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Non-resident purchases of houses: the data

May 18, 2016May 18, 2016 Michael Reddell Housing

Last week, LINZ released the first batch of data from the new attempt to measure non-resident purchases of property in New Zealand.

As they note, at this stage the data have considerable limitations (including around the exclusion of purchases by trusts and companies). In addition, it is unlikely that the few months these data cover will prove to have been representative. On the one hand, there may have been some permanent behavioural changes as a result of the introduction of the “brightline test” and the tax number requirement introduced on 1 October. For those concerned about non-resident purchases of houses in New Zealand, if those legislative changes reduce the extent of purchases that would no doubt be welcomed, but it will also mean we will never know with any certainty what the extent of non-resident purchases was in the couple of years before the law was changed.

So our law changes may have permanently reduced offshore purchases. But they will almost certainly have temporarily disrupted the flow of such purchases. Some people will have rushed to get in ahead of the law changes, and others will simply have been unsettled by them, or a little confused by them. Many regulatory changes have that sort of effect – a (potentially material) short-term disruption, which gradually abates. In the housing market, we’ve seen it with the succession of new LVR restrictions.

All of which means that whatever the non-resident share of house purchases over the first three months of the year, it is likely to be a low-end estimate of the number of non-resident purchases (at least until China more effectively cracks down on capital outflows, and/or runs a regime that makes people more comfortable with holding their wealth in China. As I’ve pointed out before, in normal successful countries citizens don’t rush to buy houses in other countries as some sort of safe-haven store of value.

The focus of the discussion of this issue has been on the Auckland market. The LINZ data tell us that in the January to March period, 4 per cent of transfers involved non-resident purchasers. In most other localities, that share appears to have been smaller, but in the Queenstown-Lakes TLA, the share was a little higher still (for the entire October to March period).

What has surprised me somewhat is that 4 per cent has been treated by most people as a small number. In writing about this almost a year ago, I noted that – with no data whatever to back the supposition – it wouldn’t surprise me if 5 per cent of Auckland housing demand was from non-residents, and that in a market with fairly tightly constrained new supply, even quite small percentages could make a material difference to house prices.

And much of the discussion of this issue seems to ignore the fact that most turnover in the housing market is not as a result of people entering the market for the first time or leaving it for the last time. Most turnover involves New Zealanders buying and selling from one another – people changing city or suburb, or just changing their stage of life (wanting a bigger house as the kids grow, or a smaller house later in life). The same goes for residential rental properties: the stock turns over as individual owners’ circumstances and interests change. A well-functioning housing market will have a lot of turnover (facilitating those changes in life circumstances etc) and little persistent pressure one way or the other on real prices. In these data, New Zealanders bought sold from each other around 40000 houses in a six-month period.

Pressure on prices arises from net new demand to the market (or – the Christchurch story post-earthquake – net reductions in supply) not from routine turnover. It is a bit like immigration influences on the housing market. In a year in which there are big swings in net migration, those fluctuations might amount to only around 1 per cent of the population. Even if migrants typically eventually purchase their own home, probably most don’t purchase in their first year or two here (especially as many initially come on temporary – work or student – visas), so newly-arrived immigrants themselves might still only account for a quite small percentage of house sales in any year. But previous formal empirical studies have suggested that a 1 per cent shock to the population from a change in immigration can still produce up to a 10 per cent change in house prices. Markets operate at the margin – it is changes in the net new demand/supply that really should be the focus of attention.

If the average New Zealand house was turned over five or six times in the course of an adult life (eg turning over roughly every 10 years), then perhaps 80 per cent of all turnover would just represent “churn” – a term that sometimes has pejorative connotations, but here I just mean New Zealanders moving through different phases of their lives. If, on the other hand, most of the non-resident purchases were net new demand to the market, then 4 per cent of total turnover might be more like 20 per cent of net new demand to the market. I’m not staking anything on that number; it is purely to illustrate that data suggesting non-resident purchases are 4 per cent of turnover may tell one very little about what role those purchases are playing in the overall balance of pressures on the Auckland market.

The issues around immigration are a bit different from those around non-resident purchases. Immigrants need to live somewhere, regardless of whether or not they own a house themselves. Non-resident purchasers, almost (but not quite on the LINZ measure) by definition don’t need somewhere to live here. On the other hand, the suggestion has been – although we don’t have the data to know the extent of it – that many non-resident purchasers have been buying properties and leaving them empty (recall the store of value motive). If that is happening to any material extent, the impact on the housing market is much as if they were a new migrant. If, on the other hand, houses purchased by non-residents are placed on the rental market, non-resident demand might still raise house prices materially (in a supply constrained city) but shouldn’t materially affect the affordability of accommodation itself – ie rents.

One other limitation of the residency data is that it doesn’t give a sense of transitions from one residency to another. For example, the data show quite a large number of purchases, and a large number of sales, by Australian tax residents. One possibility is that most of these people are actually New Zealand citizens. A New Zealander might have gone to Australia a few years ago, and left a house behind, unsure how long they would stay in Australia. Finding that life has worked out well in Australia, and having become an Australian tax resident, they might now be selling the house here. Or a New Zealander who has lived in Australia for some time, and become an Australian tax resident, might be looking at coming home, and purchases a house here in anticipation of the move. Given the easy migration flows between New Zealand and Australia, there is likely to be a different interpretation on transactions by these non-residents than there might be in respect of most purchasers with Chinese tax residence (a country where there is a well-known high level of capital outflows to a variety of countries, often manifest in residential real estate purchases). Of course, if that Australian story is correct, there is a considerable element of “churn” in those transactions too, rather than net new demand to the market.

It is going to take time, and more refinements by LINZ, to really get a good sense of the situation, particularly after the first disruptive effects of last year’s regulatory changes pass. But, for now, it is best to keep in mind that even if the offshore non-resident purchases (from people not having lived here previously or likely to live here in the near future) are only equivalent to a few per cent of total housing turnover in Auckland, that probably isn’t a small number in terms of its economic effect. In a well-functioning house supply market it might be different – increased demand boosts supply, in effect providing a new export industry. When supply doesn’t work well, quite small changes in the net balance of demand can have uncomfortably large implications for prices.

The Treasury on immigration policy

May 17, 2016May 17, 2016 Michael Reddell Immigration, Treasury

The other day Treasury released a 29 page set of slides put together in September 2014 for an internal “Immigration Policy Forum”. The Forum discussion – probably gathering all the key people in Treasury – seems to have been designed to help Treasury come to a “clearer shared position on immigration policy”. For a time, at least, there seemed to be two schools in Treasury – a “microeconomic wing” championing the gains to New Zealand from immigration policy, and a “macroeconomic wing” – perhaps somewhat influenced by some of my arguments – uneasy about the possibility that the macroeconomic pressures (eg on real interest and exchange rates) resulting from high target rates of non-citizen immigration might be impeding New Zealand’s medium-term economic performance.

I’m not entirely sure why Treasury chose to release these slides now. They aren’t a response to an OIA request, but may have been prompted by my recent OIA request (the results of which they released the same day) asking for copies of any material Treasury had prepared on immigration since 1 April 2015. I haven’t read the OIA release results in any detail yet (there is 200 pages of material), but these slides look to provide more of an overview of Treasury’s perspective than any of the specific papers in that collection. The slides themselves don’t tell us what view the Forum reached on immigration, but from the fact that Treasury has voluntarily released them and that there is no suggestion the meeting disagreed with the proposed stance, it seems safe to conclude that the slides represented a Treasury view, at least in late 2014.

Last year, I had asked for copies of papers Treasury had provided to the Minister on the economic impact of immigration. I discussed here what they released then, noting that I had been surprised how little evidence or argumentation they had advanced suggesting that New Zealanders as a whole were getting economic benefits from one of the largest inward migration programmes run anywhere.

What about the 2014 slide pack? Is there any sign of a more in-depth assessment of the issues and arguments as they apply specifically to New Zealand? Unfortunately, not really.

There are some interesting and nicely-put-together charts. There were even a few things I didn’t know (eg there is an interesting OECD chart showing that New Zealand has the highest share of the labour force made up of temporary migrants of any OECD country).

temp workers

Much of the discussion is, in principle, organized around this decision tree.

decision tree

Which is more or less fine, as far as it goes, although it continues to structure debate in terms of microeconomic benefits vs macroeconomic costs, simply taking for granting that in the specific case of New Zealand there are in fact microeconomic benefits to New Zealanders.

I’m not going to devote any more space to either Option 1a (substantially increasing immigration) or Option 1d (trying to adjust the inward flow of migrants cyclically, to ease cyclical pressures on the economy). The first simply isn’t going to happen – especially while the advocates of large scale immigration to New Zealand can show no clear evidence that New Zealanders have benefited from the large scale immigration we’ve already had over many decades. And I agree with Treasury that adjusting the immigration programme cyclically isn’t particularly sensible or workable – both because the economic cycle is difficult to forecast, and because many of the fluctuations in net migration (ie flows between NZ and Australia) aren’t directly amenable to New Zealand policy measures. Monetary policy should remain the cyclical management tool of choice.

The real choices are between maintaining something like the current target level of non-citizen immigration (45000 to 50000 residence approvals a year) and reducing that target, perhaps to something more in line with the typical OECD country. Within either of those options, there are choices about how we select migrants and what sort of people we aim to bring in. At least in these slides, Treasury is more interested in these latter issues than in the former.

The challenge of identifying impacts of current level of migration is that it

is difficult to specify a counterfactual – what would have otherwise

happened without the observed level of immigration.

The evidence isn’t definitive enough to make a judgement about whether

net benefits would be higher from the current quantity of inward

migration or a lower level. But it does show that composition matters.

Of course it is difficult to specify a counterfactual – it often is – but that is no excuse for not trying. It seems that, in substance, Treasury is reduced to saying “we really have no idea whether New Zealanders are benefiting from the large scale immigration”. That is quite indictment after 25 years of (more or less) the current policy, and this from our premier economic advisory agency.

Treasury is uneasy about the skill mix of migrants however. The slides are quite explicit in some places

Our key judgment is that migrant labour is increasingly likely to be a substitute for local low -skill labour, and this is an impact that we should try and mitigate.

I’d see this as fairly consistent with the points I made in a series of posts last year (eg here) about just how relatively not-very-skilled our skills-based immigration had become (eg the disproportionate numbers of retail or restaurant managers).

But Treasury remains quite upbeat on the prospects for highly skilled migration

More high-skilled migrants can benefit high-productivity firms and industries, and we are less concerned about wage and employment effects for high-skilled local labour.

This is because we think:

– High–skill migrant labour is more likely to complement local labour and capital, rather than substitute for it

– High-skill labour will increase the skill composition of the local workforce, which is the theoretical channel through which many of the beneficial impacts of migration are achieved

– To the extent there are LM impacts on competing local labour, we think there are normative policy reasons to be less concerned at that end of the earnings spectrum

Research suggests that the high – skill migration may have a positive impact on

innovation and productivity via its effects on skill composition. High – skill labour is also likely a complement for both low -skill labour and capital.

We think this suggests that we should look to increase the supply of this sort of labour.

All of which might be fine if, for example, they could show that the New Zealand economy (and New Zealanders in particular) was actually benefiting from the high-skilled immigration we already have. Or if they could show how New Zealand could attract genuinely highly-skilled people in large numbers, when large numbers of our own skilled people are typically treating New Zealand as a place to leave. Or if they had engaged with the data suggesting that many skilled migrants take decades to match the earnings of comparably-skilled locals.

At one level, I don’t disagree with Treasury. If we are going to run a large inward migration programme, it is far better to do as we advertise, and make it a genuinely highly-skilled focused programme. The proportion of fairly modestly skilled people we have been allowing in in recent years seems most unlikely to benefit New Zealanders as a whole, and there are more plausible stories for widespread benefits from attracting highly-skilled migrants than low-skilled ones.

But one really needs a lot more material than is captured in these slides to reach a considered view on the appropriate level of non-citizen immigration for New Zealand. Perhaps most importantly, one would need to engage seriously with 25 years of continued economic underperformance, even though we have been running one of the largest immigration programmes around. But one would also need to show signs of thinking hard about the structural characteristics of the New Zealand economy, which continues to rely – almost as heavily as ever – on its natural resource base, not self-evidently a resource that needs (or benefits from) lots more people. One might need to show a serious willingness to grapple with such characteristics of the New Zealand economy as its persistently high real interest rates and the persistently high real exchange rate. Or to grapple with the indications of the economic underperformance of Auckland.

And there is simply none of that in these slides.

(One might even want to grapple more seriously with the housing market tensions that high levels of immigration has created. I’m quite with those who say that a first best response might be to sort out the housing supply and urban land market, but……there is very little sign of that happening, and no sign that it has successfully happened anywhere else. This isn’t just some sort of sequencing problem – urban land issues look fairly intractable, not for technical reasons, but for reasons having to do with the preferences of residents on the one hand, and planners, bureaucrats and central and local government politicians on the other. In the meantime, while people blithely talk of “immigration isn’t the problem, housing supply is”, too many people seem to be living in overcrowded accommodation, garages and even – no doubt rarely and temporarily – in cars.)

I’ve argued previously that the Productivity Commission should be asked to conduct a serious review of the economics of New Zealand’s immigration policy, in the context of the specific structural features of the New Zealand economy. The Commission seems, on its track record to date, to be prone to rehearsing – in more sophisticated language and at considerable length – current conventional wisdoms, but it remains the best-placed official agency to do some more serious work in this area and to contribute to a better-informed public debate.

A Treasury official blogging on Chinese investment flows

May 16, 2016May 18, 2016 Michael Reddell Uncategorized

I had heard that The Treasury was thinking of starting a blog, and the other day I noticed on their website two new pieces under the heading “Treasury Staff Insights: Rangitaki”. On checking, ‘rangitaki’ appears to be the Maori word for blog.

Blogs are becoming a bit more common in official agencies these days: several of the regional Federal Reserves have them, as does the IMF. And the Bank of England launched one last year. I wrote about the Bank of England one here, welcoming it, but being rather skeptical as to whether its avowed aim could, or even should, be met.

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies.

I don’t read Bank Underground all the time, but I’m not aware that anything they have published in the last year has in fact challenged “prevailing policy orthodoxies”, unless it was in areas where the Governor himself wanted something challenged.

The Treasury description of their aim is less ambitious – and, hence, probably more realistic.

In their Staff Insights: Rangitaki articles staff are writing in their individual capacity or in a Treasury team’s capacity and the views are not necessarily a “Treasury” view. The goal is to focus on the analytical content and insights.

In that respect, it isn’t so different from the approach taken to formal working papers, policy perspectives papers etc that Treasury has published over the years – or to stimulating work in progress pieces such as the one by Struan Little that I wrote about a few weeks ago. The Reserve Bank does something similar with their Analytical Notes series. The main difference, at present at least, is that the blog pieces are rather shorter.

In general, I welcome having the analytical work of public servants in the public domain, and favour more rather than less pro-active release of material Treasury (and other departments) have been doing. But there is a balance to be struck. Treasury exists primarily as the adviser to the Minister of Finance – it isn’t an independent agency, and over time its effectiveness can be compromised if, say, a Minister were to feel that Treasury was attempting to use its publications (and perhaps especially ones like this) to make end runs around government policy, pursuing its own agendas. And equally, we would want to be cautious that pieces on the blog weren’t being used, in a rather informal way, to champion government PR messages. Time will tell how the model works – and how robust it proves to be to a different Minister of Finance.

One of the blog posts, on the insurance market’s move to sum insured house insurance policies, has already had quite a bit of media coverage. But it also highlights some of the limitations of the blog format for a policy agency. It discusses some potentially interesting investigative work Treasury has done, but provides no details, so we have as readers and citizens have no way – without OIAing the underlying papers – to gauge whether the Treasury approach is reasonable. Blog posts to promote new, more detailed, background papers might be more helpful.

The second blog post, by Mario di Maio, is headed “Chinese-New Zealand investment flows”, (although actually the focus of the piece is not on flows at all, but on changes in stocks). The author starts

Foreign investment flows into New Zealand assets raise a host of legal, political and economic issues. Often the political issues of the day and the source of the investment can obscure the longer-term trends. At the moment, risks around a smooth transition of the sources of growth for the Chinese economy have seen an acceleration of capital outflows. We decided to abstract from these near-term issues and take a longer perspective on what might happen to two way flows and stocks of investment between New Zealand and China over the next several decades.

In fact, they only look out to 2030, which is now not much more than a decade away. (And note that delicate public service phraseology “at the moment, risks around a smooth transition of the sources of growth” – not a hint of political crackdowns, inadequate protection of property rights, or fear of devaluation).

The author reports a scenario in which if China liberalizes its capital account the stock of Chinese investment in New Zealand and New Zealand investment in China would increase reasonably materially between now and 2030.

Here is the chart

staff-insight-dimaio-china-investment-02

Again, it cries out for more detail. The broad direction of change looks plausible enough (as one scenario), but why (for example) would we expect to see such a huge increase in the “other investment” component of New Zealanders’ investments in China? I presume there is a good reason, but it isn’t outlined here. Overall, what is perhaps noteworthy is how small the net position vis-à-vis China remains: in 2030 New Zealanders’ liabilities to Chinese entities would be around 7 per cent of New Zealanders’ total external liabilities, and New Zealand entities’ claims on Chinese entities would be around 5.5 per cent of New Zealanders total offshore assets.

But it also isn’t clear what assumption the author is making about China’s own overall NIIP position. He assumes New Zealand’s remains at around the current level which – unsatisfactory as it for such a low productivity growth economy – at least has the appeal of being the level around which it has fluctuated for the last 25 years or so. But the authors – and those he draws from – appear to be optimistic on China’s ability to continue towards upper-middle income status (closing those gaps highlighted in this morning’s post) in a generally much freer economic environment. But in such an environment it might not be unreasonable to expect to see China running material current account deficits for many years – many successful emerging economies (including Singapore and Korea) did. If so, we might still expect to see some gross outflows from individual Chinese people and firms, but it would be a quite different environment than the climate of the last decade or so, in which large current account surpluses and then large accumulated reserves made first for large official capital outflows, and more recently large private capital outflows. I don’t know what the right answer is – and am probably more skeptical than the author on China’s future progress – but his scenario probably doesn’t have much information in it without a lot more supporting detail.

Which does raise the worrying concern that the point of the blog piece might have been more about promoting a political message. Following the scenario, the piece continues:

Foreign investment from (and into) China is likely to increase significantly over time. This could potentially take some time or might occur more rapidly and would contribute positively to New Zealand economic performance at the margin. The maintenance of a stable and predictable business environment will be an important factor in ensuring that foreign investment flows from China benefit New Zealand.

Even the first claim is arguable – as his chart shows, even countries like South Africa and Argentina (neither the most repressive nor the freest) have gross international assets and liabilities not much different than China’s level today. But the second claim – that this “would contribute positively to New Zealand economic performance at the margin” seems to built on not very much at all. As I’ve said repeatedly, I’m generally supportive of a pretty open approach to foreign investment, but…..(a) di Maio’s scenario is built on the assumption that the net IIP position for New Zealand doesn’t change (as a share of GDP) so increased Chinese foreign investment largely (net) just replaces some other foreign investment, and (b) China is not an economy where market disciplines are consistently allowed to work, and as is well-recognized all major Chinese firms effectively operate within the limits set by the Party, and (c) China (and Chinese firms) have not shown the capacity to generate world-leading economic performance. Against that backdrop (and without suggesting that Chinese investment should be restricted), there is likely to be much more open question about the benefits to New Zealand of increased Chinese investment than the author allows. Curiously, he writes that “the maintenance of a stable and predictable business environment will be an important factor in ensuring that foreign investment flows from China benefit New Zealand”. Actually, I’d have thought it was much more important that the business environment in China become more stable and predictable, governed by the rule of law amid secure property rights. Then we really could be more confident that increased foreign investment would benefit both sides. But I guess Treasury officials – even speaking in a personal capacity – probably couldn’t say that openly.

The final paragraph of the post also tilts towards advertorial,

Some specific investments have been taken that can smooth two-way investment flows between China and New Zealand.This includes negotiation of a swap agreement (RMB 25 billion / NZ$5 billion) between central banks to provide liquidity to support trading in RMB; (ii) the issuance of RMB denominated corporate debt by Fonterra; and (iii) the registration of three Chinese-owned banks in 2013 and 2014. That most of the increase will occur in portfolio and other investment flows suggests where attention might focus in the coming decade.

“Investments” is an odd choice of word, but even setting that to one side the argument seems a little flimsy. The New Zealand dollar trades freely, and our central bank does not have (or need) swap agreements with the central banks of other countries with liberalised current accounts. The RMB swap agreement, like those other countries have done with China, is best seen as a piece of political theatre – not harmful, but of no real value to New Zealand in anything other than political terms either. Similarly, the choice of a major corporate which has a very large investment in China to issue some RMB-denominated bonds also doesn’t look like an “investment”, or something that will “smooth two-way investment flows”, although the ability for Fonterra to issue those bonds might be a welcome reflection of China’s liberalization to date. And finally, the choice of three government-controlled Chinese banks to set up here, doesn’t look like an “investment” either (at least not by New Zealand). If anything, we should probably think of it as a new area of risk for New Zealand. Government-owned or controlled banks have a bad record globally, often allocating credit in directions, or on a scale, not that conducive to economic stability or efficiency. It should also be a concern that all three banks are chaired by former National Party MPs, only one of whom has any past banking experience. That choice by the Chinese shareholders suggests that they have imported their “connections” model of doing business to New Zealand. One would hope that our political and official institutions are strong enough, that those connections really don’t matter, but it should be worrying trend, not a reassuring one.

And I’m left puzzling what the final sentence means. Even if this (single) scenario were correct and there was the be a material increase in Chinese portfolio investment into New Zealand in the next decade, it isn’t obvious that that has any particular policy implications. But perhaps I’m missing something obvious.

The Staff Insights blog series is an interesting new initiative. It is in the spirit of the generally quite open approach that Treasury takes to things (including the Official Information Act). I will certainly keep an eye out for future releases in this series, but I suspect they still have some way to go in finding quite the right model for the sorts of material to present in it.

China’s continuing economic failure

May 16, 2016May 16, 2016 Michael Reddell China

In my post on Saturday on the 80th anniversary of the formation of the National Party, I noted that New Zealand’s main political parties haven’t got much to be proud of in their conduct of New Zealand’s economic affairs. But our problems need to be kept in perspective.

Today is another anniversary. It is the 50th anniversary of the launch of the Cultural Revolution in China by the Communist Party government led by Chairman Mao.

Newspapers and magazines around the world have been drawing attention to the fact that the Chinese Communist Party government will not be marking the occasion: “China deploys amnesia” was the FT‘s headline, “China buries memories” was USA Today‘s and “Cultural revolution anniversary now ‘taboo'” was The Australian‘s headline. For whatever reason, New Zealand newspapers seem to be sharing in the burying of memories – no mention at all in today’s Dominion-Post, and as far as I can see nothing on the Herald website. MFAT will, no doubt, be pleased.

The horrors of the Cultural Revolution – coming only a few years after the mass starvation of the Great Leap Forward – are well-summarized in the Guardian article I linked to above. Any Party responsible for those sorts of systematic abuses would normally be shunned by the rest of the world. And – which is the point of this post – it is not even as if the Communist Party of China can claim economic successes to, in some sense, mitigate its guilt. Eggs (and worse) have certainly been broken, but the subsequent omelette is pretty underwhelming.

Here is a chart showing GDP per capita for China, and a range of now-advanced Asian countries/economies. I’ve shown each country’s GDP per capita as a percentage of that for the United States for each of 1913, 1950, and 2014, using the Maddison database for the 1913 observation and the Conference Board (which built on Maddison’s work) for the more recent observations. Data are a bit patchy in those earlier decades, but 1913 was before China descended into civil and external wars (from the late 1920s), and 1950 was the year after the Communist Party took control of the mainland.

asia gdp pc cf US

What stands out is just how badly communist-ruled China has done economically, and especially relative to the three other ethnic-Chinese countries/territories. Substantial re-convergence has happened in all the other countries on the chart, but that in China has been excruciatingly slow. A few buoyant decades (the aftermath of which we have still to see) struggle to make up for the earlier decades of even worse Communist mis-rule.

And, actually, the GDP per capita numbers somewhat flatter China (even if we take them at face value, which few would now do).

Here are the Conference Board’s estimate of hours worked per capita for the countries in the chart relative to the US.

	Hours worked per capita: ratio to the US
China	1.94
Singapore	1.70
Hong Kong	1.41
South Korea	1.35
Taiwan	1.23
Japan	1.08

The average Chinese is estimated to work almost twice as many hours per annum as the average American. One expects people in poorer countries to work longer hours (and, for example, New Zealanders also work more hours than people in most Western advanced countries), but the difference is particularly stark for China.

There isn’t a good long time series for GDP per hour worked in China, but here is a cross-country chart showing the 2014 Conference Board numbers, with the Asian countries I’ve looked at here highlighted in red. Not even Singapore is in the really top tier of countries on this measure, but it is striking just how far down one has to go to find China.

gdp phw asia

Real GDP per hour worked in China – even using official data – is still only about 11 per cent of that in the United States. It is, among other things, such an enormous waste of potential.

china gdp phw

80 years of underachievement

May 14, 2016May 16, 2016 Michael Reddell New Zealand economic history, New Zealand economic performance

Yesterday afternoon, glancing at my email inbox, I was briefly take aback. Like many no doubt, I’m signed up for the Prime Minister’s weekly mass emails. But, not really concentrating at the time, the sender/subject line of the latest one grabbed my attention.

Rt Hon John Key Celebrate 80 years with me Michael

It was an unnerving thought – 80 years with the Prime Minister.

It turned out that yesterday and today mark 80 years since the conference in Wellington in which the depleted forces of the then Opposition formed the new National Party (and the PM was trying to encourage people to join the party today). I got curious and turned to that invaluable resource Papers Past to see how the papers in 1936 had covered the formation of the new party, which was to play such a large part in subsequent New Zealand political history. Surprisingly, there was very little coverage at all. I guess the media is often not very interested in the goings-on of the Opposition the year after a new governing party has won a crushing victory.

In its eighty year history, National has been in government (and the dominant party in all those governments) from 1949 to 1957, 1960 to 1972, 1975 to 1984, 1990 to 1999, and from 2008 to now. That is 46 years – or 58 per cent of the 80 years. Take out the period of World War Two – when everyone’s attention was mostly elsewhere – and National has dominated the peacetime scene and, hence, the ability to set policy, pass legislation etc. (In fact, as the Prime Minister’s email pointed out, the National Party was formed by merging existing political parties, which themselves had governed New Zealand for decades prior to 1936.)

Against that backdrop, their achievement – as stewards, leaders, those entrusted with power – is pretty disappointing.

In 1936, Angus Maddison’s collection of national per capita GDP estimates suggests that New Zealand per capita incomes were among the very highest in the world – behind, but not much behind, the United States, the United Kingdom, and Switzerland. Denmark and Australia were a little way behind us. The Great Depression had been pretty awful for New Zealand – albeit not as bad as in the US – but we had emerged as still one of the most prosperous countries in the world.

By contrast, on the IMF’s PPP estimates, New Zealand was 29th in the world last year.

The 1936 dataset only has estimates for around 50 countries, but glancing down the 2015 list it is a pretty safe bet that none of the other countries (not in the 1936 collection) now above us would have had higher per capita incomes than New Zealand in 1936 had the data been available.

New Zealand has done badly (although it is fair to note that of the other leaders in 1936, even the US now only has the 10th highest GDP per capita).

Here is a scatterplot showing GDP per capita in 1936 and 2014 for the 45 countries for which Maddison (and his successor, the Conference Board database) had per capita GDP estimates for both 1936 and 2014 (the latest actual data).

1936 and 2014

Broadly, countries that were rich then are still pretty rich now, and countries that were p0oor then are still towards the lower end of the distribution. There are some striking exceptions – South Korea and Taiwan are two of the more striking examples here. (China, interestingly, for all the hype about the last couple of decades, is the dot furthest to the left on the entire chart).

New Zealand is marked in red, with incomes per capita well below where one might have expected knowing our economic performance in 1936. Some places have done much much worse – those green dots are Guatemala, Venezuela, and Argentina – but New Zealand’s performance has little to commend it. Relative to the starting point, it is the worst of any of the now-advanced countries.

Of course, some people will want to mount arguments that our severe underperformance is not a matter for which governments (or the political parties behind them) can be held accountable for. And there are certainly some things government can’t change – geography, natural resources, the EEC, and so on. But almost every country has advantages and disadvantages – permanent or specific to that 80 year window. In each country, governments are responsible for how they react. Ours, typically, seem to have chosen quite badly. Since our relative fortunes still aren’t improving, it is reasonable to suggest that our governments are still choosing badly.

The National Party, and those of its members who form governments need to take some considerable responsibility for that. Of course, the Labour Party and its governments do too – it is just that they have had rather less time with their hands on the levers of power.

Good luck to the National Party in celebrating their 80 years. The party has done well for itself, but less well for the people of New Zealand. I’m not suggesting any ill-will, or bad intentions, and I don’t subscribe stories in which parties skew things over time much towards their own voting base. National Party-supporting groups have probably done about as badly as everyone else – in those international comparisons – over the 80 years. And that is a problem for all of us.

Somewhat to my surprise, I discovered recently that the Fabian Society still exists. The Fabians developed in Britain as non-revolutionary socialists, and my images are of people like Sidney and Beatrice Webb, Clement Attlee, and Herbert Morrison. But anyway, the movement still exists in New Zealand. Also somewhat to my surprise, they’ve invited me to speak to one of their public meetings on what went wrong with New Zealand to generate this disappointing long-term economic performance and what might be done about it. Glancing through the list of past speakers, I think I will be the most conservative or market-oriented person ever to address them. But I like the idea of any organization whose website leads with the aim of “inciting debate”.

Anyway, meetings appear to be open to anyone who wants to come along, and for any Wellington readers who might be interested I will be speaking – sharing a platform with Herald columnist Brian Fallow (who is probably more naturally at home with the Fabians) – this coming Friday evening (20 May) Details are here, but the venue is Connolly Hall (Guildford Terrace, just off Hill St) and the meeting kicks off at 5:30pm

Outperforming cities…but not Auckland

May 13, 2016May 13, 2016 Michael Reddell Auckland, New Zealand economic performance, Uncategorized

My post the other day put the decline in Auckland’s GDP per capita (relative to that of the rest of the country) in some international context using BEA data on the average per capita GDP of various large US cities. As one would have expected, the average per capita in the typical US large city had been rising a little faster than GDP in the US as a whole.

The US data are interesting, but the US is an extremely large country. By contrast, in Europe that are lots of small countries, and (in particular) small countries with a single dominant city. In that respect at least, European experiences might be more interesting to compare Auckland’s experience against.

Eurostat publishes a huge quantity of regional per capita nominal GDP data for the 28 EU member countries. For a few (Malta, Luxembourg, and Cyprus) there wasn’t meaningful data distinguishing the performance of the biggest city from the rest of the country – and in Luxembourg, the data are problematic anyway, since GDP captures economic activity occurring in a country, while many people who work in Luxembourg live in surrounding countries. But that left 25 EU countries, and I went through the data to identify, as accurately as I could, the data for the metropolitan region capturing the largest city in each country. Again, the data are likely to be only indicative – in every metropolitan area, there will be some cases where people work in the area (so their output is in GDP) but live somewhere else (so the person isn’t in the population numbers for that region).

For a few large countries there is no single dominant city. It isn’t an issue in the United Kingdom, France or Poland, where London, Paris and Warsaw respectively dominate, But for Spain, Germany and Italy it is. For illustrative purposes, I used data for Madrid, Hamburg, and Milan respectively.

Eurostat publishes data for 2000 to 2014, but for some cities the data are only available to 2013. For each country, I took the average per capita income of the largest city and calculated that as a ratio of the whole country’s GDP.

This chart shows the behavior over time in the ratio for the median country. I’ve shown two lines: one for the 17 countries with populations less than around 10 million, and one for all 25 countries.

eu time series

For all 25 countries, the median had increased over this period. For the smaller countries, there been basically no change over the full period. It is quite different from the picture for Auckland.

akld rel to nz gdp pc

I’m not sure why the smaller EU countries did less well on this measure than the full EU sample, but the smaller countries included the countries worst hit by the 2008/09 recession and the subsequent euro crisis. There might be some cyclicality in the relative performance of the largest city does (doing really well in boom times, but suffering more than most in downturns – we see a bit of this in Auckland, which feels the demand effects of fluctuations in migration more than most places).

Auckland’s average GDP per capita is higher than that in New Zealand as a whole (and around 12 per cent than that in the rest of New Zealand excluding Auckland), even if that gap has been closing. But how does that levels gap compare?

In this chart, I’ve shown the latest observations for how much higher (%) average per capita GDP is in the big city than for the country as a whole for each of the EU country – grouped by small, medium and large. I’ve also shown the median for the twelve largest US MSAs (as per my post the other day), the Auckland numbers, and the experimental numbers for Toronto (from a Statistics Canada research paper) for 2009.

gdp pc cross EU city margins

A few things catch the eye. The first is that, at least among the smaller EU countries, it is the ones which have been catching up where the cities are doing best relative to the rest of their respective countries (eg Slovakia, Bulgaria, Hungary, and the Czech Republic). New Zealand was supposed to have been catching up, but hasn’t.

The second thing that catches the eye is just how low the margin between average Auckland incomes and those in the country as a whole is, by comparison with these other countries.

But the third thing that caught my eye, was that the Toronto wasn’t much different. Toronto doesn’t dominate Canada in the way Auckland does New Zealand: Toronto’s population is only about 50 per cent larger than that of Montreal. The Statistics Canada data are only experimental, and they provide estimates for only 2001, 2005 and 2009, but on those estimates both Toronto (in particular) and Montreal had seen a fall in their average per capita GDP relative to that in Canada as a whole.

These days, Canada has higher GDP per capita than New Zealand does (it was the other way round prior to World War Two), but Canada’s productivity growth in recent decades has been about as mediocre as that of New Zealand. Canada has much larger industrial manufacturing sectors than New Zealand does – much of it tied into the US automotive industry – but at heart much of Canada’s prosperity continues to derive from the ability to utilize its vast natural resources. It isn’t an economy whose prosperity seems to be led from its big cities – any more than New Zealand is. That said, Toronto – in such close proximity to the US – seems a much more likely place for successful global companies to base themselves long-term than Auckland.

Canada also operates large scale non-citizen immigration programmes – indeed, the new Canadian government has just announced a material increase in the target rate of immigration (and an reorientation away from economic migration – towards refugee and family). Without knowing more about the Canadian data, I’d be hesitant in drawing too many parallels – and Canada has not faced the same real interest and real exchange rate challenges New Zealand has.

But at least for New Zealand the striking underperformance of our largest city should raise real questions about strategies designed to (or having the effect of) drawing more and more people into Auckland (from abroad – New Zealanders aren’t being attracted), in a country where per capita prosperity seems to rest – and seems likely to continue to rest – on the ability of our people to utilize, ever more smartly, a largely fixed stock of natural resources.

NB: Note that the US figures are measures of real GDP, while for the other countries the data are nominal GDP. For cities other than the US, this will probably have the effect of overstating the margins by which big city per capita GDP exceeds that in the rest of the country, since many prices (including for example housing services prices, but also labour-intensive services) will typically be higher in big cites than in the rest of the country.

Was the Governor on the money?

May 12, 2016May 12, 2016 Michael Reddell Financial stabilty

That was the question a radio interviewer asked me this morning, about the talk of new Reserve Bank direct controls on banks’ housing lending. He wanted a succinct answer. Mine was simple: No. The question was about talk of loan to income ratio restrictions, but the answer would be the same even if the question had been about the Financial Stability Report as a whole.

Take the talk of loan to income restrictions on banks’ housing lending first. There was no mention of this in the FSR itself, and even in the press release there was just a brief, but telling, reference:

The Reserve Bank is closely monitoring developments to assess whether further financial policy measures would be appropriate.

And yet clearly it is a major issue. In fact, it dominated the press conference later in the morning. Journalists asked question after question, and slowly drew information out from the Governor and Deputy Governor. But there seemed to be no clear communications plan, and no developed messaging. And none of the material was in the statutory accountability document they had just published. It wasn’t impressive.

As Treasury pointed out last year, in many ways if the country is going to be dragged down the path of direct restrictions on banks’ loan portfolios, it would have been better to have looked first at loan to income restrictions (“speed limits”) rather than loan to value restrictions. Servicing capacity is typically more important than the current value of collateral. The Reserve Bank could have adopted loan to income restrictions back in 2013. But the Governor was in a hurry. There was, in his telling, a desperately urgent issue and the Bank simply couldn’t wait: it had to do something, and LVR restrictions were what could be done very quickly. The policy process in the lead-up to those restrictions was shockingly bad – one (unelected) man had a bee in his bonnet, and there was little or no debate or discussion allowed (trying to pose some questions was when I got offside with the Governor).

Back almost three years ago when those restrictions were put in place, all the talk was of the temporary nature of the restrictions. When people discussed it internally, I think most people had a sense that “temporary” might mean a couple of years. The true believers thought that the top would have been knocked off the housing market by then, with the LVR restrictions having limited the new debt taken on in the last upward surge, and then things could get back to normal – leaving bankers to decide the composition of their own portfolios.

But then we had a new wave of LVR restrictions last year. In 2013, the Bank had not only seen the restrictions as temporary, but it was staunchly opposed to having different policies for different regions. By last year we had new LVR restrictions – this time some mortgage borrowers were judged better than others, even for exactly the same underlying risk characteristics, and banks were allowed to lend in some places but not others. And now the drums are beating for yet more restrictions – perhaps even tougher, perhaps more differentiated, LVR restrictions, or perhaps loan to income restrictions. There seems to be no end in sight.

Asked about this yesterday, the Bank seemed a bit bashful. The Deputy Governor noted that the Bank had never seen these things are permanent but………housing and financial cycles can be very long, so “temporary” might still be rather a long time. I suppose exchange controls – and all the other restrictions that Walter Nash and his successors imposed on us in decades past – weren’t permanent either. It “only” took 36 46 years to get rid of exchange controls.

Frankly, the Bank seems torn between two poles, and just hasn’t done the hard thinking or analysis – or been exposed to the hard questioning by MPs and the media – to reconcile the two stances.

On the one hand, as they note in the opening sentence of the press release “New Zealand’s financial system is resilient”. (That was also the story three years ago, when LVR limits were first imposed, but then the excuse was “but it might not stay that way if we let things carry on”). As I noted (at length) last year, the stress tests the Bank had done in conjunction with APRA also suggested that the banking system could cope with very severe adverse shocks (including surges in unemployment on a scale beyond anything ever seen in floating exchange rate countries). The latest FSR reported the results of new stress tests (reported in Box C of the document), done late last year. The Bank did not publish a great deal of detail this time, but if anything the shocks look to have been a little more severe than those used in the earlier stress tests (no doubt befitting the further rise in house prices). Once again, banks seemed to come through largely unscathed. Total loan losses amounted (over several years) to around 4 per cent of initial assets – similar to the 2014 result. Of this, 0.6 percentage points related to Auckland property lending. As the Bank noted, loan loss rates on the housing mortgage books were only around 40 per cent of those observed for most other sectors. There is simply no evidence that banks – individually or collectively – have been doing housing lending in a way that would jeopardise their own financial soundness or that of the financial system. That is consistent with the international results – which the Bank has previously cited – in which vanilla housing lending has rarely played an important role in systemic financial problems (especially in floating exchange rate economies).

And yet, and yet…..they reach for ever more direct restrictions on banks. Now don’t get me wrong. The New Zealand housing market (and especially that in Auckland, which is exposed to more pressures) is a disgrace. There is no excuse for price to income ratios of 5, let alone those of around 10. And central and local government policymakers are almost entirely responsible for those outcomes. The Bank seems to half recognize this. They talk of the interacting pressures of high rates of immigration at the same time that the urban land supply market isn’t working well. But they don’t follow this point to its logical conclusion. If the prices are largely the outcome of structural policy choices, there is no particular reason to think they are the fault of banks, or borrowers, let alone the despised class of “property investors”. The Reserve Bank’s job is to use its regulatory powers to promote a sound and efficient financial system. But the stress tests – and their own regulator judgements, expressed in the press release – suggest that the system is sound, robust and resilient. And yet with every new set of restrictions they further undermine the efficiency of the financial system.

There are severe housing market policy problems, but there is no evidence that they are problems the Reserve Bank is responsible for, or needs to take action to try to remedy or ameliorate. As I noted the other day the Reserve Bank has two main jobs. The first is the soundness and efficiency of the financial system, and the second is keeping inflation near target. At present, they are failing at the latter, are continually compromising the efficiency of the financial system, and all while skewing are policy (both regulatory policy and monetary policy) towards action supposedly designed to make safe a financial system that they tell us is already robust.

I couldn’t check this electronically this morning, but my impression was that there was almost no discussion at all in the FSR on the efficiency of the financial system, and the impact of Reserve Bank regulatory measures on the efficiency of the system. That looks to be out of step with the statutory requirements for these documents. I also thought it was interesting that there was little or no discussion of banks’ lending standards and practices. I know the Bank is dominated by people with a macroeconomics background, but surely we expect to learm something in a document of this sort about the judgements the Bank, and its supervisors, are making about credit standards?

I wanted to pick up just three more dimensions of the material the Bank covered in the FSR.

The Bank went to some lengths to argue that the LVR restrictions might have had only a “transitory” impact on house prices (the Deputy Governor’s words) but had led to a structural improvement in the quality of loans on bank balance sheets. In support of this claim they produced a chart showing a reduction in the share of mortgages with LVRs in excess of 80 per cent. In fact, there are all sorts of problems with this claim. First, they don’t show us what has happened to the proportion of loans with LVRs just below 80 per cent (or just below 70 per cent for Auckland investors). The difference in the riskiness of a loan with an 80.1 per cent LVR and one with a 79.9 per cent LVR is trivial, and yet regulatory restrictions typically impose these sorts of cliffs, with lots of loans gathered just on the approved side of the limit (and in ways which don’t appear when there are no regulatory restrictions). The data mean different things in a regulated environment.

But that isn’t the end of the issue. First, if people couldn’t borrow 85 per cent of the value of a house from a bank themselves, some will deterred from buying for the time being. They might save a bit more and then go and buy. But others will turn to other sources of credit. The Bank correctly notes that there has not been a big increase in housing lending by non-bank lenders (not covered by the LVR restrictions, since the Bank has no legal power to impose such restrictions on them). In itself, that lack of (this form of) disintermediation is interesting – and perhaps worthy of further analysis (especially as it points to quite high efficiency costs from the restrictions).

But non-bank lenders aren’t the only alternative sources of credit, In many cases, parents or family members will have been tapped. In some cases, those family members will be in a very good financial position and might be happy to lend from their credit balances. But in other cases, a lower mortgage for the child might be offset by a higher (if still less than 80 per cent) mortgage for the parent. In a crisis it is not individual loans that threaten the soundness of banks, but the exposures across whole portfolios. It is quite possible that much of the apparent reduction in risky housing lending is offset by a general weakening in the overall credit quality of the portfolio. If not, it would still be useful for the Reserve Bank to have engaged with the issue and explained why it concluded that these issues were not material.

Relatedly, the Reserve Bank has simply never engaged with the behavioural responses of banks to direct restrictions on portfolio composition (which we had simply never had in New Zealand prior to 2013). These are profit-maximizing businesses. If Reserve Bank restrictions limit high LVR housing lending, it reduces profit opportunities (and use of capital) in that part of the business. But what have banks done to maintain their profits and ensure that capital is fully deployed? Surely a common take on regulatory restrictions is that they might dampen the risks we can see, while encouraging additional risk taking in less obvious areas. I don’t know how banks responded to the LVR restrictions, but I’m pretty sure the response to the LVR restrictions wasn’t “you know, Graeme, you are right: we shouldn’t be seeking so much profit, and instead we’ll send the capital we would have been using in that business line back to Australia”. I think we are owed better analysis of these issues from the Reserve Bank (and its large pool of analysts) before we accept that LVR restrictions have actually improved the soundness of the financial system.

In a sense, what each new set of regulatory interventions seems to do is the provide cheaper entry levels to the market for those purchasers who aren’t directly affected by the regulatory restrictions. Each time a new set of interventions is announced there is a bit of a pause, and those pauses look like buying opportunities for those who can (at the expense – pure and simple – of those who can’t – those upon whom the Reserve Bank looks unfavourably). The favoured might be the middle-aged trading up, cashed-up New Zealanders returning from abroad, those whose value to the banks means they are favoured recipients of credit from within the speed limits, those with wealthy parents etc (and even the non-resident foreign buyers, a significant part of net new demand in the Auckland market). In general, the interventions advantage the haves at the expense of the have-nots. Such redistributive policies might be what we elect politicians to do, but they shouldn’t be what unelected central bankers are about.

One keeps hearing disapproving comments – including from the Reserve Bank – about people purchasing residential properties to run rental services businesses. I know there is a strong community bias in favour of owner-occupation, and that the rate of owner-occupation has been falling. But here the Reserve Bank – and others who engage in this tarring of people in the rental services business – is simply engaged in scapegoating. All societies need scapegoats – to bear symbolic responsibility for what has gone wrong – but if they are going to be part of a good policy regime there needs to be rather more robust differentiation between symptoms and causes. If central and local government policies on immigration, land use, and building, combine to make house prices unaffordably high to young couples starting out, it is hardly surprising that those people end up renting (for longer) instead. And someone has to own the houses. The Reserve Bank was again citing yesterday statistics suggesting that around 40 per cent of housing sales are to “investors”, but why would this be a surprise (or even a concern, giving the “rigged” housing market?). The home ownership rate itself is dropping towards 60 per cent, most rentals are provided by the private sector, and the median investment property is probably turned over a bit more frequently that the median owner-occupied house.

Finally, the Reserve Bank notes – in a concerned fashion – that household debt to income ratios are now (just) around the pre-recession peak. In itself, this is a fair enough observation, but as so often in these documents it is the context or interpretation that is missing. As I’ve noted before , there was no sign that the level of household debt as it was in 2007/08 lead to serious or systemic financial problems. And that was so even though all the research evidence suggests that it is large increases in debt to income/GDP ratios in short periods of time that has often foreshadowed financial crises. The fact that debt to income ratios now are not materially higher than they were eight years ago – coming off 15 years in which that ratio had increased enormously – should be a source of comfort rather than concern. We simply don’t have a good sense of what an “equilibrium” debt to income ratio is, and (in any case) such an equilibrium is likely to be highly endogenous to the extent to which the housing market is distorted by structural factors. In Atlanta – where median house prices are around US$180000 and house price to income ratios ar around 3 – household debt to income is likely to be much much lower than it is in Auckland.

And the causation runs largely from housing distortions and house prices to debt, and not the other way round. It is disappointing that the Reserve Bank never explicitly recognizes that if house prices are driven higher by the interaction of immigration and supply restrictions – and that is exactly what the Governor says – younger generations will need to have more gross debt relative to income to buy the housing stock from older generations, than would be the case in a less distorted (much cheaper) market.

There was some interesting material in trhe FSR, but in the end it fell well short of what we should expect – or even of what the law requires. Wielding so much discretionary regulatory authority single-handed – in a way that simply shouldn’t be happening in our parliamentary democracy – the unelected Governor surely owes the public much more in-depth analysis of the issues and risks before we lurch into yet another ill-considered hasty patch on the symptoms of a serious problem, responsibility for which rests in the Beehive and – to a lesser extent – in council chambers up and down the country? The quality of the supporting analysis for last two LVR interventions was threadbare (or worse). As they continue to undertake the analysis on further restrictions – and talk to the Minister and Treasury, as part of getting loan to income limits on the (non-binding) list of tools in the MOU – lets hope that the quality of the argumentation and research evidence rises to much better levels than we have seen to date.

As a final point, there was some mention in the FSR of the results of the Reserve Bank’s regulatory stocktake released late last year. In that stocktake there was encouraging talk from the Bank of adopting longer consultative times for regulatory proposals and of possibly finally moving to routinely publishing the submissions they receive (as many other agencies, and select committees do, but which the Reserve Bank has consistently refused to do.). There was nothing on either of these points in the discussion in the FSR yesterday. I hope they are not backing away again.

UPDATE: This afternoon the Reserve Bank has put out a consultative document on the possibility of publishing submissions. It appears to be strongly skewed towards maintaining the status quo.

Wheeler and Hannah on the OCR leak

May 11, 2016May 11, 2016 Michael Reddell OCR leak

I will offer some thoughts on the FSR itself tomorrow, but I had few quick reactions to the comments made at the press conference this morning about the MediaWorks OCR leak and related issues.

I had heard that the Reserve Bank had been considering backtracking on the discontinuation of lock-ups, and had in fact been consulting selected journalists on the conditions on which media lock-ups might be reinstated. That was confirmed by the Governor this morning.

Frankly, they seem all over the place. Less than a month ago, they announced the discontinuation of lock-ups. I thought that was the right decision at the time (and had called for it earlier). Presumably the Bank had carefully considered the various options open to it then, and decided on balance that (a) consultation with affected parties was not required, and (b) that it was not appropriate to continue with lock-ups. One wonders what has changed, apart perhaps from some aggrieved coverage from some members of the media. As the Governor pointed out, lock-ups are very unusual internationally. There might have been a case for them 20 or 30 years ago, when citizens and investors couldn’t just download the documents themselves, and were quite reliant on the media for initial reporting and interpretation. That is no longer so, and the security risks are higher than they were (as the Governor rightly noted, they can’t simply go on relying on trust). I would urge the Reserve Bank not to reverse itself again, but if they do reinstate lock-ups for a select few media representatives – whether relying on pen and paper, or totally physically secure environments – the costs of those privileged arrangements should be borne by the media organisations concerned.

The Governor was also asked why the exclusion of MediaWorks from Bank press conferences had been announced only last week, and not when the inquiry results were released on 14 April (a question I also raised last week). The Bank simply avoided answering that question. Simply telling us that this was the first press conference since 14 April told us nothing. If there were penalties to be imposed on MediaWorks (and exclusion seems sensible) why not announce them when the inquiry report was released – rather than use that opportunity to praise the helpfulness of MediaWorks legal team?. What has changed?

Mike Hannah also confirmed that the Bank has no information on whether there had been previous breaches of security, whether by MediaWorks or other lock-up participants. He stated not only that the Bank was not aware, but that it had not asked. That seems simply extraordinary, at least as regards MediaWorks. When MediaWorks approached the Bank and Deloitte on 5 April, surely a very early question – from either party – should have been “and has this happened before?” (along with “and who in the organization knew about it?”). It is a shame media did not pursue the matter further, but we are left with the suspicion that the Reserve Bank really did not want to know too much about what had gone on, and wanted the whole issue put behind it quickly. That should not be the standard to which powerful autonomous public agencies operate.

How have big cities done in the US?

May 11, 2016May 13, 2016 Michael Reddell Auckland, New Zealand economic performance, USA

I’ve written several times about the apparent economic underperformance of Auckland – apparent, that is, in the official annual regional GDP per capita data that Statistics New Zealand publishes.

We only have the data for the period since 2000, and no doubt more recent periods in particular will be subject to revisions. And there is noise in the data from year to year. But whereas in 2000 average GDP per capita is estimated to have been 24 per cent above that in the rest of New Zealand, by the year to March 2015, that margin had shrunk to only 12 per cent.

ngdp akld ronz

That shouldn’t have been happening if the advocates of our “economic strategy” had been correct: between the agglomeration gains from cities, a rapidly rising population increasingly concentrating the population in our one moderately-large city, and all the claimed spillover effects from a skills-based immigration programme, everything should have been set for Auckland to have continued to outstrip the rest of New Zealand. But it just hasn’t happened – if anything, rather the reverse. As I noted the other day, Census data suggest that until the mid 1990s more New Zealanders were moving to Auckland than were leaving. But even that flow has reversed (albeit on a small scale) over the years since then – the years that coincide with Auckland’s relative per capita economic decline.

There aren’t comparable official data in Australia (regional GDP data are all at a state level), but in the US the BEA publishes real per capita GDP estimates for each of the metropolitan statistical areas (MSAs). The data are available from 2001 to 2014.

Here is a chart showing the median real GDP per capita for six areas people often think of when they think of the economic success of US cities (Boston, Houston, New York, San Francisco, San Jose, and Washington DC ) relative to GDP per capita for the US as a whole.

real gdp pc us cities

There is some variability, but over these 13 years as a whole average per capita incomes in these cities – already much higher relative to the rest of the country than is the case in Auckland – have increased a little further. The change over the full period isn’t large – but nor would one expect it to have been. But the change is in the direction one would have expected.

Those six cities aren’t all of the biggest MSAs in the United States. The others in the top twelve (each with populations above 4.5 million) are centred on Chicago, Dallas, Miami, Los Angeles, Atlanta, Philadelphia. If we take the whole group of 12 cities, the median city had average GDP per capita 24 per cent higher than that in the United States as a whole in 2001. In 2014, that margin has increased to 29.7 per cent.

Of course, in a country with a lot of big cities there is quite a diversity of experiences (different shocks, changing opportunities etc). In five of these twelve MSAs, average GDP per capita had actually fallen relative to the US as a whole over this thirteen year period. Most of the falls were pretty small, and might be not much more than normal year to year variance. But Atlanta did stand out.

atlanta

The fall, relative to the rest of the United States, has been even larger than the relative decline of Auckland.

I don’t know much about the Atlanta economy. There has been very rapid population growth – from just over 4 million people in 2001, to around 5.7 million now. And they have managed that growth while having median house prices of around US$180000, and a price to income ratio near 3. That is major achievement in its own right. But it is also one that makes me a little skeptical of claims that fixing Auckland’s dysfunctional housing and land supply market would materially boost per capita income prospects in Auckland (a claim the Productivity Commission has signed up to).

Auckland’s economic underperformance is real, and should be troubling. It isn’t a “quality problem“, but reflects a serious failure of the economic strategy pursued by both this government and its predecessor. Fixing the land supply market should be a policy priority in its own right, but it looks like a quite different issue to fixing the issues around Auckland’s overall economic underperformance. That looks more like the fruit of an immigration policy that funnels huge numbers of people into Auckland, which doesn’t seem to be a natural location for generating lots of highly-remunerative economic opportunities. When our largest city has so badly underperformed over fifteen years, despite all the hopes and aspirations, it is time for politicians and official agencies to start facing up to the uncomfortable data.

Twenty companies manufacturing TVs

May 10, 2016May 10, 2016 Michael Reddell New Zealand economic history, Uncategorized

No, that isn’t a statistic from South Korea or China. It is New Zealand in 1963.

My in-laws live in Waihi and whenever we are up there I point out to the children the old television factory, just off the main road, and give them a little reminder about the bad old days when New Zealand destroyed value by manufacturing and assembling television sets. Somehow I must have been under the impression that there was just one television manufacturing factory in New Zealand.

But browsing in a second-hand bookshop the other day, I stumbled on Electric Household Durable Goods: Economic Aspects of their Manufacture in New Zealand, an NZIER Research Paper published in 1965. There is 15o pages of analysis, statistics and discussion – not everyone’s cup of tea, but I found it fascinating.

It doesn’t just have information on manufacturing. There is an interesting reminder of just how many more electrical appliances New Zealand households back then had than their counterparts in other advanced countries.

durables

These sorts of international comparisons probably always have to be treated with some caution, but there is nothing very inconsistent with the data suggesting that at the time New Zealand still had among the highest real incomes per capita anywhere. Actually, I was a little surprised there were quite so many consumer electrical goods here, since New Zealand had high protective barriers which meant many such things cost more here than in other advanced countries. But, as the report notes, household electricity prices in New Zealand at the time were around half those in the United States and Australia, and around two-thirds of those in the United Kingdom. A government commission of inquiry had recently noted that in most areas the price of domestic electricity was below the cost of production and transmission.

The domestic manufacturing of electric household durable goods was largely a result of the very heavy regime of import protection and controls put on from 1938 and kept in place, with varying degrees of intensity, for decades afterwards (that Waihi factory didn’t close until the mid 1980s). As the NZIER piece notes

Before 1939, production of electric household durable goods in New Zealand, other than electric ranges and domestic radios, was practically non-existent.

Even for electric ranges, the report manages to cite statistics that over 80 per cent of those in use in 1939/40 had been imported.

The import controls which began in 1938 were precipitated by a foreign exchange crisis – which might well have led to a serious sovereign debt default if it had not been for the looming war – but also reflected an active desire by the government of the day to promote domestic manufacturing (for a variety of reasons, including pessimism about the prospects for (and volatility of) agriculture, a desire for greater self-sufficiency, and so on).

In some sense it worked. Many firms which had previously been importers and distributors turned to manufacturing. The NZIER paper quotes from the company history of Fisher & Paykel – a company established as importers and distributors.

The adoption by the Government in 1938 of a policy of controlling imports by licensing created an immediate problem for Fisher & Paykel Ltd,, as the company was trading principally in appliances imported from the USA. As dollar imports were even more restricted by the new system of import control than those from sterling sources, it became necessary to find alternative means of meeting a demand already barely filled and steadily increasing. The alternative was to produce the necessary appliances within the country, and so, in 1939, Fisher & Paykel entered the manufacturing field.

All sorts of New Zealand and foreign firms set up manufacturing operations here, producing all sort of products on a very small scale. It individually rational, and often highly profitable, but wildly inefficient. It took many decades to unwind.

But import licensing was considerably relaxed for a few years in the 1950s (although there were still typically tariff barriers), and there was a brief but substantial resurgence in imports of electrical household durables. During the brief period of liberalization, annual imports of washing machines (for example) were ten times what they had been in the periods of heavy controls before and after. Unsurprisingly, during that liberalization period there was some reduction in the number of domestic producers.

But when tight import controls were re-imposed in 1958, the whole focus on developing New Zealand industry was taken still further, with an emphasis on encouraging “manufacturing in depth”, and “since 1958 manufacturers in all industries have been encouraged to increase the ‘local content’ of their production”.

Television has been introduced into New Zealand since 1958 [experimental broadcasts only until 1960] and provides an excellent illustration of the policy in practice. Not only is the supply of receivers to the New Zealand market the sole prerogative of New Zealand manufacturers, but the manufacture of television tubes and other components in New Zealand has been deliberately encouraged……..where manufacturers are allocated a licence to use overseas exchange which is not tied to any particular product (the so-called “pool” licensing system), it pays to take advantage of the facilities of as local supplier even if some cost disadvantage is incurred.

And thus it was that in 1963 “the number of firms engaged in the manufacture of [TV] receivers (20) constituted a record for the production of any electronic consumer good in New Zealand”. The number of firms producing componentry is not listed. The New Zealand Official Yearbook records that in 1963/64 there were 35 firms engaged in “radio and television assembly and manufacture”, producing 113904 TVs and 93676 radios. The scale (or rather lack of it) is almost beyond belief – the average firms was producing just under 6000 units per annum.

Much of the focus of the NZIER is on the (in)efficiency of the New Zealand manufacturing operations. The author went to some length to get good data, including from foreign firms with manufacturing operations here and abroad. They cite one example of a European manufacturer of radios (a sector where, they noted, the economies of scale were less than those for the production of televisions) who supplied data on the estimated costs of production for different size production runs. That European manufacturer noted that they typically manufactured in Europe in production runs of 100000, but in New Zealand reasonably large firms typically did runs of around 5000 units. The cost of production per unit on that scale was around twice that for the European-sized production runs (scaling up to runs of one million units was estimated to produce further per unit cost savings of less than 10 per cent). Other estimates led the authors to conclude that New Zealand production was typically costing at least twice the “world” price.

The NZIER piece was primarily analytical and descriptive, rather than being policy-focused. But the author, rather drily, concludes:

If the cost of producing radio and television sets in New Zealand are likely to remain 100 per cent above costs of production in large industrial countries (and on the basis of the evidence presented in chapter VI this is a generous assessment of the higher costs of production in New Zealand) then it is a valid question as to whether the capital and labour now engaged in this industry could not be employed elsewhere to the greater national benefit.

Indeed.

Such staggeringly wasteful economic policies for so long.

(And since we have only continued to lose a little more ground relative to other countries since these particular policies were scrapped, one might hypothesise some ongoing policy problems. But that isn’t for today’s post.)

(And for anyone wanting a slightly caricatured sense of how things were, I recall this Alan Gibbs speech on New Zealand assembling television sets)

croaking cassandra

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

Author: Michael Reddell