New Zealand Initiative on immigration: Part 8 Labour market

March 15, 2017March 15, 2017 Michael Reddell Immigration, New Zealand Initiative

The New Zealand Initiative’s chapter four, on economic issues, includes most of their treatment of the labour market. This isn’t going to be a long post, and in a number of key areas we agree.

In particular, they are quite right to push back against the suggestion that immigration “takes jobs” from natives: there is no fixed pool of jobs, and if anything in the short-run immigration has tended to boost demand more than supply, so that in the shorter-term, it acts as a boost to (net) demand, and something that lowers the unemployment rate a bit. That is why, typically, the Reserve Bank is raising interest rates – or lowering them less than otherwise – when immigration surprises on the upside. In the medium-term, there is likely to be little or no impact on the unemployment rate, one way or the other. Labour market and welfare system regulatory rules play a key role in influencing the normal, sustainable, rate of unemployment.

And the Initiative doesn’t seem to have signed on to the silly nonsense that we need lots of immigrants to ease “skill shortages” – a line touted by Business New Zealand and their affiliates, and by their predecessor organisations for many decades. I’ve dealt with this issue in various posts (including here and here). You have to wonder how other countries manage – including the many richer and more productive countries than New Zealand that haven’t had anywhere near as much immigration over the years. Here is some of how I responded to that argument in one of those earlier posts

Business sector advocates often try to have us believe that key sectors just couldn’t survive without reliance on large scale immigration. Set aside the inherent implausibility of the argument – how do firms in the rest of the world manage – and think about some specifics. Sure, it is probably hard to get New Zealanders with alternative options to work in rest homes at present. So, absent the immigration channel, wage rates in that sector would have to rise. Were they to do so, I can see no reason why in time plenty of New Zealanders would not gravitate to the sector. It was New Zealanders who staffed the old people’s home my grandparents and great aunts were in 30 years ago. Same goes for the dairy sector, or the tourism sector.

…..

Of course, none of this is obvious to an individual employer. They probably can’t raise their wages to attract New Zealand workers instead, even if they wanted to. To do so would undermine that particular firm’s competitive position. But again, this is the difference between an individual firm’s perspective, and a whole of economy perspective – and the latter should be what shapes national policy. Cut back the immigration target, along the lines I’ve suggested, and we’d see materially fewer resources needing to be spent on simply building to keep up with the infrastructure needs of a rising population. We’d see materially low real interest rates, and with them a materially lower exchange rate. The lower exchange rate would enable New Zealand dairy farmers, and tourism operators, to pay the higher wages that might be needed to recruit New Zealanders into their industries, and probably still be more competitive than they are now. And plenty of New Zealanders now working in sectors totally reliant on an ever-growing population would, in any case, be looking for opportunities in other sectors.

The Initiative mostly stays away from this line of argument, and they are right to do so. Markets take care of incipient “shortages”, whether of labour, tomatoes or whatever – prices adjust and, if necessary, over time production and/or structures and patterns adjust. The Initiative are generally supportive of letting markets work.

A lot of the empirical literature focuses on wages, and in particular on wages for those relatively more lowly-skilled natives who are, to some extent or other, in competition with relatively lowly-skilled migrants. As even the Initiative notes, a big influx of migrants looking for work in one particular sector will probably lower wages in that sector in New Zealand. They use “fruit pickers” as an example in their report. But one could probably use aged-care workers as another concrete example.

The Initiative’s reaction to this, reasonably self-evident, proposition is to be (perhaps unconsciously) in two minds. On the one hand, they like to cite what is probably the consensus of the international literature, that if there are adverse effects of immigration on lower-skilled natives they are, in aggregate, relatively small. Perhaps that is true, although it probably isn’t much comfort to someone at the bottom end for whom every dollar in the weekly pay packet really counts. And recall that survey of US academic economists I mentioned the other day. Quite a few respondents were uncertain, but there wasn’t much dissent from the proposition that in the US context (one of the strongest and most productive economies around).

Question B: Unless they were compensated by others, many low-skilled American workers would be substantially worse off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

But on the other hand, the Initiative seems to want to celebrate how helpful even low-skilled immigration can be, even though almost the only way – even in theory – it can be helpful is by lowering domestic wages, at least for those who are near-substitutes for the migrants.

Here is what they say

Arguing for immigration restrictions to protect the incomes of New Zealand fruit pickers is as misguided as arguing for tariffs on fruit to serve the same purpose.

We cannot manipulate wages by distorting the market in the long run. Virtually anything can be imported today if there’s the will. Cheap foreign labour already competes with New Zealand labour even if workers don’t land on our shores. If wages in New Zealand for similar output rise much higher than foreign wages, we can only expect more outsourcing and exit of New Zealand firms.

Ultimately, wages are determined by the value of a worker’s production at the margin and the willingness of the worker to forgo leisure for consumption. Bringing in productive migrants more willing to work than New Zealanders may lower wages for some in the short run, but it also means New Zealand can produce more goods and services cheaper.

For a start, it is simply incorrect that “virtually anything can be imported today” – try it for a hair cut, a cafe meal or coffee, aged care for your mother, or the bus trip home tonight. The boundaries between tradables and non-tradables are fuzzy, but it doesn’t make the distinction economically irrelevant.

But what really staggered me was the starkness of the way they put it – we should be competing internationally on the basis of lots of migrants lowering wage costs. They really can’t have it both ways: lower-skilled immigration might be largely harmless (if it doesn’t have any obvious effects on wages for natives), or there might be gains from trade from bringing lots of these people in, but if so only through a mechanism that involves lower wages (than otherwise) for the natives they are competing with. It surely has to be one or the other? No one pretends these people are where all the ideas and productivity spillovers are coming from.

Despite the literature they cite, the Initiative seems to be in the latter camp. Here was another comment on lower-skilled migrants, and why we shouldn’t just focus on highly-skilled migrants.

Hiring migrant workers in the service industry, especially home production (childcare, cleaning, gardening), can free up time for workers in other sectors of the economy. This way, they can be an important complement to highly skilled workers.

It does that by lowering the relative cost of that type of work.

Earlier in the year, I wrote about an op-ed by a British economics academic that had run in the local papers, where she argued that low-skilled immigrants had been a great boon for professional women and their husbands. I summed up my reaction to that this way

Perhaps this wouldn’t be (as) morally offensive if there was an entirely separable class of temporary guest workers, who didn’t substitute at all for low-skilled domestic workers. The temporary workers would gain from the trade, and so would those employing them. But that (separability) isn’t how labour markets operate. What Bateman is in fact arguing for is a policy designed to explicitly help people like her, at the expense of poorer less highly-skilled Britons (in fact, in the roles she talks of typically poorer relatively unskilled British women). No one person is ever an exact substitute for another, but there is a great deal of overlap. Even though she never says it, what Bateman is arguing for is a policy designed to increase the differences in incomes between the highly-skilled and the less-skilled – for the comfort of the highly-skilled (women and their spouses).

I don’t see any gap between Bateman’s stance and that of the Initiative.

In their conclusion to their economics chapter, the Initiative try to sum up. They begin

The overall impact of immigration on the labour market is small, but with a multitude of individual effects. Some individuals may experience wage reduction, some wage growth, and some may remain unaffected. The effect for each individual will depend on their own skills, the skills of the migrants, and the demands from the migrants.

I suspect that isn’t too far wrong, especially when we recognise that much of the immigration to New Zealand isn’t very skilled at all, and that those at the lower end of skill spectrum are those mostly likely to be losing.

But here’s the thing. That summary really gives the game away. If even the key advocates of large-scale immigration can only end up arguing that the impact on the labour market is small, what happened to those large gains they were citing a few pages earlier in their report. Recall the recent IMF study they cited

The study finds that a 1 percentage point increase in the share of migrants in the adult population can raise GDP per capita by up to 2% in the longer run

If that was even remotely true, we’d have seen a massive increase in productivity, GDP per capita, and almost certainly wages as a result of the scale of immigration New Zealand has had over the last 25 years. Perhaps the lower-skilled would still have done relatively less well, but pretty much everyone’s incomes should have lifted, and by quite a lot. The differences really should be quite easily discernible. As it is, even the advocates haven’t been able to show those sorts of gains. In New Zealand’s case – and recall that that is my focus – they just don’t seem to be there, and there is a plausible case – weak productivity growth, high interest and exchange rates, weak business investment, weak exports, and a remote island location as personal connections have become more important – that we might mostly be worse off. Some people – some natives – are better off (anyone, for example, holding regulatorily-restricted land in Auckland 25 years ago), but a best guess – a best read of the New Zealand experience – is that the country as a whole isn’t better off, and quite probably is worse off.

The economics chapter of the report ends with a line I quoted in one of the earlier of this series of posts

Free movement of labour is a fundamental driver of the creative destruction
process, just like free movement of goods and capital. It can be painful for some but it improves outcomes for many. And if managed well, the pain can be short-lived and the benefits perpetual.

It is a statement of faith at best. We haven’t had “free movement of labour” but we’ve had a lot more of an inflow of non-citizens – all policy controlled – than almost any other advanced country. And the perpetual benefits still seem, to put it mildly, very hard to spot. Perhaps they are there in theory, in particular specifications (models), of how economies work generally, but the challenge for the Initiative should surely to have been to demonstrate that those gains are actually there for New Zealanders, amid the specifics of how this economy has actually worked in recent decades.

Reforming the Reserve Bank

March 14, 2017 Michael Reddell Governance, labour party, Reserve Bank

A couple of weeks ago I wrote a post on where the Labour Party seemed to be going on monetary policy, informed by Alex Tarrant’s interest.co.nz article on his conversations with Grant Robertson. It all seemed to amount to not very much – wording changes to make explicit an interest in the labour market (employment/unemployment), but without much reason to think it would make much difference to anything of substance. My suggestion was that there was a distinct whiff of virtue-signalling about it. And the sort of change Robertson seemed interested in on the governance front – legislating the position of in-house technocrats – seemed unlikely to be much of a step forward at all.

Last week, interest.co.nz had a piece on the same issues by former Herald economics editor Brian Fallow, also benefiting from an interview with Robertson. Fallow pushes a bit harder. His summary is that

The changes Labour proposes to make to the monetary policy framework sit somewhere between cosmetic and perilous, but closer to the former.

Cosmetic for the sorts of reasons I’ve outlined. On the one hand, the Bank has always taken the labour market into account as one indicator of excess capacity. And on the other hand, plenty of pieces of overseas central banking legislation refer to employment/unemployment somewhere, but there is little evidence that the central banks in those countries have run monetary policy much differently, on average over time, than the Reserve Bank of New Zealand has.

Robertson’s response is pretty underwhelming.

Asked how much difference the regime he advocates would have made, had it been in place in the past, he said, “In the very immediate past, not that much, truthfully. But there have been other times in our history, and there have been other examples around the world, when lower interest rates could have helped to reduce unemployment.”

If he was serious about this making a difference, he’d surely be able to quote chapter and verse. When, where and how does he think it would have made a difference?

He is, however, clearly tantalised by the current situation

Even now, “Are we satisfied as a country that with 3.5% growth 5.2% unemployment is okay?”

Given that the Treasury thinks our NAIRU is nearer 4 per cent, I don’t think we should be content. But Robertson has spent so long over the last few years defending Graeme Wheeler that he can’t quite bring himself, even now, to suggest that monetary policy could have been conducted better in the last five years, whether on the current mandate or something a little different.

If the proposed change isn’t cosmetic, Fallow worries that it could be perilous. Why? Because when he pushes Robertson he gets a more explicit – and more concerning – answer than the one Alex Tarrant got.

He has told interest.co.nz’s Alex Tarrant that he was not going to tell the Reserve Bank whether one objective is more important than the other.

Talking to me, however, he said that ultimately the bank would remain independent. “But if unemployment starts to get out of control I would expect in that environment it says ‘At this time we are preferencing that and we are going to lower rates by a greater percentage than we might have’.”

In the event of a stagflation scenario he would expect it to focus more on the falling output and employment side of the dilemma and to ease.

“I think the setting of a clear direction here is what is important.”

In short Robertson seems to be saying that if Parliament were to change the statute, the message to the bank would be when in doubt err on the side of stimulus.

If unemployment is prioritised by the Reserve Bank in such circumstances, it is a recipe for inflation getting away. In the medium-term, monetary policy can really only affect nominal variables (inflation, price level, nominal GDP or whatever), it simply can’t affect real variables. Using monetary policy to pursue such goals directly is a risky prescription. I wouldn’t want to overstate the issue – New Zealand isn’t heading for hyperinflation – but part of reason we and other countries ended up with persistently high inflation in the 1970s is that too much weight was placed on unemployment in setting monetary policy. Getting inflation back down again was costly – including in terms of increased unemployment. On a smaller scale, as Fallow highlights, the desire to “give growth a chance” was part of what was behind the monetary policy misjudgements of 2003 to 2006, when monetary policy wasn’t tight enough.

Robertson’s words suggest he still hasn’t thought the issues through very deeply or carefully. For now, I’m sticking with the “cosmetic” or virtue-signalling interpretation of what Labour is on about. And I’m still uncomfortable at the lack of command of the issues and experience in someone who aspires to be Minister of Finance later this year.

But yesterday, a mainstream economist came out in support of more or less the direction Robertson is proposing. In his youth Peter Redward spent a few years at the Reserve Bank, and then spent time in various roles, including at Barclays and Deutsche Bank, before returning to New Zealand and establishing his own economic and financial markets advisory firm. He focuses on emerging Asian foreign exchange markets, but keeps a keen eye on monetary policy developments in New Zealand.

In his short piece at Newsroom, Peter Redward says It’s time for a Reserve Bank change. He notes of the last few years that

Whether Governor Wheeler consciously aimed for a hawkish interpretation of the Act, or not, we may never know. But hawkish he’s been, leading to tighter monetary conditions than were necessary, boosting the New Zealand dollar and confining thousands of New Zealanders to needless unemployment.

And argues that

…maybe it’s time to adopt a dual mandate in the Act. One possibility is the dual mandate of the U.S. Federal Reserve. The Federal Reserve has a two percent inflation target but it also targets ‘maximum employment’. Economists have differing interpretations of ‘maximum employment’ so it acts as a constraint, and that’s the point.

While no one knows exactly where ‘maximum employment’ in New Zealand is, I believe most economists would agree that it’s likely to be consistent with an unemployment rate somewhere around 4.5 percent (give or take 0.25 percent). If the Reserve Bank had a dual mandate, its elevated level would have acted to constrain the bank’s aborted tightening of policy in 2009 and 2014.

I’m very sympathetic to his critique of Graeme Wheeler’s stewardship of monetary policy, and highlighted in numerous of my own commentaries, after it became apparent that the 2014 OCR increases had been an unnecessary mistake, the Governor’s apparent indifference to an unemployment rate that remained well above any estimates of a NAIRU.

But I remain a bit more sceptical than Peter appears to be about how much difference a re-specified mandate might have made. As I’ve argued before, past Reserve Bank research suggests that faced with the sorts of shocks New Zealand experienced, policymakers at the Fed, the RBA and the Bank of Canada would have responded much the same way as the Reserve Bank of New Zealand did. That work was done for periods prior to 2008/09 – for most of the time since then the Fed was at or very near the lower bound on interest rates, so the game was a bit different – but it isn’t clear that the specification of the target has been the problem in New Zealand in the last few years. After all, simply on inflation grounds alone the Reserve Bank hasn’t done well.

Here is a chart of the Reserve Bank’s unemployment rate projections from the March 2014 MPS, the occasion when they started raising the OCR.

2014 U projections.png

The second observation is the last actual data they had – the unemployment rate for the December 2013 quarter. So when they started the tightening cycle they thought the unemployment would be falling quite considerably that year, before levelling out around what they thought of as something near what they must have thought of as the practical NAIRU (this was before last year’s revisions to the HLFS which lowered unemployment rates, and NAIRU estimates, for the last few years). The problem then wasn’t that they didn’t care about unemployment, it is that they got their forecasts – particular as regards inflation – badly wrong. It isn’t clear why a different target specification would have altered the policy judgement at the time.

Perhaps it would have done so once it became apparent that the OCR increases hadn’t really been necessary, but a stubborn refusal by the Governor to concede mistakes, even with hindsight, plus a mindset firmly focused on how “extraordinarily stimulatory” monetary policy allegedly was – when no one had any real idea what a neutral interest rate might be in the current environment, and when inflation stubbornly didn’t rise much if at all – seem more likely explanations. The Bank kept forecasting that inflation would rise and unemployment would fall – the jointly desired outcomes.

(And if one looks at the Bank’s forecasts in mid 2010, when they made the previous unnecessary start on tightening, one gets much the same picture – forecasts of falling unemployment and rising inflation, that simply didn’t happen.)

So why should we supposed that a different specification of the target would have made much difference to how policy was set? We had an institution that was misreading things, in a political climate where no one seemed much bothered by the unemployment rate holding up, and where for a long time financial markets endorsed the approach taken by the Reserve Bank (often more enthusiastic for future tightenings than even the Governor and his advisers were). Getting something closer to the right model of the world (for the times), and quickly learning from one’s mis-steps, seem likely to matter more than the words of the Act in this area.

As I’ve said repeatedly here, I’m not firmly opposed to amending the relevant clauses of the Reserve Bank Act to mention the desirability of things like a low unemployment rate. But even the Federal Reserve Act makes clear that good monetary policy focused on a nominal target creates a climate consistent with high employment. High employment isn’t a goal for the Federal Reserve is supposed to pursue directly, even if – all else equal – a high unemployment rate relative to an (uncertain) NAIRU is a useful indicator that something might be wrong with monetary policy settings. It isn’t clear there is anything much to gain from such amendments – or that they are where the real issues regarding the Reserve Bank are – but sometimes perhaps virtue needs to be signalled? My own concrete suggestion in this area would be to require the Reserve Bank to publish, every six months, its own estimates of the NAIRU and to explain the reasons for the deviations of actual unemployment from the NAIRU, how quickly that gap could be expected to close, and the contribution of monetary policy to the evolution of the gap.

Brian Fallow’s article suggested that Labour still hasn’t settled on how to reform the governance of the Reserve Bank.

Robertson is non-committal at this stage on the composition of a monetary policy committee to take interest rate decisions, including to what extent it should include members from outside the bank.

Peter Redward has a more specific proposal for him.

What’s needed is a formal Monetary Board complete with published minutes and, released after a grace period, transcripts of the meeting and the voting record of members. In a recent speech, U.S. Federal Reserve Vice Chair, Stanley Fischer, argued that this arrangement is superior to the sole responsibility model in achieving outcomes and accountability. Changes to the role and responsibility of the Governor will necessitate changes to the structure of the Reserve Bank Board. Best practice would suggest that a Monetary Board should be created to set monetary policy with the Reserve Bank Board selecting candidates for the committee while maintaining oversight of the bank. To ensure that external board members are not simply captured by the bank it may be necessary to provide a secretariat similar to the Fonterra Shareholder’s Council, operated at arms-length from bank management.

It isn’t my favoured model, but it would be a considerable step in the right direction, and far superior – in terms of heightened accountability and good governance of a powerful government agency – to Graeme Wheeler’s preference to legislate his own internal committee. The biggest problem I see with the Redward proposal, is that it has too much of a democratic deficit. Monetary policy decisionmakers shouldn’t be appointed by other unelected people – the Reserve Bank Board – but by people (the Minister of Finance and his Cabinet colleagues) whom we the voters can toss out. That is how it is pretty much everywhere else.

Peter’s proposal focuses on monetary policy. But, of course, the Reserve Bank has much wider policy responsibilities, including a lot of discretionary power – not constrained by anything like the PTA – in the area of financial regulation. I presume he would also favour committee decisionmaking for those functions. I’ve proposed two committees – a Monetary Policy Committee and a Prudential Policy Committee, each appointed by the Minister of Finance, with a majority of non-executive members, and with each member subject to parliamentary confirmation hearings (although not parliamentary veto). It is a very similar model to that put in place in the United Kingdom in the last few years. It puts much less reliance on one person – who will sometimes be exceptional, and occasionally really bad, but on average will be about average – and would be more in step with the way in which other countries govern these sorts of functions, and with the way we govern other New Zealand public sector agencies. I hope the Labour Party is giving serious thought to these sorts of options, and while the headline interest is often in monetary policy, the governance of the financial regulatory powers is at least as important to get right.

And then of course, getting a good Governor will always matter a lot. The Governor, as chief executive, will set the tone within the organisation, and determine what behaviours are rewarded and which are frowned on or penalised. If the Reserve Bank failed over the last few years, it wasn’t just because Graeme Wheeler was the sole monetary policy decisionmaker – his advisers mostly seemed to agree with him – but because of the sort of organisation he fostered, where “getting with the agenda” seemed more important and more valued than dissent or challenge, in area where few people know anything much with a very high degree of confidence. Character and judgement are probably, at the margin, more important than high level technical expertise.

And while people are thinking about reforms to the Reserve Bank Act don’t lose sight of how little accountability and control there is over the Reserve Bank’s use of public money, or about the provisions it has carved out for itself from the Official Information Act which allow it to keep secret submissions on major policy proposals even – perhaps even especially – when they come from parties who would be affected by those proposals.

Revising the Reserve Bank Act was the first legislative priority for the first Labour government that took office in 1935. I’m not suggesting the same priority if there is a new Labour-led government later in the year, but there is a real and substantial agenda of reforms to address, which will take time to get right, and which take on some added urgency in view of the vacancy in the office of the Governor that needs to be filled by next March. That appointment – a key step in the reform and revitalisation of the Reserve Bank – should be led by whoever is Minister of Finance, not by the faceless (and unaccountable) men and women of the Reserve Bank’s Board, the people who have presided complacently over the mis-steps of the last few years.

New Zealand Initiative on immigration: Part 7 Productivity and all that

March 13, 2017March 13, 2017 Michael Reddell Immigration, New Zealand economic performance, New Zealand Initiative

Today I’m continuing on with the New Zealand Initiative’s chapter four, on the (claimed) economic benefits to New Zealanders of large scale non-citizen immigration. I don’t have the appetite to try to comment on every questionable claim in the report, so I start with a section headed “Agglomeration – Bigger is Better?” in which (despite the question mark) the Initiative appears to position itself firmly behind not just the proposition that immigration is good for us, but also the proposition that a bigger population is good for us.

There is no good evidence I’m aware of for the latter proposition. At a more informal level, I illustrated in this post that large countries (by population) haven’t grown faster (per capita income or productivity) than small countries. And, of course, consistent with this impression, we have seen many more small countries emerge in the last few decades.

What there is little doubt about is that within countries people and economic activity tend to organise themselves in ways in which the higher productivity activities are increasingly more often found in larger cities. Cities exist in substantial part because it was found economically advantageous for them to do so. But it isn’t all that way, by any means. Natural resource based production tends to occur where the natural resources are – be it farming, oil and gas extraction, mining, or whatever. And the observation that within countries an increasing share of high value economic activity is undertaken in cities, tells us little or nothing useful about comparative national economic performance, given the successful co-existence of highly productive large and small countries.

The Initiative seems keen to take the other view

Places, cities in particular, with large, dense populations face lower transport costs in goods, people and ideas. It is cheaper to supply capital or consumer goods and find good workers; there is a better network for knowledge exchange across people. All vital components of economic growth. The existence of ‘agglomeration economies’ has been established in a number of studies. A meta-analysis of 34 studies found that the positive effects of spatial concentration on productivity remain even after controlling for reverse causality. Another meta-analysis highlights the importance of considering the various mechanisms through which agglomeration can produce benefits. New Zealand’s low economic productivity is partly explained by our small population, says Phillip McCann based on economic geography and urban economics.

But, as they acknowledge, I’ve pointed out what appears to be a pitfall in the argument in the New Zealand context, at least when it is used to back encouraging large numbers of new people into Auckland – what I’ve termed, the 21st century Think Big strategy.

Reddell contends that Auckland’s failure to produce significantly higher growth
compared to the rest of the country contradicts this explanation.

Recall that Auckland’s GDP per capita has been falling relative to that of the rest of the country for the last 15 years, and is quite low relative to that in the rest of the country when compared with other main cities in other advanced countries. Not only hasn’t Auckland outperformed, it appears to have quite badly underperformed. One could throw into the mix another point I’ve made previously: there is no major outward-oriented industry (exporting or import-competing) based in Auckland. It has the feel of a disproportionately non-tradables economy, servicing (a) the rest of the country, and (b) the physical needs of its own policy-driven growth.

How does the Initiative respond to this point?

However, a recent report highlights how standard measures can understate urban productivity differentials and estimates that Auckland’s firms have labour productivity 13.5% higher than firms in other urban areas.

This is, frankly, rather naughty. The Motu study in question produces revised estimates of labour productivity in Auckland relative to the rest of the country that are not dissimilar to the estimates of the ratio of nominal GDP per capita in Auckland relative to the rest of the country. No one has questioned that GDP per capita in Auckland is higher than that, on average, in the rest of New Zealand. But, by international standards, the margin is quite small. And, more importantly for this debate, the margin has been shrinking, even though the theoretical literature the Initiative seeks to rely on suggests it should have been widening. More people, from increasingly diverse places, generating more ideas, and as a result selling more stuff here and abroad, and investing to support those sales prospects. But it just hasn’t been happening. Instead, immigration policy has been putting more and more people in a place that doesn’t seem to have been producing the expected returns. And we know that New Zealanders, who presumably are best-placed to assess opportunities and prospects here, have (net) been leaving Auckland.

Frankly I was a bit surprised the Initiative didn’t have a more effective response to these indicators of Auckland’s underperformance and the troubling questions they appear to raise about the economics of New Zealand’s immigration programme.

The next section in the chapter is headed “Macro impact and how we measure it”. As they note

As a measure of living standards, GDP is not without its faults, but it does indicate how much a nation can produce and, ultimately, consume. The effect of immigration on GDP can be difficult to disentangle. There is little contention GDP increases with more immigration – that countries produce more with more people is a no-brainer.
Of more interest to economists is GDP per capita – how much the pie is growing relative to the number of people taking slices.

I’d add that the impact on the GDP per capita of natives is, or should be, of particular interest when it comes to considering immigration policy.

There is a surprisingly limited empirical literature on this point. There is a variety of papers which set up (calibrate) models for how the authors think the economy works, add an immigration shock, and then – surprise surprise – find that the model produces much the answer one expects. Papers in this class cover the range of results. Some are set up in ways that produce gains to natives of recipient countries, through some of the sorts of channels Initiative authors cite. But others, allowing for say fixed natural resources or sluggishly adjusting capital stocks, find that emigration tends to benefit the natives left behind, and slightly dampen the prospects of those in the recipient countries (the modelling the Australian and New Zealand Productivity Commissions used a few years ago in their review of the trans-Tasman relationship worked that way). In the recent Australian Productivity Commission report on immigration, the modelling work assumed that productivity growth in Australia would be mildly adversely affected by continuing relatively large immigration inflows (there is a somewhat jaundiced, but not inaccurate, summary here).

But in terms of straightforward empirical analysis of effects on GDP per capita or productivity, there isn’t a large pool of relevant papers (and none at all focused on New Zealand, even though we’ve had one of the largest planned immigration programmes anywhere, over a long period of time).

The Initiative authors refers to two papers. The first they summarise thus

A study of 22 OECD countries from 1987 to 2009 found migrants are not just attracted to countries with higher prosperity, they also help bring it about.

That sounds promising. The actual results don’t quite match the promise.

The authors estimates four different version of their model. In each case, they show results for how GDP per capita respond to net migration, net migration responds to GDP per capita, and how the unemployment rate and net migration respond to each other.

Here is the impulse response function chart from the first version of the model

boubtane etc model 1

The solid line is the central estimate, and the dotted lines are the confidence bands.

There is a statistically significant response of GDP per capita to a change in the migration rate in the first year after the shock, but everything beyond that is (a) statistically insignificant, and (b) slightly negative – ie below the zero line. No one would be surprised by a positive effect in the first period, since in the short-term demand effects from unexpected immigration inflows will typically exceed the supply effects. But over the medium-term, there is no evidence here of a sustained boost to per capita income. The pictures from the other three versions of the model all look much the same.

Before moving on, I should briefly highlight two other points about this paper:

it uses net migration, whereas most of the theoretical arguments for possible gains from immigration relate to inflows of non-natives (new ideas, new skills etc). For most countries, the difference isn’t that important, but for New Zealand it is very important.
one of the key things the paper sets out to show is that immigration does not materially affect the unemployment rate. This is a point that the Initiative and I are at one on, and – for what it is worth – the results of the paper suggest, as we would expect, no statistically significant effect.

The Initiative then moves on to some recent empirical work (Number 8, October 2016) by several IMF staff researchers, which built on another recent paper, by Ortega and Peri, but focused only on advanced countries.

The study finds that a 1 percentage point increase in the share of migrants
in the adult population can raise GDP per capita by up to 2% in the longer run and that the benefits from immigration are broadly shared across the income distribution.

As it happens, I wrote about this paper , somewhat sceptically, when it was first released, in conjunction with the IMF’s World Economic Outlook, late last year.

Here is the summary version of why the results simply don’t ring true.

This chart is from the paper (here “migrants” is the foreign-born share of the adult population)
stock-of-migrants

And this was my comment last year.

Think about France and Britain for a moment. Both of them in 2010 had migrant populations of just over 10 per cent of the (over 25) population. If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term. Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap. It simply doesn’t ring true – and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

Or, we could turn it around, and think about New Zealand’s actual experience. Let’s say that the foreign-born share of New Zealand’s adult population increased by 10 percentage points since 1990 – I can’t quickly find the exact numbers, but it is likely to have been in that order of magnitude. If this model is correctly specificied – and recall that New Zealand is included in its sample – that should have given us a huge lift in productivity and GDP per capita, say by around 20 percentage points. In fact, of course, despite having had probably the largest non-citizen immigration programme of any of these countries in that period (Israel, for example, isn’t in their sample), our productivity (GDP per hour worked – the metric the IMF authors use) has slipped further behind that of other advanced countries. Yes, perhaps there were lots of other particularly bad offsetting policies undermining New Zealand’s prospects – but over this period international agencies, including both the IMF and OECD, repeatedly stated that they thought we had pretty good policies in place.

Of course, as I noted on Friday, my main interest is New Zealand. If immigration to and among other countries has been productivity-positive, that is something to celebrate, but there is little evidence that it has been so for New Zealand.

One could take the critique and questions a bit broader. For example, note how the gains arise in this study. It is from having a large (increased) share of foreign-born people in one’s population. But immigrants age, have children etc. Without a continuing inflow of non-citizen migrants, any initial boost to the foreign-born share will erode quite steadily over time.

The US offers an interesting case study. Around the time of World War One, about 15 per cent of the US population was foreign-born. Immigration restrictions imposed in the 1920s, and in place for the following forty years, saw the foreign-born share of the US population fall to around 5 per cent by around 1970. There was nothing comparable in other large migrant recipient countries (eg Australia, New Zealand, Canada). All else equal, if the IMF model was correctly-specificied, this huge reduction in the foreign-born share should have resulted in a substantial deterioration in the absolute and relative producitivity position of the United States. There is simply no evidence I’m aware of to support such a proposition (and, in fact, historical estimates suggest that the US had some of its strongest productivity growth in history during these decades).

In my earlier write-up of the IMF paper I noted that

There are other reasons to be skeptical of the results in this IMF paper. Among them is that there is a fairly strong relationship between the economic performance of countries today and the performance of those countries a long time ago. GDP per capita in 1910 was a pretty good predictor of a country’s relative GDP per capita ranking in 2010, suggesting reason to doubt that the current migrant share of population can be a big part of explaining the current level of GDP per capita (and some of the bigger outliers over the last 100 years have been low immigration Korea and Japan and high immigration New Zealand). In fact, I’ve pointed readers previously to robust papers suggesting that much about a country’s economic performance today can be explained by its relative performance 3000 year ago. How plausible is it that so much of today’s differences in level of GDP per capita among advanced countries can be explained simply by the current migrant share of the population?

If this is the strongest empirical support advocates of New Zealand’s approach to immigration can adduce, those who have been inclined simply to go along should surely be rethinking their unquestioning support for the policy approach – whatever merits it may or may not have for some other countries. I’m aware of a tendency for New Zealand Initiative people to think that the onus of proof isn’t, or shouldn’t, be on them, so obvious and “morally right” is the case for immigration. Quite where the burden of proof lies is probably more a political one than an economic one, but one might hope that the advocates could produce more evidence, or sustained analysis of the New Zealand case, than is evident in the New Zealand Initiative’s economics chapter. Especially when the policy approach they support has been tried for more than 25 years, and when even they concede some puzzles about New Zealand’s economic performance in that time.

The authors of the IMF paper, and the earlier Ortega and Peri, paper, hypothesise that the gains from immigration come largely through a total factor productivity (TFP) channel. Although they never explicitly say so, The Initiative seem to share this perspective, with all their talk of ideas, innovation, alternative perspectives etc. The IMF researchers didn’t test the connection between immigration and TFP. But in my earlier post I included this chart, using the same foreign-born population share data the IMF did.

imf-mfp

If anything, over the period they looked at, the relationship was negative – a larger increase in the foreign-born population share was associated with weaker TFP/MFP growth. New Zealand is the red dot in the chart. The outlier – in the top right hand corner – was Ireland, which looks more positive for the IMF/Initiative story, except that as I also showed in that earlier post, it is quite clear that the surge of migrants into Ireland came several years after the surge in TFP growth.

And, on the topic of TFP growth, in a post last week I illustrated again just how weak New Zealand’s TFP growth has been relative to that in other advanced economies. Surely, serious think-tank advocates of New Zealand’s large scale non-citizen immigration policy would want to engage with this sort of record, and the apparent inconsistency with the connections they have hypothesised?

Sadly, simply ignoring the actual record in New Zealand seems to be par for course in the economic chapter of the Initiative’s report.

To their credit, they devote a couple of pages of the report to my hypothesis around the contribution of immigration policy to New Zealand’s longer-term economic underperformance (pp 39 and 40 for anyone interested). As they note, I have argued that

“given New Zealand’s continued heavy dependence on natural resource based exports, New Zealand might not be a natural place to locate many more people, while still generating really high incomes for them all”, and that
high levels of non-citizen immigration have helpd explain persistently high real interest and exchange rates, in turn deterring business investment, especially that in the tradables sector, and thus tending to undermine productivity growth.

But they don’t really know what to do with these ideas, and so end up largely ignoring them. There is simply nothing more, in this section or in the rest of the report, on the issues around a natural resource based economy, that is very distant for major markets/suppliers/networks etc. New Zealand may have many things in common with other advanced economies, but this is one probably very important difference.

And when it comes to New Zealand’s dismal long-term productivity record, the limit of their comment is this

New Zealand productivity has been less than stellar for a long time – a concern to many economists and policymakers.

And that’s it. There is no attempt at all to engage with the data, or to tell some alternative story of economic management and prospects over the last 25 years or so, in which for example, non-citizen immigration has played a more favourable role.

There is a little bit more on real interest rates – why they’ve been so persistently high relative to the rest of the world.

The hypothesis also cannot fully explain why the real interest rate has not converged to the rest of the world. Reddell says competing theories explaining the high real interest rate, such as a risk premium associated with New Zealand investment, do not fit with the evidence either, in particular with the persistent strength of the real exchange rate. He contends that the only explanation currently on offer is that the repeated shocks to domestic demand – not fully recognised in advance by market participants – must have been a big part of the story.

Clearly, the Initiative don’t find my story persuasive, but there is simply no attempt to explain why, or to pose a credible alternative hypothesis for one of the most striking features of New Zealand macro data in recent decades.

The best they seem able to come up with is to point out that any sustained demand pressures will tend to put upward pressure on real interest rates. And that is quite correct of course. An economy with very strong productivity growth, and the associated investment in support of it and consumption in anticipation of the future income gains, will tend to have high real interest rates (relative to those abroad). And no one much will regard that as problematic – rather it is a mark of the success of the economy.

But that hasn’t been the New Zealand story. Business investment has been quite low as a share of GDP (especially given our population growth) and productivity growth (labour or total factor) has been low. There is little, or nothing, to suggest that the high relative interest rates we’ve experienced in New Zealand over the last 25 years have been a desirable market-led phenomenon. They look anomalous not just relative to other countries, but also relative to our own underwhelming economic performance.

Here is the Initiative’s attempt to fend off my analysis

The concerns raised by Reddell would apply more broadly than just on immigration. For example, tourists are foreigners who come to New Zealand, purchase our currency and goods, and use infrastructure (they require accommodation, drive on the roads, may require police assistance, add waste to landfills. etc.). Hence, tourism also puts pressure on the real interest rate and real exchange rate.

As I’ve already noted, any persistent demand pressure – whether from exports or the domestic economy – will, all else equal, tend to put upward pressure on local interest rates.

But except for population-driven pressures (in a country with a modest savings rate) we just haven’t had such pressures. As I noted just before, business investment has been lower than we might have hoped, exports as a share of GDP have been sideways or backwards, and the consumption share of GDP has been flat for decades. What hasn’t been flat has been the population, and particularly the foreign-born population, the direct consequence of government immigration policy. Take their tourism example. SNZ has data on the average daily stock of foreign travellers in New Zealand(boosting domestic demand) and the average stock of New Zealand travellers abroad (easing domestic demand), going back to 1999. There are more foreign travellers here than New Zealanders abroad, on average, but the numbers aren’t large. In 1999, there were on the average day 16000 more foreign travellers here than New Zealanders abroad. Last year, that number was 54000. 38000 (net) more travellers here is a helpful addition to net exports, and some pressure on demand. But

the overall export share of GDP is less now than it was in 1999
from 1999 to 2016, there was a net inflow of 759000 non-citizen migrants to New Zealand.

That is both a very large number, and a direct government economic policy choice. It has had consequences, and there seems a reasonable prima facie case, which the New Zealand Initiative has not attempted to seriously rebut, that that government-controlled influx has not been economically beneficial to New Zealanders as a whole.

This post has already got rather long, so just two final thoughts.

First, it is striking how little attention the Initiative gives to the large sustained outflow of New Zealanders over recent decades. That outflow is certainly at a low ebb at the moment, but there seems little reason to assume that the exodus has come to any sort of permanent end – as even the Initiative recognises, our productivity performance languishes. Whatever one thinks of immigration policy in the abstract, surely it is a somewhat relevant consideration to look at what New Zealanders themselves are doing – people best placed to assess opportunities and prospects here? There is, among some policymakers, a weird approach to this issue, in which immigration policy is substantially about replacing those who leave. I don’t think the Initiative subscribes to that silliness, but neither does it call it out. When individuals are making rational choices to move – to leave New Zealand – the burden of proof should really be on those who want the government to try to second-guess those judgements and choices. When people left Ireland, Italy, Sweden or wherever for the US in the 19th century, it benefited those who left and those who stayed. It would have daft for the authorities in those places to have responded “woe is me, we need to find some poorer people from other places to bring in to replace those who’ve left”. A quite different approach would be to respect and respond to the market signals – movements of their own people – and try to fix up their own economies in ways that might make it no longer attractive for their own people to leave. It would have been a much better lesson for the New Zealand authorities to take. Residents of Taihape and Invercargill should be grateful governments didn’t/couldn’t respond to outflows of people from those towns by suggesting a presssing need to get other people from elsewhere in the world to move to Taihape and Invercargill, even though the economic opportunities had moved on from those places.

And second, in the IMF paper that the Initiative cite there are references to a new paper by various Harvard researchers on the economic effects of diversity (so recent that the references have been added since the version of the IMF piece that I commented on last year). The authors note that typically in studies to date “the negative effects of diversity seem to dominate empirically”. In this paper, they find more positive results, but they also look at what sort of diversity might produce benefits (p 26)

we extend our index of birthplace diversity and account for cultural and economic distance between immigrants and natives. The productive effects of birthplace diversity appear to be largest for immigrants originating from richer countries and from countries at intermediate levels of cultural proximity.

and

This suggests that a combination of culturally closer immigrants and richer origins (potentially a proxy for higher skills) can be particularly valuable.

If this model is robust, then it is perhaps unfortunate for the economic case for the immigration programme that very little of New Zealand’s immigration is from countries richer than our own, and most of it isn’t from countries with close or intermediate levels of “cultural proximity”. By contrast – and uncomfortable as it is to point it out again – all New Zealand’s immigration in the mid 19th century was from countries richer than us. As such, there is little doubt that if lifted economic performance and productivity for all New Zealanders. Whether the results are robust is something for others to look at, but it is the sort of specific results, that recognise that some immigration can be beneficial, but not all needs to be – it depends on various things, including time, place, and people – that the New Zealand Initiative should be engaging with rather than merrily asserting, with no New Zealand specific evidence – that the gains to natives are there simply because people have come among us from another country, any country.

New Zealand Initiative on immigration: Part 6 The economists

March 10, 2017March 11, 2017 Michael Reddell New Zealand Initiative, Uncategorized

Chapter 4 of the New Zealand Initiative’s immigration advocacy report is headed “It’s the Economy, Stupid”. In opening it, they note

While the effects of immigration are broad, the economic impacts often receive the most focus.

That is certainly true of economists, although I’m less sure it is generally true. But my background is in economics, and I came to thinking about immigration, and immigration policy, in the context of thinking about New Zealand’s disappointing long-term economic performance.

In my previous couple of posts I’ve touched on the Initiative’s treatment of the impact of immigration on government finances and house prices. But chapter 4 gets to what many economists will think of as the most important economic dimensions of immigration: what it does for productivity and for material living standards. Economists often get queasy about distributional questions, but since we are talking about policies made by national policymakers I have no problem in narrowing down these questions mostly to the impact on the people already in the country (“natives”), rather than to the latest/next wave of migrants. As an economic matter,in any particular country policy-controlled immigration of non-citizens should benefit “natives” as a group. If it doesn’t, the policy should be reconsidered. But answering that question, in any specific country or even more generally, isn’t easy. There aren’t that many countries that have had significant inward non-citizen immigration, and of course some of the most successful emergent economies of the last century have had very little immigration at all – Taiwan, Japan, and South Korea. Sample sizes get very small very quickly. Time and place probably matter quite a bit too. Most economic research suggests that emigration from Ireland in the 19th century materially benefited those left behind. But the dominant economists’ argument today would assert that the Irish are now benefiting from substantial inward migration.

As the Initiative notes

By and large, economists favour immigration….

The Initiative’s interpretation on this is that

…as migrants benefit the countries they move to through knowledge spill-overs and global connectedness. Growing the population through immigration also produces ‘economies of agglomeration’ (i.e. the abilities of larger, denser populations to support more commerce and knowledge exchange).

Their prior seems to be not only that non-citizen immigration will benefit natives, but that a growing population – whether from immigration or natural increase – will also raise productivity. And the impression I’ve taken is that they seem to believe this is necessarily (or at least almost certainly) true wherever the immigration occurs.

As a descriptive statement, I think there is little doubt that economists generally do favour a fairly open approach to immigration. But not all the evidence the Initiative adduces even on this point is quite as persuasive as it might first appear. For example,

An open letter emphasising the benefits of immigration to the US president and Congress in 2006 had no difficulty amassing more than 500 signatures, the majority from practising economists.

Which sounds quite a lot, but the US is a country of around 320 million people. In New Zealand – with 4.7 million people – the equivalent of that 500 signature open letter would be one signed by seven people. In the New Zealand Initiative’s own offices they just about muster that number, “the majority from practising economists”. I could probably find seven people, mostly practising economists, in New Zealand to sign letters for or against free trade, for or against capital gains taxes, for or against almost anything.

But there is better data than that.

The IGM Economics Experts Panel regularly surveys economists on policy questions. Almost all experts agree that high-skilled immigration benefits existing residents, and the majority agree unskilled immigration would benefit existing residents.

It is worth remembering that these surveys are of economists at US universities, answering in a US context. Looking through the list, many of the respondents are themselves immigrants, likely predisposed to believe their own migration was mutually-beneficial. And, in the US, of course the overall rate of legal non-citizen immigration is much smaller than that in New Zealand, and the selection criteria are strongly skewed towards family reunification, rather than emphasising skills.

I’ve seen three IGM questions about immigration.

The average US citizen would be better off if a larger number of highly educated foreign workers were legally allowed to immigrate to the US each year.

Of the respondents, 89 per cent agreed, and none disagreed. Of course, even sceptics of immigration might be inclined to favour more highly educated immigrants, if it were at the expense of the current family focus.

In asking about low-skilled immigrants, there were two questions. The first was

Question A: The average US citizen would be better off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

52 per cent of respondents agreed (and most of the other responses were “uncertain”)

Question B: Unless they were compensated by others, many low-skilled American workers would be substantially worse off if a larger number of low-skilled foreign workers were legally allowed to enter the US each year.

Note that the phrasing is “substantially worse”, not just “slightly” worse. 50 per cent respondents agreed with this proposition, and against most of the other responses were “uncertain”.

There was a more recent poll specifically about the immigration of people with advanced degrees in science and engineering, again a two-parter.

Question A: Allowing US-based employers to hire many more immigrants with advanced degrees in science or engineering would lower (at least temporarily) the premium earned by current American workers with similar degrees.

71 per cent agreed with that proposition.

Question B: Allowing US-based employers to hire many more immigrants with advanced degrees in science or engineering would raise per capita income in the US over time.

86 per cent agreed with that proposition.

So that even among this panel of economists, who believe that US natives generally benefit from immigration to the US, there is quite clear recognition that low-skilled immigration would be likely to disadvantage substantially many low-skilled American workers. Consistent with this, they also appear to believe that importing lots of any particular type of worker will lower the relative returns of Americans working in that field (if it is true of people with advanced degrees in engineering and science, it is no doubt true to a greater or lesser extent in other specialities – including perhaps chefs and aged care workers?)

My point here is not to dispute that most economists are quite sympathetic to immigration. And even most sceptics of immigration won’t have much problem with genuinely highly-skilled migrants. But when the reality is that the average migrants (and perhaps more importantly the marginal migrant) isn’t that skilled at all, then even in the US context, the views of economists suggest that distributional considerations matter. As Professor George Borgas, a leading researcher on the economics of immigration, at Harvard University’s Kennedy School, put it in a recent New York Times op-ed, in thinking about immigration policy a key question for policymakers is “who are you rooting for?” Borgas reckons there are small overall gains to natives as a whole from immigration to the US, but that the distribution of those gains is such that people at the bottom of the skill distribution are clearly worse off.

In typically flamboyant style, the Initiative talk of economists “loving” immigration, and pose the question “Why do they love it so much?”. New Zealand doesn’t get much specific attention in the Initiative’s report, but it is as well to remember that in this country there was a long tradition of leading economists being really quite sceptical of the economic gains from immigration to New Zealand – I wrote about one prominent example here.

But lets stick with the current overseas perspective for now. The Initiative seek to explain:

To understand why economists generally favour immigration, think of the opposite. If immigration was not generally beneficial, why stop at the national level? Migration flows occur far more significantly within than across nations. Would stemming these domestic flows improve outcomes? Would Wellington’s economy improve if we prevent Christchurchians and Aucklanders flooding in?

And, of course, there is an important element of truth in this argument. The ability of people to leave Taihape or Invercargill as the economic opportunities declined in those places, relative to other places in New Zealand, has been an important part of internal adjustment. There is no actual evidence that natives of Wellington or Christchurch benefited from people migrating from Taihape or Invercargill, but we can be pretty sure the migrants themselves benefited (or they wouldn’t have moved), and there are reasonable grounds to suppose that the people who stayed behind in those declining towns also benefited. One of the other basic insights of economics – not, I think, mentioned in the Initiative report at all, but strongly backed by empirical research on, say, pre World War One migration – is that mobility of resources encourages what economists call “factor price equalisation”. In other words, wages in Wellington or Christchurch might actually be a bit lower than otherwise as a result of the internal migration.

Of course, we don’t stop internal migration, because that is what being a country (or at least a free country) means. We share some sense of common identity across Auckland, Dunedin, Kawerau and Westport, that we mostly don’t share with people in other countries. It is the similarities that matter – we are ‘New Zealanders’, whatever that means when one digs down – and in particular it is the right to dwell in this land that is common to us all. It is an arbitrary line to some extent, but little different in concept to the notion, practised by us all, surely, in which we treat family differently than we do outsiders.

As the Initiative notes, economists (rightly) emphasise the potential gains from trade. Winding up the rhetoric they argue

Larger and more diverse markets of potential traders have more opportunity for specialisation and greater advantages from trade. These insights lead economists to broadly favour free movement of goods, capital and money – so why not labour, too?

Indeed, the arguments are similar – immigration improves economic performance for much the same reason international trade improves economic performance. Individuals vary in their capabilities, and freedom of movement allows people to move to where their skills are needed most. The fewer the constraints on labour mobility, the more countries prosper. So large is the potential prosperity gain that open borders are estimated to double world GDP. The implications of economic theory are clear: New Zealand can benefit from those who are like us and those who are not. Those who have skills similar to those of New Zealanders can help sectors that hold comparative advantage to reach efficient scale. Those with different skills can improve the market at the micro level by creating new industries or rejuvenating old ones with new ideas.

New Zealand benefits by embracing those who can offer new and challenging ideas and perspectives. Simply by being from another country, migrants help bridge the gap between New Zealand and the rest of the world. Global connectedness is vital for
prosperity, and welcoming migrants can help New Zealand improve those connections.

There is a lot one could unpick here. Even if they won’t actually call for it as policy, the New Zealand Initiative want us to think of “open borders” as the natural default, which only fear, racism, selfishness or whatever holds us back from.

But note that the exercise in which open borders – no immigration restrictions anywhere – could double world GDP assumes that massive numbers of people (hundreds and hundreds of million) migrate, and yet in doing so they do not change what it was – the culture/institutions etc – that made the country they migrate to rich and successful. No one takes that very seriously. People bring their cultures with them – which isn’t just tastes in food, but views about how things are and should be done. That the ancestors of today’s European citizens of New Zealand did so is a big part of why New Zealand is a fairly wealthy country today. But that migration involved people moving from the then-richest, and most economically successful, culture/country to lightly-populated temperate New Zealand. In small numbers, there is little doubt that migrants from poor countries to rich countries benefit, often very considerably, and in doing so they don’t change the recipient country/culture much. In large numbers, one simply can’t make the assumptions the authors of that exercise did.

Note too that there is no sense in any of this that fixed factors of production might matter. Land and natural resources are the most obvious example. They may not be overly important in some places – one might think of Singapore or Hong Kong as examples, or at a city level somewhere like London. On the other hand, no one doubts that natural resources are hugely important to the prosperity of Norway or Australia – not the only factor of course (the human capital to exploit the resources matters a lot), but hugely important nonetheless. From memory, Norway had about twice as much North Sea oil and gas reserves as the United Kingdom, but with less than a tenth of the population of the UK, that natural resource might much more difference to the living standards of the average Norwegian, than it did to the average Briton. The economics of adding lots more people to a particular place depend a lot on what that place has going for it. And yet the New Zealand Initiative pay no attention to this consideration at all – barely mentioning that New Zealand is the most remote significant economy in the world, and demonstrably still heavily dependent on fixed natural resources. There is simply no obvious reason why the economics of immigration should look quite the same for the United Kingdom or the Netherlands as for Kuwait or New Zealand.

Perhaps large-scale immigration to New Zealand – of the sort the Initiative champions – has been, and will be, beneficial to New Zealanders, but you can’t just get away with asserting it, while largely ignoring key facets of the New Zealand economy.

Should alternative perspectives be welcome? Well, mostly yes. And so to that extent I’ll agree with the Initiative when they claim that

New Zealand benefits by embracing those who can offer new and challenging ideas and perspectives

But the proportion of migrants who will actually offer “new and challenging ideas and perspectives” is inevitably pretty small – as no doubt it is for natives – and most ideas and knowledge simply aren’t transmitted primarily by immigration. I’d be happy to see us welcome leading researchers as migrants, but mostly you’d have to ask yourself – what no doubt they’ve already asked themselves – why would they come (to a small, remote, not-overly-prosperous corner of the world), rather than staying nearer global centres of knowledge-generation and dissemination. Typically they won’t.

The Initiative goes on

Simply by being from another country, migrants help bridge the gap between New Zealand and the rest of the world. Global connectedness is vital for prosperity, and welcoming migrants can help New Zealand improve those connections.

Silly extreme examples illustrate how empty this rhetoric is. Half a million Syrian immigrants or Turkmen, Bolivian or Zambian immigrants would be exceptionally unlikely to strengthen our “global connections” in ways that enhance our national prosperity (they’d happily come, to a much richer country). In considering national policy, you simply can’t – or shouldn’t – operate at this sort of high level of generality. Evidence abour New Zealand, and analysis of New Zealand, illuminated by perspectives from other similar countries is surely critical to reaching robust policy perspectives on what immigration policy we should adopt.

I should stress, as I have noted for many years, that my main interest is New Zealand (as I hope the New Zealand Initiative’s is). So my main interest is not whether immigration is sometimes good for natives, or even generally good for natives, in some or most other countries. My interests is in whether modern (say, post-war) immigration to New Zealand has been, and is likely to be, good for New Zealanders. Since places differ, and location oftenr matters in economics, one cannot simply assume that what is good in some places (even most places) is good in all places. As I noted, the number of countries with large scale immigration programmes (and hence the effective sample size in any study) is small. In an age when personal connections seem to matter more than ever, particular on the production of things other than natural resources, and when more and more production is done through global supply chains, there is at least a reasonable prima facie case for why conclusions one might reach about immigration to the Netherlands or Singapore might be different from those for New Zealand.

And all that is even before considering New Zealand’s actual economic experiences over the decades of high non-citizen immigration, including the (barely mentioned in the Initiative report) huge exodus of our own citizens over recent decades. In my next post, I’ll look at some of the papers the Initiative cites in their report, and look at their response to my own arguments, but it is worth remembering that in no other country I’m aware of has there been both a huge exodus of natives, and a huge policy-controlled influx of non-citizens. A diagnostician would usually pay some attention to the voluntary market-driven outflow of natives in considering the prospect that government-led large inflows would benefit the natives who remained.

Total factor productivity growth: how have we been doing?

March 9, 2017 Michael Reddell New Zealand economic performance

The Conference Board’s Total Economy Database is my favourite source for cross-country comparisons of productivity growth. I’m not close enough to the respective methodologies to know whether and where to prefer their methodology to that of the OECD, but the Conference Board has data for a lot more countries, and typically has estimates that go back a bit further in history.

Yesterday, I dug out their estimates of total factor productivity (TFP) growth. They’ve recently revised their methodology, although for the time being that means they only currently go back 20 years. I was curious to see how New Zealand had performed, on this metric, relative to other advanced countries.

Some readers will recall this IMF chart which I’ve run a few times previously.

imf-hours-and-mfp

It uses an earlier vintage of Conference Board estimates, and on that basis, New Zealand had had the lowest TFP growth of any of these OECD countries for the full period 1970 to 2007.

How about the more recent period, since 1994? Here I’ve used a larger group of countries – all the OECD countries, all the EU countries, plus Singapore, Hong Kong, and Taiwan – very similar to the set of countries I used for a range of posts back in 2015 about New Zealand’s relative performance.

TFP growth 94 ot 15 TED Over this period on this measure, we weren’t the worst, but we weren’t far off the worst. A lot of the former eastern-bloc countries, now given the opportunity to catch-up with the West, are bunched towards the left of the chart.

And here are New Zealand and Australia shown relative to the median of these advanced countries.

TFP NZ and AUs And New Zealand relative to the median of the G7 countries, and to the median of the former eastern-bloc countries. Recall, after all, that the narrative of economic reform in New Zealand had also been to allow us to catch up again with the richer advanced countries.

TFP NZ g7 east europe Not an altogether pretty picture.

Of course, observant readers have probably noticed that there doesn’t seem to have been much TFP growth anywhere for the last decade or so, and that while New Zealand doesn’t look to have done particularly well during that period, we also don’t look much worse than usual. But here is how we have done relative to various other countries/sub-groups over that period.

TFP 05 to 15

Plenty of countries did worse than us, but among those that were quite similar to New Zealand and Australia over this period were Italy, Spain and Portugal (Greece was materially worse).

For these purposes, I’m mostly interested in how New Zealand has done relative to other countries. There is a reasonable question as to how the level of TFP can have fallen so badly in 20 years (almost 15 per cent in New Zealand if one believes this measure). TFP growth is a residual, after decomposing GDP growth into growth in the capital and labour stocks and – done properly – measuring both of those isn’t straightforward (eg it is one thing to measure total hours worked, another to get a good measure of the quality of the labour, or thus total human capital applied to production, especially in an era when tertiary education has become a lot more common). Different methodologies will produce different estimates, but so long as similar methodologies are applied for all countries we can still use the datasets for cross-country comparative purposes

All of which is a lead in to a perhaps slightly less discouraging picture for New Zealand. The OECD also produces TFP growth estimates, but for a much smaller range of countries – only 20 of their 34 member states, including none of the east European convergence economies. And there aren’t yet estimates for all the countries for 2015.

But here is the comparison for 1994 to 2014 between New Zealand and this sample of the really advanced OECD countries.

TFP oecd oecd sample The gap between New Zealand’s cumulative TFP growth and that of the other advanced economies isn’t as large as that shown on the Conference Board data (second chart above). Then again, since the OECD data doesn’t include the catching-up eastern Europeans that shouldn’t be a surprise. But what is more striking is that until 2003 we were more or less matching the other OECD countries in this sample.

Here, for comparison, is the Conference Board data for New Zealand and the OECD’s sample of (20) countries.

TFP OECD TED sample In the end, perhaps the pictures aren’t really that dissimilar after all. We’ve done badly relative to other traditional advanced countries and, if anything, on this measure too, the last decade or so is looking relatively worse. In other words, if there was some convergence of growth rates, it looks to have been mostly only because TFP growth in the east European countries (in the TED sample but not in the OECD’s) slowed up so very markedly (as you can see in the third chart above). That might be unfortunate for them – and some combination of policy limitations, and substantial convergence already having occurred in some countries – but doesn’t put New Zealand’s underperformance in any better light.

It is the sort of underperformance that should be leading to hard questions about the overall direction of economic policy in New Zealand. After all, if TFP growth isn’t everything about economic performance and sustained prospects for prosperity, it is typically seen as quite a large part of the picture. And we’ve just kept on doing badly.

Bias and a possible gender pay gap?

March 8, 2017March 8, 2017 Michael Reddell Uncategorized

The media this morning is awash with breathless reports of a new study (and slides on the main results here), conducted for the Ministry for Women, on the differences between hourly earnings for men and women. Not a hint of scepticism has been reported in what I’ve seen and heard, even from the Deputy Prime Minister in our ostensibly centre-right market-oriented government. On principle, one should probably always be more sceptical of research results that confirm the preferences and priors of the agencies commissioning such research.

It isn’t my area of speciality at all, so this is just a brief note. To the extent I have a dog in the fight, on the one hand I tend to believe that markets work pretty well most of the time, which makes me instinctively suspicious of the notion of “free lunches” or that somehow huge systematic effects result from conscious or unconscious bias or discrimination. And on the other hand, I’m not in paid employment myself, while my wife is, and I have more daughters than sons. If there was a material real gap, it wouldn’t be against our family interest to recognise it.

The authors use a fairly large sample of people, and look at quite a range of variables. But, having read some summary articles on this issue from the US literature, I was quite struck by what appeared to be missing. I couldn’t, for example, see any sign of a “time out of the workforce” variable. I think there is huge value in one parent being at home, especially when children are young, but it isn’t necessarily experience that has a huge value back in the paid workforce (different skills, different roles). Someone – male or female, but most are women – who takes five years out of the workforce to look after their young children is likely to set back their income-earning prospects back in the paid workforce, for any given set of qualifications, or even any particular type of job. And, as far as I could see, the only proxy for input/effort (and thus, accumulated skill/expertise) was a distinction between part-time work and full-time work, at a 30 hours a week cut-off. For some jobs, that might be a perfectly reasonable marker, but there is a big difference between, say, a lawyer working 32 hours a week and one working 60 hours a week. More women are more likely to select for working relatively fewer hours, to prioritise family, and this study – data-rich as it is – doesn’t seem likely to be able to distinguish that point.

Are there pointers in the paper to these sorts of factors being part of the explanation? Well, yes, there is, here in this chart.

gender pay gap

Note that there is no statistically significant difference in gender pay for the first three deciles, (and if anything the unexplained component goes the other way – the purple line is above the “gap” line). That appears to run contrary to, for example, one of the Ministry for Women’s other “causes” – eg pay differences between rest home workers and other ostensibly similar occupations. The big difference show up in the upper part of the income range, where the personal characteristics of the individual employee are likely to be both much more important (than for relatively homogeneous positions at the bottom of the income scale) and much harder for researchers in studies like this to observe.

If such large differences, for people with exactly the same characteristics, existed, it points in the direction of large “free lunches”. Relatively “enlightened”, or unbiased employers, could profit hugely by replacing expensive male employees with cheap females ones, in relatively senior positions. Perhaps it was to some extent true 100 years ago, when cultural expectations – among men and women – were quite different. It defies belief now.

UPDATE: In some exchanges in the comments, not only did it became apparent that the AUT researchers had not even cited the leading work in this field, by Claudia Goldin at Harvard, but that the Ministry for Women policy staff, while aware of that work, do not refer to it. Here is a link to an accessible discussion with Goldin and an extract from that interview

DUBNER: Talk for a moment about potential categorical differences between men and women that have shown up in some research. The different appetite for competition, as some have labeled it. Or, in another instance, the willingness to bargain on salary or flexibility. How much might those contribute to the pay gap?

GOLDIN: I think there’s no doubt that they contribute to some degree. But let me tell you why I don’t think that they go the real distance. Some of the best studies that we have of the gender pay gap, following individuals longitudinally, show that when they show up right out of college, or out of law school, or after they get their M.B.A. — all the studies that we have indicate that wages are pretty similar then. So if men were better bargainers, they would have been better right then. And it doesn’t look as if they’re better bargainers to a degree that shows up as a very large number. But further down the pike in their lives, by 10-15 years out, we see very large differences in their pay. But we also see large differences in where they are, in their job titles, and a lot of that occurs a year or two after a kid is born, and it occurs for women and not for men. If anything, men tend to work somewhat harder. And I know that there are many who have done many experiments on the fact that women don’t necessarily like competition as much as men do — they value temporal flexibility, men value income growth — that there are various differences. But in terms of bargaining and competition it doesn’t look like it’s showing up that much at the very beginning.

DUBNER: Let me ask you about one more contributory factor. The parent penalty, what’s often called the mommy tax. How significant is that as a contributory factor?

GOLDIN: Well, it seems as if it’s a very large factor. That anything that leads you to want to have more time is going to be a large factor.

Half a hand clap?

March 7, 2017March 7, 2017 Michael Reddell Uncategorized

For the leader of the National Party, Bill English, that is, for announcing yesterday that if his party is in government after September’s election it will seek to

(a) lift the residency requirement from 10 years to 20 years, starting some way down the track, and

(b) lift the age of eligibility for New Zealand Superannuation from 65 to 67, but not starting until 2037.

It is a topsy-turvy political world in which at the last election the National Party was campaigning on, in essence, no changes to NZS ever (talk of everything being “affordable” for the next 50 years), while the Labour Party was campaigning on a rather faster move to age 67 than the National Party is proposing now. But now the Labour Party appears staunchly opposed to any increase in the eligibility age. Perhaps if Bill English and David Cunliffe had held the reins at the same time, a cross-party accord might have been in prospect?

It is also a bit odd when media start talking as if political promises made today, even if enacted next year, actually make very much difference to what will happens in 2037 and beyond. For all the talk of “giving people certainty”, it is most unlikely National will be in office for the next 20 years and all-but-certain that Bill English won’t be. Office-holders change, and so do circumstances.

In 1859, no one really envisaged the Land Wars, gold rushes, or the massive transfomative effects of the Vogel public works and immigration programmes.

In 1879, no one was probably planning on having a state age pension at all (let alone the economic opportunities of refrigerated shipping etc). That came in 1898.

In 1899, no one was expecting World War One, and the huge toll of lives and money that took.

In 1919, no one was expecting the Great Depression, or an overhang of debt so severe the New Zealand government defaulted on its domestic debt, and almost had to do so on its foreign debt.

In 1939, even if people anticipated war, they probably neither conceived of one as long and devastating as it was (globally), or that over the following couple of decades New Zealand would enjoy high commodity prices, and end up with very little public debt.

In 1959, few people probably planned on the basis on the “end of the golden weather” – the severe and sustained fall in our terms of trade over the late 60s and especially in the mid-late 70s, that undermined fiscal prospects and opportunities for improved living standards.

In 1979, probably not many envisaged Think Big as the massive fiscal disaster it was, or the disruption (and loss of revenue) that the (overdue) economic reform and liberalisation process would entail.

In 1999, well…..perhaps there have been fewer disruptions in the last couple of decades (even allowing for earthquakes and a serious recession). But it seems unlikely that history is ending.

No one knows what the next 20 years hold, for good or ill, and it would be crazy for anyone to plan today based on a political party’s promise of what welfare payments might be available 20 years hence. My (considerably younger) wife was stunned to learn yesterday that if the new proposed policy carries through she will be eligible for NZS at 65. Since anything can happen in 20 years, I discouraged the idea of starting planning for an extra overseas holiday

And government plans and policies do change, often considerably. In the late 80s, the then Labour government announced a very slow increase in the NZS age, only to have that overturned (and rapidly accelerated) by an incoming government only two years later. And in the 25 years from the early 1970s to the late 1990s, we went through numerous, quite substantial, changes in NZS policy, each no doubt intended by the governments that proposed them as “providing certainty”.

If the National Party really thinks change is needed, they should have promised something that might have involved gradual increases in the eligibility age starting in the next term of Parliament – age-indexed beyond that. If not, they should have bequeathed the issue to their successors.

My own view, outlined in a couple of posts late last year, is that the case for changing the NZS eligibility age (and residence requirement) isn’t primarily one about future fiscal balances. As I noted when the Treasury released their long-term fiscal statement,

Treasury included this chart in the report.

As I noted then, one could reasonably run this under a headline “no urgent need for any big fiscal changes for 20 years”. On these projections, in 2035 the spending share of GDP would be around where it was five years ago. Actual fiscal policy changes happen all the time, and the base on which revenue is raised changes too. It wouldn’t take much for spending as a share of GDP in 2035 to be not much different from where it has been on average over the last decade. One can’t reasonably generate “fiscal crisis” headlines – or urgent official advice to ministers – out of that sort of scenario.

And perhaps that is the sort of thinking the National Party had in mind. There just isn’t a pressing near-term fiscal issue (although, of course, taxes could be lower, or the money spent on other priorities).

My take was different.

To my mind, issues around New Zealand Superannuation are substantially moral in nature, and the debate would be better if centred on those dimensions, rather than on fiscal policy. Our level of government debt isn’t that low, but by international standards it isn’t high either, and if anything looks likely to drop as a share of GDP over the next few years. So the issue shouldn’t be “can we afford to pay a universal welfare benefit to an ever-increasing share of the population?” – ever-increasing, on the assumption that adult life expectancy continues to increase. We probably could. But rather “should we?”, or “is it right to do so?”. Economists quickly get uncomfortable with “is it right” type questions, sidelining them as “political choices”, but almost all the important political choices are about conceptions of what sort of society or government we want – competing visions of what is “right”. Of course, there are practical dimensions, and areas where experts can offer technical perspectives – eg the implications of particular choices for other things we care about (eg labour force participation, incentives to save etc) – but the key choices shouldn’t really be seen as technocratic in nature.

For me, there is simply something wrong about offering a universal income to an ever-increasing share of the population. Governments don’t exist to support us all,

From the SNZ life tables, we can trace changes in life expectancy since 1950. Here I’ve shown life expectancy for those reaching age 20 (ie old enough to have reached the workforce).

life expectancy

The observations aren’t always evenly spaced (especially towards the end), but over the full period, of 64 years, average (across male and female, Maori and non-Maori) life expectancy for people who get to age 20 has increased by 9.8 years – about 1.5 years per decade.

At the first observation, centred on 1951, life expectancy at birth for males was only around 67.2 years. Too many died very young – in 1948 (the first year with data on Infoshare), just over 10 per cent of all male deaths were of children under 5. But around 1950 a large chunk of the men who reached adulthood, and the taxpaying years, still died before they were 65 (around a third of all male deaths of those over 20 occurred before age 65. The female numbers weren’t that much lower. None of those people lived to collect a state pension payable from age 65.

By contrast, in 2015 only 18 per cent of adult deaths occurred before age 65.

It is quite true that, on SNZ estimates, life expectancy at 65 has not increased as rapidly as overall life expectancy (up 6.6 years over 64 years), or even that at age 20.

life expectancy 3 ages

But the fiscal burden doesn’t just arise from how long people live once they get to 65, but what proportion of adults get to age 65 at all.

Here is a chart showing life expectancy at 20, and the NZS eligibility age. The final two dots are what might have happened by 2040 if the life expectancy gains continue at the same rate as since 1950, and the NZS eligibility age if yesterday’s National Party policy proposal comes to pass.

life and NZS age

Over that full period, 90 years, the NZS eligibility age would have risen by two years, and adult life expectancy (those getting to 20) would have increased by about 13.5 years. By 2040 it will be amost 40 years since the NZS age got back to 65. In that time, adult life expectancy is likely to have risen by 5 to 6 years, and yet the NZS age will have risen only by two years, if the new National Party policy is implemented.

Something seems bad out of whack there, and that is before allowing for the fact that the typical person now enters the fulltime workforce considerably later than they did in earlier decades: many fewer leave school at 15, and now most do tertiary education as well. The period the typical adult will be receiving NZS for, as a share of their time in the workforce (paid, or raising children) just keeps on rising. And that seems wrong. For some, no doubt, working until 67 or beyond would be physically difficult, or impossible. In the past, for very many, even living to 65 was aspirational.

Overall, National’s proposal yesterday was a pretty feeble one. Better than Labour’s stance – which seemed to involve potentially reducing future pensions, but not increasing the age – but so far in the future it should probably be discounted back to very little. Perhaps it would have deserved a little more credit, if they had been willing to embrace – and campaign on- the notion of formally indexing future increases in the eligibility age to future changes in life expectancy. But they couldn’t even manage that, not even for the hypothetical adjustments that might occur in the decades after 2040.

House prices and population

March 6, 2017March 6, 2017 Michael Reddell Auckland, Housing, Uncategorized

I wrote the other day about the role that population growth, including that accounted for by immigration policy, plays in influencing house prices, at least in places where regulatory restrictions on land use or construction impair the responsiveness of housing supply. More demand, in the face of lagging supply, seems fairly ineluctably to put upward pressure on prices.

The latest QV house price data, for January 2017, also came out the other day. They produce data at an individual TLA level, which in conjunction with SNZ TLA population estimates, enables us to have a look at whether there has been a relationship (albeit crude and bivariate) between population growth and house price inflation.

In the chart below, I’ve focused on the period since 2007. 2007 was the peak of the last house price boom, and a period for which QV has supplied house price data for each TLA. The population growth data is the percentage increase in population from June 2007 to June 2016 – the most recent SNZ estimates. It is worth remembering that in periods since the last census, population estimates are approximate at best, but these estimates are the best SNZ can do and they presumably use a consistent methodology across the country.

house-prices-and-popn-growth-by-tla-since-2007

Given that we have pretty pervasive land-use restrictions, it isn’t very surprising to find that areas with the greatest (lowest) population growth also tend to be the areas with the largest (smallest) real house price increases over this period. It isn’t a mechanical, or one-for-one, relationship of course. One factor is likely to be differences from TLA to TLA in how practically constraining the land-use rules are. All else equal, a TLA where land use restrictions are less constraining will see less real house price inflation for any given population increase than a TLA with more-binding restrictions. (I’m not aware of any good land-use restrictions indexes for individual New Zealand TLAs).

The observation on the far right of the chart might be an illustration of this point. That dot represents Selwyn district, on the outskirts of Christchurch. It has experienced a huge population increase – in excess of 50 per cent in nine years – especially since the earthquakes. Some observers argue that the local authority has been relatively liberal in facilitating new housing and business development. Perhaps (I was a little sceptical here), but one other factor is that, at the margin, people considering buying in Selwyn are likely to be considering developments in the rest of greater Christchurch too – and over this period real prices in Christchurch city and Waimakariri only rose 10 and 14 per cent respectively.

The other obvious outlier is the observation at the top of the chart – that for Auckland. Real house prices in Auckland have risen 61 per cent since the 2007 peak. Auckland has had considerable population growth over that period (16.1 per cent)

But the population growth in these TLAs wasn’t that different from Auckland’s experience

Kaipara
Waikato
Hamilton
Waipa
Tauranga
Hurunui
Ashburton
McKenzie

and they all experienced much less real house price inflation (these are the dots more or less directly below Auckland’s on the chart)

There could have been a variety of factors at work explaining how much Auckland prices have risen (even given population growth):

perhaps Auckland’s land use restrictions are just that much tighter than those in other places,
perhaps Auckland prices are being influenced by expectations of continuing strong population growth (which isn’t likely in all of those other TLAs),
perhaps Auckland prices were being influenced by the non-resident purchasers (of whom we have heard so much, but don’t really have good data on).

On the other hand, factors that aren’t likely to explain the difference include:

interest rates, which are the same across the whole country,
tax policy, which is the same across the entire country.
(and, for that matter, immigration policy which is much the same for the entire country)

Sometimes people will try to ascribe strongly rising house prices in particular localities to the state of the specific region’s economy. But since 2007, Auckland’s average GDP per capita has grown no faster than that in the country as a whole.

akld rel to nz gdp pc

and the unemployment rate in Auckland has mostly been a touch higher than that in the country as a whole.

u-rate-akld-and-national

The other thing that struck me from the scatter plot above was just how many parts of New Zealand still have real house prices lower than those at the peak of the previous boom. Some have had falling populations, but one or two have actually had faster population growth than Auckland (eg Carterton, for some reason unknown to me). These are the places where real house prices are still more than 10 per cent lower in real terms than in 2007.

Clutha
Taupo
Southland
South Taranaki
Westland
Masterton
Central Hawkes Bay
Tararua
Whanganui
Kaikoura
Gisborne
Rangitikei
Buller
Opotiki
Ruapehu
Grey (-27.2 per cent)

It is easy for people in Auckland and Wellington to be dismissive of some of these places, but as I’ve already illustrated, it isn’t as if Auckland’s economic performance over the last decade has stood out as noticeably better for the average person than that of the country as a whole.

On which note, real house prices across the whole country are now around 6.4 per cent higher than they were in 2007. With Auckland accounting for a third of the country, and with real prices up 61 per cent there, average real house prices in the rest of the country are still, fortunately, lower than they were at the peak of that previous boom.

What’s wrong with Auckland and Wellington?

March 4, 2017March 4, 2017 Michael Reddell Auckland, Immigration, Wellington

Having not lived anywhere else in New Zealand since I was 10, I’m not quite sure.

Yesterday I was filming an interview in which one of the questions the interviewer asked was whether Auckland house prices could be explained, at least in part, by an influx of New Zealanders, whether returning from overseas or moving to Auckland from elsewhere in New Zealand. I noted that the data actually still showed a net outflow of New Zealanders from Auckland to other countries in 2016 (albeit much smaller than in earlier years), and that Census data had suggested a modest net outflow of Aucklanders to the rest of New Zealand since the mid 1990s, and that that pattern seemed unlikely to have changed in the years since the last census.

All of which got me curious. If New Zealanders were still (net) leaving Auckland for abroad, what was happening in other regions of the country. Were there places where there was a net inflow of returning New Zealanders? As it happened, the answer proved to be most of them.

plt-by-region

Auckland and Wellington were, in fact, the outliers.

Here is a more aggregated look at the same data.

plt-by-agg-region

New Zealanders (net) came back last year to the rest of the North Island, and to the South Island, but not to Auckland or Wellington.

I wouldn’t want to make too much of it. It is, after all, one year’s data, and has all the pitfalls of the PLT data (self-reported intentions and all that).

But it did bring to mind some analysis from The Treasury that I highlighted a couple of weeks ago

As agglomeration and clustering theory predicts, our more urban services-based regional economies (Auckland and Wellington and to a lesser extent Christchurch) are relatively more productive and generate higher incomes than our more resource-based regional economies.

Our Treasury preference is usually to encourage or permit the continued concentration of economic activity in key centres (forces of agglomeration) where returns are expected to be greatest. Resources and activities should be allowed to flow betwen regions over time.

New Zealanders don’t seem to have been convinced by our officials’ analysis of the prospects and opportunities within New Zealand.

What about over a longer period? Here is the average annual net outflow of New Zealand citizens from each regional council area, as a per cent of that region’s population each year, for the period 1996 to 2014 (ie from when the data start to just prior to the current sharp reduction in the overall outflow of New Zealanders).

plt-net-flow-96-to-14

Wellington and Auckland were losing just over 0.6 per cent of their population each year as New Zealand citizens left those regions for abroad. But so were the Bay of Plenty and Gisborne. (What is, perhaps, more striking is how much lower the net outflow rate abroad was from the South Island). And in the last year, New Zealanders flowed into Gisborne and the Bay of Plenty, and they still flowed out of Wellington and Auckland.

I can think of various stories why this might be. Auckland, presumably, has the highest share of naturalised citizens, and perhaps there is more of tendency for those new citizens to leave, than for natives? But if so, it doesn’t explain the previous 20 years of Wellington, Bay of Plenty or Gisborne. And while house prices are ruinously high in Auckland, they are nowhere near so bad in Wellington. Perhaps there is something in a story about Auckland and Wellington people being more “internationally connected” – but again, over almost 20 years, the outflow rates were the same in the Bay of Plenty and Gisborne. And perhaps, for all the talk of agglomeration opportunities, and a focus on Auckland and Wellington, the economic opportunities, and overall prospective living standards, just aren’t really there in Auckland and Wellington. The regional per capita GDP data certainly support that story for Auckland.

Perhaps the patterns will change again this year – and there is quite a bit of year-to-year variation in the regional outflow rates – but for now, despite all the talk of “problems of success“, or “quality problems“, the migration data suggest New Zealanders when deciding whether to stay or go, and where to come back to if they do, don’t seem to share the sense of Wellington and Auckland as success stories.

Other interpretations/perspectives most welcome.

Wellington rental market: a problem of success?

March 3, 2017March 3, 2017 Michael Reddell Housing, Wellington

I’m a bit tied up with other stuff today, so will come back to the New Zealand Initiative’s immigration report next week. But in the meantime, I was somewhat taken aback to see the Prime Minister quoted as describing the current squeeze on the Wellington private rental market as “a problem of success“.

Sadly, it is like some line lifted directly from the John Key playbook. I wrote last year about the then Prime Minister’s ludicrous, and frankly insulting to the intelligence of ordinary citizens/voters, attempt to pass off the extraordinary pressures on Auckland house prices and infrastructure, including traffic congestion, as “quality problems”. In fact, what they were – and are – are failures of central and local government to get the land supply market functioning effectively, having over-regulated it in the first place, interacting with central government’s decisions to keep on bringing in lots more non-citizen immigrants.

How does the new Prime Minister justify his insouciance about the Wellington situation?

However, English said the demand for rentals was “a problem of success”, which the Wellington City Council was already trying to address.

“It’s actually a long time since Wellington has felt the pressures of growth – the Government’s investing large amounts of money in the infrastructure…

“The council has shown that it understands for the first time in a number of decades, there is pressure on the housing stock and they are enabling more houses to be built because that’s the only way that they’re going to see a bit less pressurised.”

Damage to Wellington office buildings from last November’s Kaikoura earthquake had also had “a bit of a flow-on effect” to the city’s accommodation, English said.

Although the large lines were “certainly concerning for people who are looking for accommodation”, they did not show a crisis as the housing shortfall was well understood by the council.

Wellington hasn’t experienced pressure in its market for quite some time and as long as they respond quickly, they’ll be able to deal with it.”

I presume not even he is arguing that the earthquake effects were a problem of success.

I was a bit puzzled by the infrastructure spending line. I’m looking forward to trying out the new Kapiti expressway, but the biggest local infrastructure spend is on Transmission Gully, the total uneconomic new motorway on the outskirts of the city. Perhaps that might, in time, help ease housing pressures in Wellington city, if people could get in more easily from Kapiti, but then I recall a commenter a while ago pointing out how little land Kapiti had actually zoned as residential.

But what really puzzled me about the PM’s comment was that it was a long time since Wellington had felt the pressures of growth, as if this was the dawn of some new renaissance of Wellington. But here are the population growth data for Wellington city (where the pressures seem to be), greater Wellington (Wellington, Upper and Lower Hutt, Porirua and Kapiti) and New Zealand as a whole.

wellington-popn

Wellington city has had population growth rates very similar to those for the country as a whole – Wellington city grew faster than the country as a whole in the previous population surge in the early 2000s, and has been just slightly behind in the last few years. As for the “greater Wellington” region – a more comparable basis to compare to Christchurch or Auckland – there has certainly been a rebound in population growth in the last few years, but it continues to lag behind New Zealand’s population growth rate as a whole. In only two years in the 20 shown here has greater Wellington’s population growth exceeded that of the country as a whole, none of them in this decade. House prices rose rapidly in Wellington in the 2000s boom, and they are doing so again now. It just looks like the same old shared central and local government failure.

I’ve written about rents previously. In a well-functioning urban land supply market, a substantial and sustained fall in real interest rates should be expected to result in rents falling. Actually, what has happened – and still appears to be happening in Wellington – is that real rents have been rising: not as much as house prices have certainly (rental yields have been falling), but they;ve been rising when, if governments hadn’t so badly messed up the housing market, they’d have been falling.

But, says the Prime Minister, not to worry: the Wellington city council is apparently on the case and moving to resolve the problem. Really? They didn’t do anything very much in the previous boom, and I haven’t seen much sign of far-reaching reform this time round. Last week, they announced a plan to build more “social housing” – which might or might not be a good thing in time – but I’ve seen little sign of any sort of serious reform of the land supply regulatory situation.

Immediately after the local body election late last year, I wrote about the prospects for housing supply liberalisation in Wellington.

Sadly I don’t expect much. Here is the housing policy of the new Labour Party mayor of Wellington.

For starters, I’ll be sending a bill through to parliament to make rental WoF a reality in Wellington. If you’re paying rental for a house it’s only fair that house meets basic standards. Living in a warm, dry house that’s free of mould should be a right for every Wellingtonian.

I’ll also invest in social housing, so there’s more available for the people who need it most. This means a long term building program, partnering with third sector housing providers to increase the number of live-to-own dwellings. It also means improving the 2500 existing Wellington council owned social housing units, making them safer and better to live in.

But that’s not enough. It’s vital that we look after those in need, but we also want Wellington to grow and prosper. That’s why I’m offering a $5000 rates rebate for anyone building their first home in Wellington. Newer homes means better quality homes, and Wellington needs to encourage fresh young talent and new families to move here if we want to keep thriving.

Plus, I’m committed to establishing Build Wellington, an urban development agency that will utilise existing green-field land holdings for affordable, good quality residential development in the tradition of state and Council housing in years gone by.

Nothing, at all, about freeing-up land supply, just more statist “solutions”, and a local version of the sort of first home buyer grant central government offers – the sort of tool that has been proved, time and time again, to do precisely nothing to improve housing affordability.

And this is the Council that the Prime Minister thinks is going to quickly resolve the stresses? Promising to make renting more costly, and offering subsidies to first home buyers to bid up the price of houses

In truth, Wellington’s situation looks a lot like the situation in the country as a whole – a milder form of Auckland’s stresses, with 2 per cent population growth at present rather than 3 per cent. There is no sign that housing stresses are a result of some great Wellington renaissance, but rather it looks like the outcome of the same old mess: land use regulations imposed and enabled by central and local government combined with a fresh wave of fairly rapid population growth. Some of that is about a drop in the number of New Zealanders leaving Wellington – only about 800 last year – but much of it is, in effect, down to central government’s non-citizen immigration policy.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Author: Michael Reddell