.

Rarely, if ever in politics, does one get explicit, irrefutable proof of a risky and unpopular hypothesis within a week of venturing it.

But Attorney General Hon Christopher Francis Finlayson provided such proof last night.

Last week, after discussing on Radio NZ the Newsroom suspicions that NZ MP Jian Yang may be a spy for mainland China I blogged my explanation that time did not permit with Jim Mora. I predicted that the Communist government could expect their spies who have penetrated New Zealand leading circles to be sheltered by our  elite’s PC terror of being accused of racism.

Last night at an election candidate’s meeting Finlayson showed just how the accusing is done. The other  candidates then showed how effective it is in cowing them.

Others tweeted the story.  There was Rodney Jones, for example: Beijing-based New Zealand economist, who had himself last week called for Jian Yang’s resignation.

Numerous commentators offshore focused on China have been drawing attention to, and stressing the importance of, Professor’s Brady’s paper –  the one New Zealand’s Attorney-General could deal with only be attempting to smear the author.

Professor Brady herself tweeted a link to Stephen Franks’ post.

And then flicking round the web over lunch, I stumbled on a new story on the Sydney Morning Herald website.  The authors begin thus

Attorney General George Brandis is planning a once-in-a-generation shake-up of the legal framework governing who can lawfully influence Australian politicians, amid fears of clandestine Chinese Communist Party influence over politics in this country.

Having seen Professor Brady’s tweet drawing attention to Finlayson’s despicable comments, Fairfax’s Asia-Pacific editor, John Garnaut,  a former lawyer who had previously spent many years in Beijing as the Fairfax China correspondent was moved to tweet thus:

What a disgrace. How have things in New Zealand been allowed to sink this low so quickly?

For those interested in reading in more depth about the sorts of issues Professor Brady has raised, I would recommend an article on the Brady paper by an independent researcher on China who blogs at a site called Jichang Lulu (and who has also tweeted a link to the Franks account).  It is a substantial post on the issues in the (quite long) Brady paper.  The author knows China, but comes fresh to New Zealand.   As the author notes

New Zealand provides an example of successful United Front domination of a diaspora community. As of this election, the top ethnic Chinese candidates are linked to CCP organisations and support PRC policies. In New Zealand, the Chinese community can only realistically aspire to political representation by its own members through individuals approved by Beijing. This situation, enabled by the leaders of the top parties, effectively allows the extraterritorial implementation of PRC policy.

(This incidentally makes a nonsense of Chris Finlayson’s absurd allegation that anyone raising these issues is “racist”.   The alleged PRC interference in New Zealand affairs directly affects the freedoms in New Zealand of the many Chinese-origin New Zealand citizens – whether recent migrants or descendants  of those who came generations ago – who abhor the Beijing regime and its repression. State-sponsored actors are the focus of the story, and the paper.)

As he notes of Jian Yang

In the same Chinese-language interview quoted above, Yang says he used to be a Communist Party member, but he isn’t one any more. That presumably means ‘not an active member’; as Brady notes, you don’t just ‘leave’ the CCP. You are considered a member unless expelled. Considering Yang’s excellent relations with Chinese state entities and the praise state media award him, it would be ridiculous to assume he was expelled. In all likelihood, Yang is in fact a CCP member. Chen Yonglin 陈用林, a former PRC diplomat who defected to Australia in 2005, cast further doubt on Yang’s claims he was a PLA ‘civilian officer’. Based on his knowledge of military institutions before reforms in the late aughts, Chen estimates Yang was in fact a ‘soldier’ and probably reached the rank of  captain.

And

Perhaps even more remarkably, despite what an external observer would see as devastating evidence compromising a candidate before a tight election, his direct political adversaries in the Labour party produced absolutely no criticism of Yang. I’m not terribly knowledgeable about NZ politics, so perhaps I’m being naive, but is it normal to have such a major security revelation on a senior political figure days before an election and hear nothing from his rivals?

Noting that these are issues for the Labour Party as well.

In theory, Yang Jian’s direct adversary should be Raymond Huo (Huo Jianqiang 霍建强), a Labour Party MP. Yang and Huo compete for the Chinese-community electorate; Yang has been found to have a background in military intelligence, which he had declined to disclose in the past; Huo, whatever his sympathies, isn’t tainted by work for a foreign military. Recent polls have put Huo’s party a few points short of unseating the Nationals, or even able to lead a coalition. How can he not use this?

The only explanation that makes sense (and that is consistent with reactions from other senior politicians) is that he wouldn’t like to speak up against United Front interests.

Again it, as well as the original paper, is an analysis well worth reading.

We seem to have come to an extraordinary, and shameful, pass.  The very fact of the silence of most of the local media (the Herald’s recent article a welcome exception) and the refusal to engage seriously of any of our senior political figures (and responses by people like Jenny Shipley and Don Brash that could be seen to trivialise the issue) is surely worth a story in itself.

Fairfax’s local media have been very quiet on both the Yang story and on the arguments and evidence at the heart of the Brady paper – in the very week of a general election. Perhaps John Garnaut – recall, he is Fairfax’s Asia-Pacfic editor – would consider writing such an article? Perhaps the local papers might even publish it?   As he notes, the episode is  “a case study on how important it is to repel foreign interference before it gets to the political centre”.

But the primary responsibility for dealing with these issues can’t rest with foreign journalists, but with our own leaders.    I’m not sure that leaves me with much (any) reason for optimism.

(Due to New Zealand’s somewhat absurd electoral laws, I will remove any comments put up between midnight tonight and 7pm tomorrow that have any sort of party political tinge, so please refrain from making them.)

Investment data again highlight fundamental weaknesses

Michael Reddell Exports, Immigration, New Zealand economic performance, Productivity

After an early morning with some boisterous visiting nieces and nephews, there is a certain calm retreat in getting back to some of the details of yesterday’s national accounts release.

I’ve written previously here about the investment numbers.  The state of investment spending is a useful, if never foolproof, indicator of the state of the economy.  Not so much in a mechanical adding-up sense –  a quarter of weak investment probably translates into a weaker quarter for GDP – as in the questions the data can pose about just what is going on more broadly, and the viable opportunities that businesses are finding, and taking up (or not), in New Zealand.

My typical starting point is a chart like this, breaking out investment spending into residential, government, and “business”.  (I put “business” in quote marks because, as the OECD does, it is calculated residually –  subtracting the other two components from total fixed capital formation.)

I shares of GDP june 17

Using quarterly data means living with a bit of “noise”, but not that much, and doing so enables us to see if there are any material changes emerging at the very end of the series.

I don’t want to say much about general government investment spending.   In recent years, that share has been averaging a bit higher than what we saw in, say, the five years before the last recession.  Then again, government (central and local) has faced significant post-earthquakes repair and rebuild expenditure, and the population growth on average over recent years has been a bit faster than that in the previous decade.  If anything, one might have expected the government investment share would have needed to be a bit higher still, at least given the range of functions governments currently take on,

What of residential?   In nominal terms, residential investment spending (new builds and renovations etc) as a share of GDP is now just below the highest levels seen in the history of this series (and actually in the annual series which goes all the way back to the year to March 1972, thus capturing the peak of the building boom in the early 1970s).    Given the rapid rate of population growth –  a little higher, but lasting longer, than the growth rates 15 years ago –  one would expect to see a pretty high share of GDP being devoted to housebuilding and associated activities.   But you will notice that the residential line has fallen a bit in recent quarters, and consistent with that the volume of residential investment spending undertaken in the June quarter this year was about 1.4 per cent lower than such spending in the June quarter of last year.

popn growth apc

In this post, my main interest is in the business investment component (the orange line in the chart).  Strip out the modest quarter-to-quarter fluctuations up and down, and there has been no real change in the share of (nominal) GDP devoted to business investment for almost six years now.   Over the six years, business investment as a share of GDP has been materially lower (around 2 percentage points of GDP) than the average for the 15 years or so prior to the 2008/09 recession.    That is a big change.    And doubly so because of the sustained acceleration in the population growth rate in the last few years (and with it growth in the number of jobs).  Workers typically need capital equipment, even if it is nothing more than a laptop (and associated software) and a place to work.

Ratios of nominal investment spending to nominal GDP aren’t the only sensible way to look at things. In particular, in New Zealand a lot of capital equipment is imported (eg vehicles and most machinery, but not buildings themselves).  A high exchange rate –  such as we’ve had in recent years, but also had to a lesser extent in the last few years of the 2000s boom –  tends to lower the price (in NZD terms) of capital equipment.  The volume of business investment might still be growing quite rapidly, even if the nominal investment spending share of GDP is pretty weak  (of course, for tradables sector firms the high exchange rate is no gain –  capital equipment might be cheap, but the expected returns to any investment are also dampened).

So here is a chart of the annual percentage change in real business investment.

bus i 2

The volume of business investment has been growing, but at a quite modest rate.  In the last five years of the previous previous boom, the annual growth rate was around 10 per cent per annum.  Over the last five years, the annual growth rate in the volume of busines investment has averaged only about 4 per cent (which also happens to have been the growth rate for the last year).

These pictures don’t really surprise me.  They are what one would have expected once one knew of (a) the magnitude of the damage caused by the earthquakes (from day one  at the Reserve Bank we knew this was a large non-tradables shock, which would skew activity away from business investment, especially in the tradables sector, for several years), and (b) the scale of the population increase.   Those pressures have helped hold our real exchange rate up so much and for so long, and reinforced the persistent large margin between our real interest rates and those abroad.  In that sort of environment, total business investment (share of GDP) is less than it otherwise would be, and –  although it isn’t able to be illustrated here –  what business investment does occur will be skewed away from tradables sectors.   Not even very high terms of trade levels were enough to counter-act the downward pressure on business investment growth, and monetary policy held tighter than it needed to be didn’t help either.

Looking back at that first chart, the weak and almost dead-flat business investment line was reminiscent of the productivity chart I showed yesterday.  It is also consistent with the weak export performance I wrote about last week.  The three indicators are causally related: business operating in, or which might have contemplated entering, the tradables sector, and thus taking on the world, simply haven’t been able to find sufficient attractive and remunerative opportunities.

The pressures associated with post-earthquake rebuild expenditure will wane, and probably already are.  But meanwhile, policy continues, year in and year out, to supercharge our rate of population growth, bringing in huge numbers of modestly skilled people, to a location where the successful opportunities for firms to take on the world with great products and services seem to be growing much more slowly than the number of people living here.  The flawed policy –  shared across both main parties and several of the minor ones –  just keeps making it harder than it needs to be for New Zealanders as a whole to get ahead.   Our immigration policy was crazy when lots of New Zealanders were leaving each year, but it is even more deeply problematic when the travails of Australia’s labour market mean that the outflow has (probably temporarily) largely ceased.

 

Productivity growth still missing in action

Michael Reddell New Zealand economic performance, Productivity, Uncategorized

It was Paul Krugman, winner of the economics pseudo-Nobel Prize who famously captured one of the fairly basic insights of economics.  When it comes to material living standards in the medium to longer-term, if productivity isn’t everything, it is almost everything.   The terms of trade bob around, but probably won’t do much (harm or good) over the longer term, as they haven’t in New Zealand over 100 years.  But productivity growth –  managing to produce more per unit of inputs – is the basis for improved material living standards.   The best timely and accessible measure of productivity, widely used in international comparisons, is real GDP per hour worked.

Productivity growth in New Zealand has been pretty lousy in New Zealand for many decades, really since around the end of World War Two. We’ve had the odd decent run, but over the decades we’ve had one of the lowest rates of productivity growth of any advanced country.  We’ve slipped down the OECD league tables, and now part of the way we maintain reasonable living standards is by putting many more hours, over a lifetime, than the typical person in an advanced country.

Across the advanced world, productivity growth seems to have slowed from around 2005 (before the financial crisis).  We didn’t need to share in that slowdown, because productivity levels in New Zealand were so far below those of the OECD leaders.  Countries like the Netherlands, France, and Germany –  which historically we were richer and more productive than – now have labour productivity levels around 60 per cent higher than those of New Zealand.  We should have been able to close some of the gap in the last decade or so, utilising existing technologies, even if advances at the technological and managerial frontiers were slowing.  Various other poorer OECD countries –  notably the former Soviet bloc countries that are now part of the OECD – have done so.  We haven’t.

Several weeks ago the Prime Minister and the Minister of Finance were repeatedly claiming that New Zealand’s productivity performance in recent years had really been pretty good.  In fact, they suggested that under their watch we’d managed faster productivity growth than in other advanced economies and that the gaps were beginning to close.

I went to some lengths to unpick those claims.    New Zealand doesn’t have an official measure of real GDP per hour worked (unlike Australia, where the ABS routinely reports numbers as part of their national accounts release).  Instead, we have two measures of real GDP (expenditure and production), and two measures of hours (HLFS and QES).  Instead of just picking on one combination, I calculated all the possible methods, and looked at them individually and on average (nine in total).

For broad-ranging international comparisons, it often makes sense to use annual data, because not all countries have easily accessible quarterly data.  Unfortunately, the annual data are often only available with a lag, and the OECD doesn’t yet have annual data on real GDP per hour worked for all countries for calendar 2016.   But in the years from 2008 to 2015, on not one of the possible New Zealand productivity measures did New Zealand quite manage productivity growth as fast as that of the median OECD country.

This morning Statistics New Zealand released the latest quarterly national accounts, which enabled me to update the various quarterly productivity series.   In this chart I’ve shown the average of the various possible measures, and compared the performance of New Zealand relative to that of Australia (using the official Australian data).  I’ve started the chart in the last quarter of 2007, just before the 2008/09 recession began.

aus vs nz ral gdp phw 2

Over the first few years, through the recession period and in the year or two beyond, productivity growth in New Zealand and Australia was modest, but we more or less kept pace.   But what is striking is how increasingly large and persistent the deviation has been since around the start of 2012.  Over the five years, we’ve had no productivity growth at all, and Australia has managed quite reasonable growth.   And over the last five years, using the average measure for New Zealand doesn’t mask anything: from the second quarter of 2012 to the second quarter of 2017, the strongest of the nine series recorded productivity growth of 0.8 per cent (that is, in total over five years) and on the weakest, the level of productivity fell by 0.6 per cent (in total over five years).  Best guess: zero.

Recall that at the start of the period the average of level of productivity in Australia was already well above that in New Zealand.  That gap has widened still further.  In the early days of this government readers will recall that there was a goal to close those gaps to Australia by 2025, only eight years away now.

It has been a dismal performance.  Productivity isn’t mostly about how hard people work, but is much more about the ability of firms to find opportunities here that generate high incomes, and in particular high wages.  That is very difficult when the real exchange rate is as persistently high as it has been here.  Particularly over the last few years, very rapid population growth has underpinned the strength of the real exchange rate, driving up the prices of non-tradables relative to those of tradables.

And what of the comparison I mentioned earlier with the former Soviet-bloc central and eastern European countries (Slovenia and Slovakia, Poland and Hungary, the Czech Republic, and Latvia, Lithuania and Estonia)?  Thirty years ago, all of them were in a much worse state than New Zealand, but like New Zealand they had an aspiration to reverse decades of economic underperformance and catch-up with the richer countries in the OECD –   in their case, particularly those in western Europe.     But here is how we have done relative to them over the period since 2000, when there is consistent data available for all the countries (and by then all the other countries had got well through the nasty shakeouts immediately after the fall of communism).

eastern europe 3.png

It is a steady and substantial decline in our productivity levels relative to those of these central and east European countries.   The data are only annual, of course, but as you can see in earlier chart, we’ve had no productivity growth at all recently so not incorporating the last couple of quarters won’t help the picture.   Some of these countries –  communist-era basket cases 30 years ago –  now have levels of productivity very similar to New Zealand’s.  Most are on a path that may well take them past us in the next decade or so.  Most, as it happens, have little or no population growth.  They make the most of their opportunities –  which are considerable, being close to western Europe –  with their own people.

To sum up, New Zealand has lagged a bit behind the median advanced country since 2007/08, and has had no productivity growth at all for the last five years.  We continue to drift further behind our closest neighbour, Australia, and now face the likelihood that before too long we’ll be overtaken by countries that, throughout modern history, were never previously as productive as New Zealand was, and which 30 years ago we’d have looked on as pretty hopeless cases.   We could do much better, but there is absolutely nothing to suggest that we will manage to do so pursuing current economic policies.  Sadly, there isn’t much sign that any of the parties competing for your vote on Saturday are offering anything materially different, that might finally begin to reverse almost 70 years of continuing relative decline.   The apparent refusal of our leaders to face the reality, and make steps to change, won’t alter the fact of our continuing relative economic decline.

 

 

Immigration, the election, and shelf-stackers

Michael Reddell Immigration, NZ politics

Back in February I had coffee with a senior journalist, who was convinced that immigration was going to be a central issue in this year’s election campaign.  The journalist cited the Trump and Brexit phenomena, and I suppose at the time Geert Wilders and Marine le Pen were in the wind.   I was a bit sceptical.  I’d, mostly, have welcomed such a central place in the election campaign for what I regard as one of the key long-term failings in our economic policy settings.   But I didn’t really see any sign of a Trumpian insurgent – or a mood that was just waiting for such a person – or of the fascinating mix of motivations (immigration was only one) that had driven the Brexit vote.  But my interlocutor told me that political party focus groups were picking immigration up as a key issue, and suggested that the media need to attract readers would help fuel an intense focus on immigration.  I think there was a sense back then that National was in such a strong position in the polls that an issue like immigration would, as much as anything, be hyped to help keep things interesting.

As I say, I was sceptical –  although interested in the focus group snippet (which I later had confirmed by one MP).   We had dreadfully high house prices, and a dismal productivity (and exports) performance. High immigration has played a part in both those outcomes.  But those weren’t, it seemed to me, the sort of visceral dimensions that seemed to have played such a part in other countries: our last experience of terrorism was state-sponsored, by France; we don’t have problems with illegal immigration (some upsides to being a remote island), and we haven’t had problems with substantial Muslim immigration.  And for all my concerns about the mediocre quality of the skills of the median migrant, we’ve done less badly on that count that many other OECD countries (again, land borders and an explicit economic focus to the programme both help).

But now we are two days out from the election, and it is clear that immigration hasn’t played a particularly important role in the campaign at all.  New Zealand First –  which might have been a natural recipient of votes if there had been an upsurge in serious concerns –  looks as if it might end up with a smaller vote share than it had in 2014.   The government made some minor tweaks to immigration policy this year, on top of some other minor tweaks last year.   And Labour’s immigration policy didn’t involve much change –  outside the overseas student sector –  and hasn’t (at least that I’ve seen) had any pro-active place in their campaigning.   Oh, and the Greens’ leader ended up abjectly apologising to his base, casting slurs all round, for even having suggested last year a rational debate on the appropriate rate of immigration.

It is interesting to ponder why immigration hasn’t been a key issue.  After all, if one focuses (inappropriately, but as the headline writers do) on the PLT numbers there has been no abatement in the net inflow (whether of non-citizens –  the bit policy bears on –  or the reduced outflow of citizens).  And the “true” net inflow is almost as high, as a per cent of the population, as the previous peak 15 years ago, and it has run on for longer.

One reason is, presumably, the change in the political personalities.  At the start of the year, many thought the campaign might see Labour at or below the vote share it got in 2014, and New Zealand First and Greens perhaps both polling in the teens, and scrapping for second place in a possible left-led government.  Perhaps that might have been a climate in which Labour and New Zealand First in particular might have more prominently battled to capture those who were concerned about immigration-related issues.  But the “Jacinda effect” transformed that outlook and the campaign has mostly been like something from the old days: two big parties, with some minor players struggling for attention and coverage.    And although Labour has stuck with the immigration policy announced under Andrew Little, it is clear that Ardern has made a conscious choice to de-emphasise that policy, even though the focus of the proposed changes was on the deeply-flawed student market.

But I wonder whether some other factors aren’t at least as relevant among voters (and for all the talk of “leadership” a great deal of what politicians do is “followership”).   For one, house price inflation has abated in much of the country, and although house prices in Auckland remain sky-high they’ve gone roughly sideways for a year or so.    Quite why that has happened is still debated, but it isn’t because (a) the rate of growth of the number of people needing a roof over their head has slowed, or (b) because housebuilding in Auckland is now proceeding so rapidly that it has got ahead of population growth, or (c) because regulatory reforms have freed up land use sufficiently that peripheral section prices are now plummeting.     More plausibly, it is some mix of (a) rising domestic interest rates, (b) the tighter LVR controls the Reserve Bank put on last year, (c) tighter credit standards the banks themselves have established, under the influence of parents and of APRA, and (d) reduced capital outflows from China as the regime has tightened-up its controls.  But whatever the precise reason, it has taken much of intense heat out of the house price issue –  imagine if the opposition has still been able to repeat endlessly “house prices in Auckland are up another [x] per cent in just the last six months.   And with it, much of the heat around the immigration issue?

And the other reason –  one of the reasons I was sceptical of the political salience of the issue at present –  is the point I have been arguing for (and that previous generations of NZ economists recognised ) for years.  In the short-term, high and unexpected immigration adds more to demand in the economy than it does to supply.  In other words, it tends to boost economic activity –  measured or headline GDP for example –  and put more pressure on scarce resources.  Migrants don’t take jobs from locals, or add to unemployment; if anything, in the short to medium term, they add more to the demand for labour (all that capital stock that needs to be built) than to supply, and thus migration inflows tend to reduce unemployment.   The sugar-high is a real thing.  The effects might not last long, but when the dose is repeated each year for several in a row, it does have an effect.

There might have been no productivity growth at all for five years, but that sort of concept or measure doesn’t easily get much public resonance.  Exports might be shrinking as a share of GDP, as the need to build to cope with a rapidly-rising population crowds out the tradables sector……but it is a geeky macro statistic, and not one that anyone has successfully built a narrative around.  And perhaps people aren’t feeling good about their wages, but as I’ve noted recently, real wages have been rising consistently faster than productivity for some years now.  It is an unsustainable, unbalanced, mix, but it isn’t one that was ever going to capture the public imagination in any sort of “build a wall” way.  In the short-term, for those (most) with jobs things don’t seem too bad.  And even the Leader of Opposition has repeated on numerous occasions that the economy is doing fine.

And, of course, few of us want to be nasty about individual migrants (and of course, as I argue, the issue is New Zealand policy, not the rational choices of individuals), and no one wants to be subject to the dread “r-word” slur.

In many respects, I’ve long thought that the best environment for a serious public pushback against the out-of-step, failing, immigration policy we have run for a long time, is in the next severe downturn.  I wouldn’t welcome recessions – and remain concerned that the government and the Reserve Bank aren’t doing enough to prepare for the next one – but in a sense it is in periods when things are manifestly not going well that one is perhaps more likely to find a willingness to contemplate serious change in policy.  That’s a shame –  the best time (easiest adjustment) to make changes would be now, when the economic environment globally isn’t too bad –  but perhaps it is unavoidable, especially when (as above) we –  fortunately – don’t have the visceral issues around immigration that some other countries do.

Immigration policy did come up at the local candidates’ meeting last night.   The minor party representatives were predictable –  the Greens candidate was adamant that we “knew” that migrants benefited us economically, while on the other side the most entertaining TOP candidate –  whose opening speech was done in iambic pentameter – made the case for easier access for really skilled migrants, but for fewer migrants overall to ease the (claimed) downward pressure on wages.

Chris Finlayson repeated some of the serious misrepresentations that seem to characterise his party’s view.  We were told of the lots of New Zealanders who were coming back from Australia (when in the year to June 2017, a net 4678 New Zealanders left for Australia) and about how the immigration policy was bringing in the tradespeople wiuth the skills needed for, for example, the housebuilding.  I heard the PM repeat that line –  who will build the houses if we cut immigration – on Radio New Zealand yesterday: I would draw his attention, and that of his minister and local candidate to the data suggesting that the net immigration of building trades people is very small relative to (a) the actual increase in the construction workforce in recent years, and (b) to the total increase in the need for new housebuilding occasioned by the rapid increase in the population.   High immigration is worsening, not easing, those pressures.

But it was Labour candidate –  and near-certain winner –  Deputy Mayor, Paul Eagle whose comments on immigration really caught my attention.  He was obviously feeling on the defensive about the issue, and thus even though Labour’s actual policy proposals focus (numerically) mostly on fixing up some of the rorts around the student visa sector, he never mentioned that issue at all.  Instead, he wanted to stress that Labour welcomed immigration, and that we need immigration in some sectors.  It sounded fine, more or less, until he went on:  “Island Bay New World needs people”.   So can we take it that official Labour policy, enunciated by a candidate likely to be an MP for many years to come, is that we need immigration –  perhaps even more immigration –  so that the supermarket shelves get stacked?  What, I wondered, had we come to?  Once –  in MBIE”s words – a “critical economic enabler”, and now shelf stackers?

(And for anyone interested in some more observations from our Attorney-General, someone asked from the floor about Jim Bolger’s recent denunciation of “neo-liberalism”.  This senior minister got up and indicated he had talked to Bolger about what he had said, clarifying that he had meant the policies adopted by Labour and National governments between 1984 and 1993.  Finlayson himself went on to characterise that period as one of “extremist economic policies” concluding that “that ideology does not work, and we are not that sort of party”.  One brave member of the audience –  Island Bay is a pretty left-liberal sort of place –  called out “but none of it has been repealed has it?”        Was it floating the exchange rate, removing farm subsidies, removing trade protection, making credit available to ordinary people, lowering maximum marginal tax rates, ending fiscal deficits as a norm, putting in place a good GST, removing union monopolies, privatising state-owned business operating in competitive markets, or what……that the Attorney-General of an allegedly centre-right pro-market government regarded as “extremist”? )

The political cone of silence, with slurs

Michael Reddell China, NZ politics

I’m furious.

Local democracy came to Island Bay this evening, and I –  an undecided voter – joined the crowd at the local candidates’ meeting, in the Rongotai electorate.   Candidates congratulated themselves on a well-fought campaign –  as the National Party’s candidate put it, not a cross word had been spoken between any of them through all the various meetings they’ve attended together.  Most of tonight’s meeting was like that.  Most.

Over the years, I’ve heard nothing to suggest that the National Party’s candidate was other than an honourable and decent man.  The Hon. Chris Finlayson is the 8th ranked Cabinet minister, minister responsible for the intelligence services, and Attorney-General.  He appoints our judges.  And as he described himself tonight, he is “the first law officer in the land”.  You’d imagine he’d be at the forefront of defending the integrity of our democratic system and its institutions.  But not based on his performance tonight.

The format of the meeting allowed questions from the floor.  Each question had to be addressed to one particular candidate, but each other candidate also had a chance to answer.  On almost all the questions, almost all the candidates took the opportunity to answer.  But not on one question.

I got up and asked a question of Chris Finlayson, explicitly noting that I was not asking him as a minister responsible for the intelligence services (where I would have expected a fob-off) but as a senior National Party figure.   My question ran roughly as follows:

“Mr Finlayson, last week one of the world’s leading newspapers, the Financial Times gave considerable prominence to a story about a New Zealand MP.  That MP had been a member of the Chinese communist party, and part of the Chinese intelligence services.  He never disclosed that past to the public when he stood for Parliament, and has never taken the opportunity to denounce the evils of the Chinese regime.  Can you comment on why it is appropriate for such a person to be in our Parliament?  And could you also comment on the new paper by Professor Anne-Marie Brady raising concerns about the extent of China’s attempts to exert political influence in New Zealand, and about the close ties of various senior National Party figures with Chinese interests?”

The question was greeted not with embarrassed silence, but with pretty vigorous applause from the floor.

Finlayson –  our Attorney-General, first law officer of the land, senior National Party minister  – got up, briefly.   His answer ran roughly as follows:

“That was a Newsroom article, timed to damage the man politically.  I’m not going to respond to any of the allegations that have been made about/against him. I think it is disgraceful that a whole class of people have been singled out for racial abuse.  As for Professor Brady, I don’t think she likes any foreigners at all.”

And as I shouted back “the claim was about one man”, our Attorney-General sat down.  He’d simply refused to answer, or even address, the question, at any level other than suggesting that anyone raising these quite serious issues was a racist or a xenophobe.  Starting, presumably, with the Asia editor of the Financial Times, Jamil Anderlini a Kuwaiti-born Italian-American New Zealander who has spent almost 20 years in China, including more than a decade reporting from Beijing (and now is based in Hong Kong) through to Professor Brady, with all the other serious media outlets and China-focused commentators overseas who have reported the concerns somewhere in-between?   It was preposterous.  Plus, one couldn’t help thinking that he knew he was on weak ground.  After all, if there was a clear, simple, authoritative and compelling explanation, presumably he’d have given it.

I hold the Attorney-General –  first law officer of the land –  to a considerably higher standard than other local candidates.   And the specific question was actually about a National Party MP, National Party selection choices, and the ties of National Party figures to Chinese business and political interests.

And, as I said, on every other question this evening, all the other candidates rushed to the microphone to have their say, on everything from apprentices to housing to guidance counsellors.  But not one of the others said a word on the Chinese government’s politicial influence seeking in New Zealand, or specifically on Jian Yang’s position.   Not the Labour candidate –  deputy mayor of Wellington, and sure to become a member of Parliament on Saturday.  Not the quite highly ranked, and apparently very able, Greens candidate.  Not the TOP candidate, or the Conservative candidate.  Strangely, not even the New Zealand First candidate, who was presumably unaware that his party had taken a stand, both on Yang, and on the more general issues Professor Brady has raised about the activities in New Zealand of the Chinese government.     Not a word, from a single one of them.  It left me wondering about what our democracy was coming to.

As it happens, there was someone in the room who knew Professor Brady; in fact, this woman had done her masters thesis under Brady’s guidance.    Noting that Finlayson had tried to claim that Professor Brady didn’t like any foreigners, she proceeded to point out that not only was Brady fluent in Mandarin, but that her husband was Chinese.    Cue to guffaws and applause, and a rather grudging apology by the Attorney-General for his specific claims about one of our leading experts on China and its international activities.

It was a shameful performance all round.  The candidates can congratulate themselves all they like on the bonhomie of the campaign, but when not one of them will even address a serious question, raising concerns themselves raised by serious international publications and respected experts –  and Brady’s paper has been linked to and report quite widely –  it rather gives the game away.   As Professor Brady put it in her paper, the fear of giving any offence to the government of the People’s Republic of China –  a brutal  and aggressive dictatorship –  seems to have been raised to a defining feature of New Zealand politics, and not just by National.

We saw it on display tonight, nowhere more so than in the despicable performance by our Attorney-General and first law officer.   How safe is our democracy, our values and freedoms, our laws, in such hands?

 

Operating allowances don’t cover inescapable cost pressures

Michael Reddell Uncategorized

I didn’t have any intention of writing again about the Labour Party’s fiscal plans.  I’d already done so, prompted by the infamous Steven Joyce “fiscal hole” here and here.

But on Monday evening I was sent some analysis of the fiscal outlook prepared by a group of former senior Treasury officials, who were keen that I should give it some coverage.  They are keen to retain anonymity, but I know all those involved, and have a considerable regard for most of them.   Most, in my observation, would also seem considerably more likely to vote for ACT than for, say, Labour or parties to its left.  But  what they sent me wasn’t particularly value-laden; it was an attempt at a technocratic assessment of some of the basic pressures on government finances over the next few years.

I’m not going to swamp you with numbers  And trying to unpick and explain here the differences between core Crown and total Crown expense items, and which is relevant where, is sure to have your eyes glaze over, and (frankly) on a couple of points I couldn’t get clear answers myself.

But their main point is a simple one.  Budget projections of government tax revenue, including the PREFU ones that both Labour and National are relying on, include the effects of forecast wage and price inflation, and forecasts of a rising population.  On the other hand, most line items for government expenditure, as presented in the PREFU, do not do so.

But things governments purchase, and people governments employ, will become more expensive over time (that’s inflation).  And a rising population will also, over time and all else equal, require more public employees –  perhaps no more Treasury officials, but certainly more nurses and teachers, police and perhaps even Corrections officers.    Given the outlook for inflation and population growth, those cost pressures are largely inescapable –  at least without specific decisions to cut real per capita spending in some or other areas.   (When I say “inescapable”, of course governments can change inflation and non-citizen immigration targets, but given the targets they choose, there are future –  largely inevitable or inescapable –  spending consequences.

In fact, the PREFU documents would be much more useful –  as I noted a couple of weeks ago, picking up a comment on an earlier post – if they included some analytical tables showing expenditure numbers that adjusted for these all-but-inescapable inflation and population pressures.  If political parties presented their alternative plans relative to that sort of baseline we would all be much better off.

Instead, at present, we are given a table like this (or its total Crown equivalent)

PREFU extract

In this table, some specific line items show considerable increases over the four year period.  In particular, where there is a statutory requirement to make expenditures in a particular way, explicit allowance is made in the PREFU line item numbers.  New Zealand Superannuation expenditure for example –  eligibility and formula in statute –  is explicitly shown as increasing from $13043 million in 2016/17 to $16085 million in 2020/21 (included in the first line above).

But most government spending isn’t like that.  It is simply subject to appropriations after each year’s budget, and each government agency must make an explicit bid for any new spending, even that which (in effect) simply results from inflation or population increases.  So those –  largely inescapable –  prospective spending increases aren’t identified in specific line items in the table above.  Instead, it is all lumped together in the line labelled “Forecast new operating spending”, which –  in PREFU –  captures the cumulative total of the annual “operating allowances” the current government has identified for the next few years  (cumulative because the decision to spend $1000 million extra next year, and another $1000 million extra the following year means that in the second year, total spending would be $2000 million higher than what has been appropriated this year).

In other words, that new operating spending line can deceive.  From a Treasury budget management perspective it is all new money available to spend –  you don’t want government departments counting on what ministers and Parliament haven’t approved.  From a bigger picture perspective though it is a mix of money available for genuinely new initiatives, and money that will end up having to be spent to keep up with wage and price inflation and population.     Quite how much governments want to have available for genuinely new stuff is up to them –  and political and market tolerance for debt and taxes.  But in recent years, that proportion hasn’t been much.  Government spending has been falling as a share of GDP.    In fact, as I’ve noted previously, both parties tell us they expect to reduce government spending as a share of GDP further over the next few years.

core crown spending 17 election

Labour less so than National, but it is still a reduction.

And the other half of the point the former senior Treasury officials are making is that Labour seems to have promised to do quite a lot of new stuff over the next few years.  Specifically, in 2020/21 –  the final PREFU year, although not the last year of Labour’s plan –  they have announced specific policy promises that,  on their numbers, would have total spending $6058 million higher than under PREFU.

Of course, they are partly doing this through revenue measures –  primarily not proceeding with National’s promised tax cuts. On their numbers –  and the same economic assumptions – revenue will be $2341 million higher in 2020/21 than is provided for in the PREFU.    Since the projected surplus in 2020/21 is almost identical to that in PREFU, they have precommitted a net additional $3700 million to fund the (net) new policy promises.

And how much as-yet-unallocated spending provision is there in PREFU for 2020/21?  Well, we can see that number in the table above: $5495 million.   But if around $3700 million is already committed to meet policy promises, that leaves only around $1800 million.

Again, the question the former senior Treasury officials are raising in whether that is enough to cover the inescapable cost pressures.

Over the three years (from the current Budget numbers for 2017/18) to 2020/21, those “inescapable” pressures include projected:

  • Population growth of 4.6 per cent
  • Cumulative increases in the CPI of 6.2 per cent, and
  • Cumulative wage increases (QES measure) of 8.5 per cent.

Across core Crown agencies and Crown entities (the latter includes schools and DHBs) the government expects to spend $20142 million this year on “personnel expenses”.     Using those cost pressures:

  • forecast wage inflation alone would lift annual spending by around $1700 million by 2020/21, and
  • if the number of public employees kept pace with population growth that alone would add another $900 million to the wage and salary bill.
  • for an overall increase (the new workers will also get the higher salaries) of around $2700 million

But there was only about $1800 million left after the specific policy promises Labour has made.

Another item we could look at is Other Operating Expenses.   These are around $39000 million this year (2017/18 Budget).   Assume that the cost of whatever the government is purchasing increases at the rate of CPI inflation, and that the volume of purchases will increase with the forecast increase in population, and that would raise government spending on this item (simply to deliver the same volume of real services per capita) by about $4200 million by 2020/21.

Across just those two (large) items, the “inescapable” cost pressures would add $6900 million by 2020/21 to annual spending.    And yet, the government’s operating allowance –  passed to Treasury as current policy to use in PREFU – is for only $5495 million more spending by 2020/21.

We know the policy promises the Labour Party has made:  they’ve committed about $3700 million to meet specific policy promises.  We don’t have any decent estimate (that I’m aware of) of the cost of the National Party’s promises, although they seem almost certain to be less –  for now anyway –  than those the Labour Party has put out.

But the bottom line is that, on the macroeconomic assumptions both parties are using, the existing operating allowances (and revenue projections) are not sufficient to cover even what former senior Treasury officials would regard as “inescapable” cost pressures on the Budget over the next few years.  (In the spreadsheets they sent me, they didn’t explicitly allow for the population growth, but in my subsequent exchanges with their representative, they accepted that the population pressures on spending are just as real as the inflation ones.)   The gap  –  hole if you like –  appears likely to be materially larger for Labour than for National, but it is there for both sides of the political divide.

Of course, there are ways through that.  A government led by either main party could decide to make material cuts to services or other spending.     Labour seems to have talked of the Defence budget and perhaps Corrections.  National –  probably faced with a smaller gap –  has given us no clues.  And none of those possible cuts –  from either party –  has been outlined in any detail and debated in this election campaign.   Perhaps public service salaries could be held below general wage inflation.   Perhaps no more teachers or nurses could be hired even as the population increased?  Perhaps some extraneous (but mostly rather small) government agencies could be closed?

Then again, perhaps the spending as a share of GDP tracks just aren’t very credible, probably for either party (but probably more so for Labour).  As I’ve said before, it is a little hard to understand how, for example, a party can campaign on the idea of years of underfunding of core services, and yet suggest that government spending will fall as a share of GDP over the next few years if they are elected.

And when (properly measured) net core Crown debt is about 9 per cent of GDP, and the macro outlook suggests rising surpluses from here, it isn’t entirely clear why it would be sensible to do so, given the stuff that a left-wing party says that it wants to deliver.

The future is uncertain.  We could have a recession in the next few years, or a period of really strong growth.  But if we take the Treasury PREFU macro outlook as given, it is hard not to conclude that under whichever party we elect there will be more total spending (than in either PREFU or the Labour plan) as a share of GDP and somewhat higher public debt.   And before anyone starts hyperventilating about higher interest rates, a reminder of the Orr/Conway results I linked to on Monday: on those estimates, even a 10 percentage point increase in net debt to GDP might be worth about 6.5 basis points on long-term bond yields.   Realistic differences over the next three years would not be worth anything like an additional 10 percentage points on the debt to GDP ratio.

And finally, my suggestion –  indeed plea –  to The Treasury, and to possible new Fiscal Council (which Labour is proposing if elected)  –  is that for the next PREFU we should have analytical tables that take explicit identifiable account of the likely –  largely “inescapable” (in the words of the senior Treasury officials) cost pressures resulting from inflation and population growth.  There are real debates to be had on what level of real per capita services/spending governments should provide –  that is the stuff of politics –  but for these sorts of purposes a much more sensible baseline –  and a more enlightening one for voters –  is one that explicitly takes account of those pressures, and thus more clearly identifies how much is “left over” for genuinely new initiatives.  Anything beyond that amount has to be funded by either cuts in other spending, or lower surpluses.    But inflation means things cost more, and more people means more government spending (all else equal), and it doesn’t help to bury those pressures, as current practice –  led by Treasury, which decides what to publish –  tends to do.