Once one of our largest towns

A few years ago, in slightly whimsical post-holiday mode, I did a post highlighting a snippet I’d discovered in the Whakatane museum that until about 1950 the Whakatane port handled more shipping tonnage than Tauranga’s did.   These days, of course, Whakatane’s “port” is known only for sports fishing and White Island tours and Tauranga handles the most cargo of any port in the country.  How economies change in just a few decades.

This summer we spent our holiday at Waihi (with my in-laws) and Waihi Beach.  I’ve come to quite like Waihi, and it seems I’m not the only one.  Just a few months ago it was named the “most beautiful small town” in New Zealand, and if that surprised me a little it is certainly a pleasant place, with an air of prosperity about it – and decent French and German bakeries  – one often doesn’t find in small towns these days.     It seems to share in the same sort of insane zoning practices that hold up house prices almost everywhere (if you get on the right side of the council rules there is apparently money to be made subdividing semi-urban sections –  which in any sane world wouldn’t happen for a town set surrounded by large amounts of fairly flat rural land.)    As for the air of prosperity, probably it helps to be on the main road from Auckland to Tauranga, but Waihi has a more prosperous feel than Paeroa, 15 miles nearer Auckland, and I presume that must be down to mining –  represented by the huge open-cast pit perhaps 50 metres from the main shopping street.

What perhaps makes Waihi something of an anomaly is that it is both prosperous and well-kept and yet has fewer people than it had 100+ years ago.

Just prior to World War One, Waihi had an estimated population (31 March 1913) of 6740.  By New Zealand standards, that made it a big place.    Here were the urban area populations at the time.  Of course, then the urban population was mostly in handful of large cities (the old “four main centres”)

waihi 1.png

but Waihi was the 13th largest town/city in the entire country, not much smaller than places like Nelson and Plymouth (and ahead of those other six places I’ve shown, all now substantial cities).  Of those top 13, only Waihi and Palmerston North were not ports.

And why?   That was (gold) mining.   Waihi was by far the largest gold mining operation in New Zealand (and had been the location of the major miners’ strike the previous year –  a confrontation that at its height involved 10 per cent of all New Zealand’s police, and the death of one striker).    And mining in New Zealand wasn’t on a trivial scale.  These were the days of the Gold Standard, when many monetary systems (including our own) were backed by/convertible into gold.  In 1910, New Zealand –  mostly Waihi – accounted from just over 2 per cent of the world’s annual gold production.  Gold production was similar to that from the Australian state of Victoria.  Of the Australian states, only Western Australia produced a lot more (3 to 4 times total New Zealand production).

What about now?   There is still gold (and quite a lot of less-valuable silver) being mined in Waihi.  In fact, just recently Labour ministers overruled one of their Green Party colleagues on a decision that will facilitate mining for some years to come.

But relative to what is going on elsewhere it is a shadow of what it was (and, of course, much less labour intensive).   Total New Zealand gold exports are now about 5 per cent of those of Western Australia.  As a gold producing country, New Zealand now ranks between Ethiopia and Finland, mining about a quarter of one per cent of the world’s new gold production (did you know –  I didn’t –  that China is now, by some margin, the largest producer of gold?).     Most likely, there is a lot of gold elsewhere in the Coromandel Hills, but the political barriers to exploiting it remain formidable.

And as for Waihi, if the mine and its gold and silver production helps keep a town fairly prosperous and well-kept, the latest SNZ population estimate is only 5160, just behind Dannevirke, Carterton, and Dargaville.  Waihi’s population means it is now only our 56th= largest urban area, almost halfway down the SNZ list.  The smallest of the other places on my earlier chart –  Blenheim –  now has six times Waihi’s population.  In fact glancing down the list of 115 urban areas from 1913, Waihi’s drop in the ranking looks more precipitate than any other town in New Zealand, perhaps matched only by a handful of (then much smaller) South Island mining towns.

Natural resources really can make a difference.  Even today, they are the difference between Waihi and numerous down-at-heel rural communities scattered around New Zealand.

Financial literacy: how about schools fix maths etc and governments free up the housing market

It was anything but a slow news week globally, but here in New Zealand not much seemed to be happening (not even much summer, at least in Wellington).    Perhaps that was why the Sunday Star-Times chose to devote two full pages (with the promise of more in the next couple of weeks) to the hardy perennial cause of –   in the words of the headline – “More financial literacy needed”.   Especially (it appears) for kids, from schools.  In years gone by, there have even been public opinion polls –  paid for by people championing the cause –  suggesting that the public agree.

I’m as sceptical as ever, perhaps more so as my own kids have progressed through the education system.  What follows is mostly from a post I wrote on the issue a few years ago

I’m sceptical at a variety of levels.  First, and perhaps most practically, these surveys (and the reported views of advocates) never ask what people would prefer schools to stop teaching.  There are only so many hours in the day/year.  I’d face the same question as to what should the schools stop teaching, but given a choice, personally I’d rather that schools were required to teach a sustained course in New Zealand and British/European history than that they teach so-called financial literacy.   Kids are exposed every day to their parents’ attitudes to, and practices with, money and things.  They aren’t directly exposed, to anything like the same extent, to maths, science, history, or foreign languages.

Second, as far as I can see, the evidence is pretty mixed as to whether teaching “financial literacy” makes any difference to anything that matters.  Are countries with higher “financial literacy” scores richer as a result, more stable, happier?  And a recent report (page 32) for our own government agency that deals with this stuff actually showed that, for what it is worth, the “financial literacy” of New Zealanders scored quite well in international comparisons.  What is the nature of the problem?

financial literacy

Third, why would we expect that the government, and its representatives, would be good people to teach children about money?  …at a bigger picture level, in one way or another governments are the source of most financial crises –  Spain, Ireland, Argentina, the United States, China.   Governments are more prone than most to undertaking projects that they know provide low or negative economic rates of return.  Governments face fewer market disciplines than citizens. And governments don’t have to live with the consequences of their mistakes.  So perhaps I could support a civics programme that included a section on critically evaluating election promises and government policy announcements.

Fourth, much of the discussion in this area is quite strongly value-laden.  And no doubt it has always been so.  I recall the day when our 6th form economics class was visited by a banker, to try to promote savings etc.  He brought along a hundred dollar note –  this was 1978, and it was probably the first time any of us had seen one.  Trying to set up a discussion about the merits of bank deposits (probably with negative real interest rates at the time), he asked us all what we’d do with the $100 if we had it.  Various class mates rattled off their spending wishes, but the banker was totally flummoxed when one of my friends, a strong Christian, told him that what she’d do was to give it away.

And where, for example, in all the discussion of financial literacy is there any reference to the idea that one of the best routes to financial security is to get married and to stay married?  There are elements of both causation and correlation there, but finding the right spouse, and learning what is required to make a lifelong commitment work, is almost certainly a more (financially) valuable lesson that knowing that when interest rates fall bond prices rise.  But it is not one we are likely to hear from the powers that be –  particularly not under the current government.

And fourth, this becomes an excuse for yet more bureaucratic/political bumpf, reinforcing a sense that governments should have “strategies” about everything and anything.  I was somewhat surprised to learn that our government has a financial capability strategy.  Why?

Building the financial capability of New Zealanders is a priority for the Government.  It will help us improve the wellbeing of our families and communities, reduce hardship, increase investment, and  grow the economy.

The National Strategy for Financial Capability led by the Commission for Financial Capability provides a framework for building financial capability. It has five key streams:

  • Talk: a cultural shift where it’s easy to talk about money
  • Learn: effective financial learning throughout life
  • Plan: everyone has a current financial plan and is prepared for the unexpected
  • Debt-smart: people make smart use of debt
  • Save and invest: everyone saving and investing

On this measure, might we assume that “debt-smart” would mean taking as much interest-free student debt as possible and paying it off as slowly as possible?  Not an approach I will be encouraging in my children.

More generally, I’m not sure that any of these items represent areas where we should expect governments to bring much of value to the table.  One might marvel that human beings had got to our current state of material prosperity and security –  let alone how our pioneers built a country that was once the richest on earth – without the aid of government financial literacy/capability strategies. And since when has a traditional Anglo reticence about matters of money been something for governments to try to change?   Better perhaps might be a focus on improving the financial capability of governments.

The Commission’s own research (p 26) shows what one might expect, people develop more “financial literacy” as they need it.  So-called “literacy” is low among young people (18% of 18-24 year old males are “high knowledge”), who don’t need it much.  It rises strongly during the working (child-rearing, mortgage etc) years (53% of 55-64 males are “high knowledge”), and then looks to tail off a little in retirement.  All of which is unsurprising, and (to me) unconcerning.

I know the so-called Commission for Financial Capability doesn’t cost that much money, but as I’m sure they would point out, every little counts.  The money they fritter away on national strategies and capabilities is money that New Zealanders don’t have to spend, or save, for themselves.

As an easy way into this, consider this US-government funded online quiz, a shop window for a US project on better understanding financial literacy.  I imagine that most readers of this blog will score 6/6, while the average American scores 3.  But then stand back and ask yourself why the average American (or New Zealander) needs to know the answers to these questions, phrased rather in the manner of a school economics exam.  People who read blogs like this take for granted a knowledge of the answers, but in what way has that knowledge made your life, or mine, better?

Back to 2020.  As ever, in the Sunday Star-Times articles there is no hint of what schools might sensibly cut back on to squeeze in more financial literacy teaching (or “money mojo” as a couple of middle-aged commentators suggest calling it).     It isn’t as if our core school academic results –  maths, English, science etc-  are so impressive that the marginal time would be a zero cost resource.  There are only so many hours in the day, weeks in the years, years in a school life.  And in recent years, schools have been told to add “digital literacy” to their teaching, they are about to be required to teach New Zealand history (something I generally welcome), and seem to devote ever more time to climate change issues (“all we ever heard about in social studies”, in the words of one of my kids).    And yet you’d have thought that binding budget constraints would have been one of the ideas anyone wanting to teach financial literacy would be conscious of themselves, and take seriously.

Similarly for all the talk in the articles about how tough life is, there is no hint of any recognition that (say) average labour productivity (the underpinning of average material living standards) even in underperforming New Zealand is now more than 50 per cent higher than it was when I left school.   And equally no hint of any recognition of the role governments –  the people who would be teaching “financial literacy” –  have played in the alarming underperformance of our economy.   There is some mention of housing challenges, but none of the conscious and deliberate choices governments made, and keep on making, to render decent houses all but unaffordable to young families in our larger cities.     Fix that at source and life (financially) would be a great deal easier for many of our lower income people.  But that would involve governments making good and responsible choices, not continuing to shred the prospects of each successive generation.     Even then, there would still be no obvious role for governments doing “financial literacy” education, but at least our governments might have a little more credibility as some fount of discipline and financial wisdom.

Parents do “financial literacy” all the time –  not necessarily in the words they use (some more reticent than others) but in the choices they make, and which kids see them making.  About consumption, about debt, about giving, about choice and opportunity cost, about budget constraints (if not in quite those words), about celebration (and self-denial), about partnership –  about casts of mind (extravagant, frugal or whatever).   We model –  often inadequately perhaps –  the values we encourage our kids to live by.   It is how society works, and always has.

And I’m quite sure I don’t want Jacinda Ardern, Chris Hipkins, Simon Bridges, Nikki Kaye (or the teachers’ unions) getting in the way with their corrosive views.  Rather better that the politicians focused on fixing the stuff that governments messed up in the first place.  I was having a sad conversation yesterday with my daughter, who asked if it was really true that houses had once cost less than $100000.   I had to explain briefly the idea of general inflation, but went on to tell her that when I was first house-hunting in 1985 I’d looked at several decent places priced at around $80000.   Adjust for the CPI and that would be around $230000 today, but try looking for a house in south Wellington for $230000 –  even one with 1985 type fittings, decor etc –  and you’ll be stiff out of luck. Even at twice that price it would be almost impossible.  That is deliberate government recklessness.

 

 

 

Slightly less-bad news

As foreshadowed earlier in the week, when Statistics New Zealand yesterday released the latest GDP numbers, there were also some quite significant revisions to the numbers for the last few years.  This happens every year at this time, reflecting the addition of various bits of data that are only available with quite long lags, and sometimes the use of new data sources.   My impression has been that these annual revisions have, at least in recent years, tended to revise up history, and it was clear from what SNZ had already told us that this year would be no exception.   (These revisions tend not to have any great implications for monetary policy –  inflation already is what it is whatever the statisticians belated tell us last year’s GDP was.)

This is the latest picture for annual growth in real GDP per capita.

sept 19 GDP 1

The various revisions suggests that per capita growth in real GDP for much of this decade hasn’t been too bad, averaging around 2 per cent from 2011 to 2017.   But (a) the preceding recession had been quite deep and long, and (b) the run of per capita growth looks pretty subdued when compared to what we saw for several years in the 90s and 00s.   More recently, annual growth in real GDP has fallen away to a point that no one should really be comfortable with.

But the data do bring some end of year good news (of sorts) for the Minister of Finance.   In Parliament on Wednesday he clarified that he was boasting that under this government annual growth in real GDP per capita had risen from 3rd worst in the OECD to only 5th worst in the OECD.  It seemed –  and still seems –  almost incomprehensible thing to boast about, especially when you and your leader have gone round the country boasting that we were doing better than most of our peers.   On those numbers, quite clearly we weren’t.

But as I noted when I wrote about this earlier in the week, the revisions were coming.    In both (calendar) 2017 and calendar 2018, growth in real GDP per capita was – so we are now told – 1.6 per cent (using an average of the production and expenditure GDP measures).    On those numbers, New Zealand’s growth would have been 26th in the OECD (of 36 members) in 2017, and 21st in 2018.       Even more of an improvement than the Minister claimed.   But…..in both cases still quite a bit worse than the median OECD country.  In other words, even in real per capita GDP terms, the gaps to the rest of the advanced world have widened and worsened, in both years under both governments (realistically of course, individual governments only have very limited impact on individual year outcomes).  And per capita growth has slowed this year.

What about (labour) productivity?  In my post on Wednesday I noted that the productivity numbers would be revised up and that the revision could be as large as 2 per cent.    On my preferred measure of real GDP per hour worked (using averages of the two GDP measures and two hours measures), the revision for calendar 2018 was exactly 2 per cent.   Here is how my regular chart looks with the old and new data shown.

GDP phw to sept 19

It is hardly stellar growth, but it is certainly better than nothing (“nothing” being roughly what the earlier data suggested we’d had for several years).   It lifts us just above Lithuania in this chart I showed the other day

OECD real GDP phw 2018

But that was data for 2018.   When I checked the productivity growth rates for Lithuania, Israel, the Czech Republic and Poland for the last few years, they were each materially faster than New Zealand’s (even with our data revisions).  Unless something pretty startling happens (a) in the Dec quarter data for New Zealand or (b)  there is a very sharp slowing in productivity growth in those other countries for 2019, it isn’t at all inconceivable that when the 2019 comparisons are available in the middle of next year, we could have slipped behind all four countries.

Bottomline?  There have been revisions upwards, and they should be unambiguously welcomed.      But we are starting a long way behind the group of advanced countries we typically like to compare ourselves too, and yet we have mediocre at best productivity growth and –  before the latest slowdown –  we have had per capita income growth less than that of the median advanced country.     We are still making no progress in closing those gaps, and often they are widening further.  That shouldn’t be a great surprise, given that our governments keep on with the same policy approaches that have failed to generate any reconvergence for the last 25+ years, failing to reverse the relative decline that began perhaps 70 years ago.    There is no light in that darkness.

This is my last post for the year. I’ll be back sometime around mid-January.  In the meantime Christmas wishes to my Christian readers –  celebrate the Incarnation (God made flesh) joyously –  and best wishes for the New Year to all.

I see that Alexandra Ocasio-Cortez is (quite aptly) quoting Scripture today.  I’ll leave you with an extract with something more of Advent/Christmas theme, Mary’s song of praise,  recorded in Luke 2 and known as the Magnificat

My soul doth magnify the Lord,
and my spirit hath rejoiced in God my Saviour.
For he hath regarded the lowliness of his handmaiden.
For behold, from henceforth all generations shall call me blessed.
And his mercy is on them that fear him throughout all generations.
He hath shewed strength with his arm.
He hath scattered the proud in the imagination of their hearts.
He hath put down the mighty from their seat
and hath exalted the humble and meek.
He hath filled the hungry with good things.
And the rich he hath sent empty away.
He remembering his mercy hath holpen his servant Israel
as he promised to our forefathers Abraham, and his seed forever.
Amen.

 

Reforming the RB: next steps

The government yesterday released a series of decisions as part of the next stage of the multi-year review of the Reserve Bank Act.   The decisions were in two classes: the first set around the governance of the institution are firm decisions now to embodied in draft legislation to be introduced (but not enacted) before the election, and the second set are in-principle decisions around prudential regulation and deposit insurance on which there is to be a further round of consultation next year.

On the latter set of proposals, I’m only going to comment briefly today.  There is one important decision I support –  a common framework for the prudential regulation of all deposit-takers (rather than separate ones for banks and for non-banks).   Much of the rest I’m fairly sceptical of:

  •  the decision to cap deposit insurance at $50000 is as flawed, and would prove as untenable in a crisis, as I warned in a post when the consultative document was released.  The proposed limit is well out of step with those in other advanced countries, notably Australia, and as I noted earlier “failing to get this right, ex ante simply increases the risk that when the crisis comes we’ll end up bailing out wholesale creditors (including foreign ones) too”,
  • the government is still toying with introducing statutory preference for depositors over other creditors.  This would be a mistake, and nowhere is it noted that it would tend to reinforce the advantage large banks tend to have locally in competing for retail deposits (since the small retail banks have little other funding to subordinate),
  • the in-principle decisions shift more policymaking powers out of the hands of elected people (the Minister of Finance) to unelected ones.

Remarkably, in the entire Cabinet paper there was no reference to the recent decision by the Governor to set minimum capital requirements for locally-incorporated banks well above international norms, even as the paper talked about a need for more, more-intensive, supervision in future.    As the Bank’s own favoured expert pointed out, there is usually something of a trade-off between the two, whether in how bridges are engineered or bank risk managed.

But my main focus was on the governance decisions, outlined in detail in the associated Cabinet paper.    Flicking through my hard copy, there are lots of specific and detailed points where I support the decisions being made (although specific legislative drafting may matter even there) and there are some general aspects that represent significant steps forward.  But if they proceed on governance as Cabinet has decided, we will end up with an unwieldy beast, mostly as a consequence of the government’s determination not to adopt the model used in a majority of advanced democracies (including small ones, and also notably Australia), in which monetary policy and financial system prudential regulation are conducted by two separate institutions.   And the existing democratic deficits will be worsened.

(I’m not sure if The Treasury has yet published the submissions that were made on the consultative document covering these issues. But in case anyone is looking, I did not make one.  That was solely because the morning I sat down to start writing one, in the week submissions closed, my mother died and so other things took priority.)

It is unambiguously good that the proposed new legislation will complete the work of reversing the key weakness of the 1989 Reserve Bank Act, in putting all the Bank’s powers in the hands of a single (unelected) official, complemented with provisions the rested on the naive assumption that it would be easy to tell if the Governor was not doing his/her job (mostly then about monetary policy) and that the Board would act in the public interest in thus holding the Governor to account.

We now already have an (anaemic) statutory Monetary Policy Committee –  feeble in construction and operation, and not very open or accountable, but it is better than nothing and in future it might evolve towards something good.  Under the proposed new legislation, all the remaining functions and powers of the Bank would become matters for the Board (a new one, the existing one would be dis-established), which could in turn delegate some of those powers to the Governor and other management as they chose.    And the Governor will not even be a member of the new Board – the intention is that it should be wholly non-executive, more akin to the model used in many Crown entities, including the FMA.

But there are a number of significant problems with what Cabinet has decided.

First, as the documents acknowledge, the Bank has extensive policymaking powers (that go far beyond those of most –  all? –  Crown entities) but decisions on those policies will be made wholly be non-elected (and thus not effectively accountable to the public) people.   There will be the figleaf in which the Governor and the Board are formally appointed by the Minister, but (a) the Minister will only have veto power and will (as now) only be able to appoint someone the Board has proposed, and (b) Board members could only be appointed from among those names proposed by a (statutory) nominating committee, including consultation with other political parties.

These models are quite out of step with how most other advanced countries appoint people to these key positions, where it is recognised that the elected government should be able to appoint people largely as they see fit (again, the model in Australia).  There has long been a substantial democratic deficit, but it is being further entrenched.  (The Cabinet paper notes that the nominating committee model is used for the New Zealand Superannuation Fund, but it is clearly and explicitly not a policymaking body.)     These models might be satisfactory if the powers of the Bank were operational and implementational only –  where one wants to ensure that ministers can’t influence decisions regarding application of rules to specific individuals or institutions –  but not when it involves major, highly contentious, policy decisions (such as the recent bank capital decisions, or the use of LVR or DTI restructions).  My own preference –  and I note that the National Party has spoken in these terms as well –  would be for the major regulatory policymaking powers to be reserved to the (elected) Minister and Parliament, leaving the practical implementation of policy in operationally independent hands.  There is no sign in the Cabinet paper (or in the earlier consultative document) that such an option was even seriously looked at.

So further entrenchment of the lack of effective democratic control of major areas of policy –  where, pace Paul Tucker, there is no general agreement on policy models, how to assess success, and where there are significant distributional effects –  is a significant (apparently deliberate) weakness.

But the other is an apparently irresolvable tension between the sorts of skills and people required from Board members.  The new Board’s day job will be the goverance and overall responsibility for the Bank in all areas other than those that are the responsibility of the Monetary Policy Committee.   That includes regulation of deposit-takers and insurers, operation of securities settlement systems, foreign reserves management, and all the standard corporate functions.  Given that documents talk of requiring people to have appropriate skills, you will presumably be expecting to see a standard mix of lawyers and accountants with some sort of banking and regulatory flavour.  Given their policy making powers, you sort of hope there are some serious policy people.

But these people are also to be primarily responsible for the appointment of the Governor, for the appointment of the other Monetary Policy Committee members, for things like the MPC Code of Conduct, for issues around resource allocation for monetary policy, and (I think) still for holding the MPC to account.  The sort of people who would be likely to be well-equipped to make those sort of choices, decisions, and recommendations are unlikely to overlap very much with the sort of people you might expect on a Board primarily focused on the regulation of deposit-takers and insurers.    It is simply flawed model, only compounded by the risks around lack of clarity over who has control over precisely what, particularly in a crisis or a new era of unconventional monetary policy instruments.

A better model would simply have made the Minister (and Cabinet) directly responsible for all statutory appointments (Governor, MPC members, Board members), but the much more sensible model would have been to have spun out the regulatory functions into a New Zealand Prudential Regulatory Agency (with policymaking powers reverting to the Minister), and allowing both a monetary policy focused central bank and the NZPRA to develop their own cultures of excellence and specialisation, with much greater clarity as to who is responsible for what.

The other unfortunate choice I wanted to highlight today was around funding the Reserve Bank. I have no particular problem with allowng for levies to partially fund the prudential functions.  But I do have a problem with the main Bank funding continuing to be secured through the Funding Agreement model.   I wrote about that in a couple of posts –  one at the time the last Funding Agreement was approved and the other in 2018 as the current review process was kicking off.  The Funding Agreement model is (a) voluntary, (b) hardly transparent at all, and (c) perpetuates the myth that “the Reserve Bank is different”.   Sure, we want operational choices at arms-length from politicians, but we nonetheless fund Police (for example) by means of annual parliamentary appropriation, one of the cornerstones of parliamentary control in our system of government.

It is bad enough that the Funding Agreement model is being retained (with some modifications, the details of which I might come back to when we have a bill) but what shocked me was the announcement that the government intends to legislate to remove the current requirement that any Funding Agreement must secure parliamentary ratification.     The only grounds they seem to offer for this is that “parliamentary ratification impedes flexibility” but (a) they could readily have moved to shorter terms for funding agreements, and (b) most agencies operate, rightly, with annual appropriations, approved each and every year by Parliament.  Generally, governments can’t spend what Parliament has not appropriated.  There is simple no good reason why the Reserve Bank –  a powerful policymaking agency (not just a referee –  like the courts –  or a detailed implementation body) –  should be any different.

I may well have further comments on these and other issues next year, including when the bill is presented and is open for select committee scrutiny.  But my summary position is that whatever good aspects there are in what Cabinet has decided, it is –  a bit like the new MPC system –  a lost opportunity to have created a so much better system, including one more open, more accountable, and without such gaping democratic deficits.  In both cases, although on paper the Governor will be materially weaker than he was under the 1989 Act, in practice it is likely that a wily Governor will be almost as powerful as ever.  That leaves us too vulnerable to poor or mediocre Governors (real stars will shine whatever the governance structure).

One aspect of the Bank still up in the air is the appointment of the chair and deputy chair of the current Board (and realistically the current legislation is likely to be on the books until at least mid-2021 even if the current government is returned).  The Board terms of both the chair (Neil Quigley) and the deputy chair (Kerrin Vautier) expires on 31 January and 8 February respectively.  Both will have already served the customary maximum of two full five year terms on the Board.  And under the legislative amendments last year not only does the Minister get to appoint Board members but (appropriately) he now gets to appoint the chair and deputy chair.    It will be interesting to see what choices he makes.  He could simply reappoint Quigley and Vautier to see out the current functions of the Board, but the Board is widely regarded as having done a poor job, and it isn’t obvious that after 10 years plus on the old Board you’d expect them to be the people to lead the new Board after the new legislation.   A better call would be to appoint as chair someone whom the Minister would regard as a credible candidate to the chair the new-look regulatory-focused corporate-like Board as well, and thus to oversee the transition (although that option is complicated by the timing: if the current government lost office any reforms might proceed rather differently).

 

 

Poor answer, poor economic performance

I don’t generally watch or listen to Parliament’s question time. But my teenage son has finished school for the year and, being a nascent political junkie, turns on the TV each afternoon to watch the jousting.

I was doing something else yesterday afternoon when this exchange caught my ear

Hon Paul Goldsmith: Isn’t the most relevant current economic indicator the fact that New Zealand has the highest terms of trade in recent modern history and we’re still growing very slowly and running a deficit?

Hon GRANT ROBERTSON: We can all pick our most relevant economic indicator, but the one I want to leave with the member is this: we, as a country, are growing faster than the UK, Australia, Canada, Japan, and the eurozone. No country with which we trade or compare ourselves is growing how they were two or three years ago. We are ahead of the pack and we’re doing well as a country.

Hon Paul Goldsmith: Which of the countries he listed in the answer to my previous question are we growing faster than, on a per-person basis?

Hon GRANT ROBERTSON: On a per-person basis, I don’t have the information the member asked for, but what I can tell the member is this: when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward. On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

That “34th in the OECD” I knew to be wrong.    There are only 36 OECD countries and without even checking the others everyone knows Chile, Portugal, and Mexico are poorer than we are.  I had a very quick look at some data and put it in this tweet.

I checked the IMF numbers because –  with so many more members and countries in their data –  being 34th sounded about right.  Perhaps the Minister had his IMF and OECD confused: it certainly looked like a first for any Minister of Finance to be boasting that New Zealand was 34th (or 32nd) on anything in the OECD.

But out of curiosity I decided to take a closer look.  There are, after all, both constant price and current prices GDP per capita measures, each converted at respective PPP exchange rates.   And you’d have to be pretty sceptical of putting much weight on movements over just a year or two, give both measurement and conversion challenges.

The IMF numbers go back to 1980.  Here is how our rank looks on these two measures and across time (2019 being an estimate/forecast).

GDP per capita, PPP, New Zealand rank
Constant price Current price
2019 35 35
2018 34 34
2017 34 34
2012 37 37
2007 40 40
2000 34 35
1990 31 31
1980 29 29

On these measures we were indeed 34th in 2017 –  looks like that was what the Minister might have had in mind.  But, if anything, there is a little slippage in the last couple of years.    Over the longer run of data, there has been some improvement in our rank since 2007 –  back then subsequently crisis-hit places like Greece, Italy, and Puerto Rico had got ahead of us (and Equatorial Guinea too) –  but we are in much the same position we were in 2000.  The significant worsening in our ranking occurred in the 80s and 90s, and there has been no consistent improvement since.

But our more usual comparators –  the comparison the Minister claimed to be making –  is with the OECD countries.

GDP per capita, PPP, New Zealand ranking
Current prices Constant prices
2018 20 21
2017 20 20
2016 20 19
2012 20 20
2007 21 22
2000 22 21
1990 20 21
1980 20 17
1970 11 12

It is mostly a pretty similar story.   People most often focus on the constant price numbers.  Again, if anything there has been a little slippage in the last year or two, but on these numbers our ranking is broadly where it was as long ago as 1990, and the real drop down the rankings occurred in the 1970s and 1980s  (and no doubt earlier if the consistent data went back further).    Those long in the tooth will recall that in 1990 we were about half way through the extensive reform programme –  itself implemented in response to the deterioration in New Zealand’s economic performance –  that was going to be lift us back up the OECD rankings.  Shame about that.

But what about productivity?  It wasn’t what Paul Goldsmith was asking, but it is the foundation of all sustained improvements in material living standards.   Here is the OECD data for GDP per hour worked

GDP per hour worked, PPP, New Zealand ranking
Current prices Constant prices
2018 27 26
2017 24 25
2016 22 23
2012 22 21
2007 23 23
2000 22 21
1990 21 20
1980 19 17
1970 15 15

(I mostly refer to the constant price series, in all such international comparison on this blog this is “real GDP per hour worked”).

If I were a Minister of Finance I wouldn’t be boasting anything here.  Then again, if I were the Finance spokesperson for the other party that governed New Zealand for large chunks of this half-century I’d probably keep quiet too.

The data are what they are, for now.   That said, I don’t want to make much just yet of the apparent sharp fall in our ranking over the last couple of years (and even if it is for real, it isn’t yet this government’s fault any more than that of its predecessor –  it is 2018 data and policy, or the lack of it, works with a lag).    It both looks too bad to be true and we know that there are significant revisions being published tomorrow by SNZ which are expected to raise productivity growth a bit over the last few years.  In the grand scheme of things, the differences are unlikely to be very large but a levels shift of 2 per cent –  which might happen –  would be enough (just) to lift us from 26th to 24th on the constant price measure.

On the data as they stand today, here are the 10 OECD countries with the next highest productivity and 10 (all the rest) with the next lowest.

OECD real GDP phw 2018

Three former communist countries are now ahead of us, as is Turkey, and the Czech Republic and Poland have had recent productivity growth records that mean they will almost certainly go past us in the next couple of years (even with New Zealand data revisions).

So, to revert to where this all started, what about the Minister’s claims

We are ahead of the pack and we’re doing well as a country.

No

when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward.

No.  Hasn’t happened so far, and no sign things are about to improve.

And there was that final puzzling claim

On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

I have no idea what he has in mind, but whatever he had in mind perhaps the Minister should keep in mind the old mantra that if a number sounds too good to be true it probably is.

Sure in cyclical terms the economy isn’t in a dreadful state.  But in any longer-term sense we are underperforming, have underperformed for decades, there is no sign of any structural improvement underway now, and neither main party shows any sign of serious policy thinking that might finally –  decades after those promises from both major parties –  make a difference for New Zealanders.   As things stand –  and by reference to that final chart –  if we just keep on doing policy as we have it isn’t inconceivable that in 2030 we could have the third lowest labour productivity in the entire OECD.   Convergence with Uruguay may still happen.

 

UPDATE: In the House this afternoon the Minister made clear that he had been talking about annual growth in real GDP per capita.  Per the OECD data –  as it stands today, before significant SNZ revisions to be published tomorrow – New Zealand’s growth rate did rise from 34th (of 36) in the OECD to 32nd (the latter for calendar 2018).  It seems very odd to boast about having the 5th worst per capita GDP growth among the OECD countries (and quite clarifying given the rhetoric the PM and Minister often use claiming New Zealand’s growth record is materially better than that of advanced countries we typically compare ourselves too).  Clearly –  given that this was an off-the-cuff response to a supplementary question – they’ve known the dismal (on official data) per capita picture all along.

 

The void where hope might have been

If, as I do, you’ve lived for almost 25 years 100 yards or so from the old Erskine College you have a fairly good sense of what National was on about in this snippet from their new “Building NZ, RMA Reform and Housing” policy discussion document released yesterday.

Objections to proposals for residential reuse of the old Erskine School site in Wellington held it up for more than 20 years. It involved claims that the decaying buildings had heritage value, as well as the routine RMA neighbour objections. Long after the school closed the buildings were red-stickered by Wellington City Council as being unsafe for occupancy. After two decades of costly objections and delays, development eventually started on the site providing 94 dwellings for families.

The school closed in 1985.  Some of the land was developed decades ago, but the main site is only now getting the first few occupants in the new (eye-wateringly expensive, at least on the advert I followed up) townhouses.

But if there seem to be some hints of some modest good things in the document, it is hard to be that positive  Every so often Opposition parties talk a good game about fixing (or rather, freeing) the housing market –  the one that results in such appallingly high price-to-income ratios, systematically skewing opportunity away from the young.   And then nothing very much that matters happens.  It has been that way for 30 years now, even as the problem has got worse and the imbalances more entrenched.

National talked a good game leading up to 2008.  And then accomplished almost nothing –  people from David Seymour to David Parker argue they made things worse – including when they had a clear absolute majority with ACT.  Some elements of Labour –  well, mostly just Phil Twyford – talked a good game prior to 2017.  Twyford can still give a pretty good speech on the subject, but are real house/land prices higher or lower than they were when Labour took office two years ago?  Higher of course.  And these are asset markets, that trade not just on how things are right now –  policymaking and legislating takes time – but on best credible expectations about the future.

And now we have National in Opposition again, trying to shape the best policies for New Zealand –  oops, the best policies they think they might win on –  heading towards next year’s election.  They seem to have given up already.

Oh, I know the headlines don’t say that.   They’ll report National talking of splitting the Resource Management Act in two, to have separate regimes for urban development and for wider environmental resource utilisation issues.  But then the current government is already looking at that option in one of their numerous working groups and consultative processes.    Have land prices on the edges of our cities been falling towards the value in the best alternative (agricultural?) use?  Not that I’ve noticed.  In principle, the idea of  splitting the Act sounds appealing, although with the caution that various experts have posed that there is a risk of creating huge uncertainty for a decade or two as courts define the implications and limits of a whole new regime.

But what is striking is how little specific there is about how differently things might actually operate under new National legislation.  National grappled with these issues in government for nine years, with ready access to experts inside and outside government.  They’ve now had two years in Opposition, with key former ministers (eg Amy Adams and Nick Smith) still on board, and yet nine months out from an election we have page after page of ideas from other people (notably the Environmental Defence Society) and discussions of how things are done in Scotland, South Australia, and Queensland, but little or nothing specific, and nothing that articulates any sort of National vision of a radically more functional future system.     And nothing that, for example, notes that Scotland has little population growth and the big cities in Queensland and South Australia have house price to income ratios well in excess of six –  classified in the annual Demographia rankings as “severely unaffordable” –  when both Brisbane and Adelaide not that many decades ago had price to income ratios of three.

And, sadly here I add an “of course”, there is not a single reference anywhere in the document to that myriad of thriving growing US cities where house price to income ratios today  –  10 years into an economic growth phase, with interest rates almost as low as those here now –  are anywhere from 2.5 to 4.    Or how we might be able to deliver those sorts of outcomes for New Zealanders.

I got to the end of the document last night and was rather struck by the lack of apparent ambition and by what appeared to be an avoidance of directly addressing the main issues.  So I checked the entire document and neither ‘land prices’ nor ‘house prices’ appear at all.   And yet every serious analyst knows that one of the key presenting issues is how large a share of the cost of an urban house+land is the price of the land under the house.  We aren’t short of land in New Zealand –  far from it.   Fly in and out of even Wellington or Auckland –  let alone most provincial cities –  and it is striking just how much land is close by the existing urban areas.  And yet our governments –  central and local –  have managed to create an artificial scarcity that often means that well over half the cost of a house+land in our cities is the price of the land.  It is crazy –  and we aren’t just talking close-in places like Mount Victoria or Parnell, with distinct locational advantages.   But it is worse than crazy, it is a chosen evil that governments do to our younger generations.    National can do all it likes –  and there looks to be good stuff that could and should be done –  but unless they end the artificial (government created and maintained) scarcity of (potentially) urban land, they will never make any serious inroads in fixing housing affordability.    There wasn’t even any sign in the document of National pushing back against the current proposal to worsen the situation around so-called “highly productive land”.    No hint of, for example, a flagship stake in the ground, promising (say) to enact a presumptive right to build two-storey housing on (almost) any land.

And so one comes away from the document with a sense that National really doesn’t care that much about severely unaffordable housing and rigged land markets, or they are scared and don’t trust themselves to actually be able to sell the case for change and what it might take to bring that change about.   Probably only they know the answer to which influence is more important, and perhaps not even they do (since the human capacity for barely conscious self-deception is pretty well-developed).    And so the government-created disaster, and all the attendant injustices, will go on.  It doesn’t make National any worse than the Labour-New Zealand First-Greens government, but what consolation is that to anyone (other than those sitting on existing artificially high-priced assets)?   On these issues –  as on so many –  they are really two sides of the same coin, largely protecting the status quo and wasting the offices of government which could be occupied by an –  as yet non-existent party –  that might be really willing to address the core issues to promise to get house and land prices a long way down, and perhaps even offer some sort of limited compensation scheme for those who –  largely through no fault of their own –  have taken on very large debts in recent years to get into any sort of home of their own.

Instead, all we get is small-target stuff, with nothing to scare the horses, no bold messages to sell, and little or no prospect of overdue real change and improvement.  Much like –  again from both parties –  the failure to even begin to get to grips with the decades-long productivity failure.  I’m guessing National – like Labour –  would be quite happy if several decades hence houses were once again affordable (perhaps three times income) more or less by accident.  But they won’t promise to get house and land prices down, they won’t do what it would take to fix this massive failure of our government.  And, so it seems, they’d mostly also be happy with just a bit of marginal product differentiation and just little enough action to keep the public angst (my children should be in the house market 10 years from now) more or less in check.

 

The mediocre performer across the Tasman

The other day, courtesy of the Twitter feed of the chair of our own Productivity Commission, I noticed a link to a speech by the chair of the Australian Productivity Commission, Michael Brennan, under the title “Economic Knowledge and the State” given to an ANU symposium last week with the same title.   That sounded intriguing.

In truth there was less there than I hoped there might be.   It was mostly an attempt to argue that economics has been a generally positive influence on policy in Australia in recent decades and can be expected to continue to be so.  But he was a bit modest about that, partly because it can be very hard to unpick quite how much difference economic analysis and the advice of economists made, and what the counterfactual might have been.

Brennan starts with a nice illustration of the power of productivity to make a difference in material living standards.

Average incomes in Australia today are 7 times higher than they were in 1900. To give you a tangible illustration of what this means, in 1900 we estimate that it would take an average worker over 500 working hours (a couple of months) to earn enough to buy a bicycle, which was then a staple form of transport.

For an average worker in the 21st century, it would take about a day. And of course, in 1900 you couldn’t buy anti-biotics, air-conditioning or a refrigerator.

But the focus of this post was Brennan’s short discussion of Australia’s overall economic performance.

In the post war period, Australia’s per capita GDP went from being nearly $6,000 above the OECD average in 1950, to below the average in 1990.

That is partly due to the comparator — several OECD nations converged rapidly towards US living standards in the post war era.

But there is no denying that Australia’s relative fortunes have improved since 1990.

Over that 30 year period, our real per capita GDP (that is, excluding population growth and terms of trade effects) has out-performed all of the G7 economies, and our incomes have risen back to being well above the OECD average.

It was the first part of that final sentence that caught my eye.  It is true –  using the OECD’s real per capita GDP numbers, Australia’s growth since 1990 has exceeded that of all the G7 countries.  I was a little surprised to learn that the UK had been (narrowly) the best of the G7 grouping over that period.

But lets unpick that a little.

First, the OECD data themselves only go back to 1970.  At that stage there were only (from memory) 22 member countries (not including Australia or New Zealand) but the OECD has data for 1970 for 27 of the countries that are now members (most of the others were then in the communist bloc, or weren’t yet separate countries at all).

Going back further, if we use the Conference Board Total Economy database for those 27 countries we get something like the margin Mr Brennan quotes (he may have used a slightly different comparator).  In 1950, Australia’s real GDP per capita was not only higher than the OECD average, but massively so: real GDP per capita in Australia was around 50 per cent higher than that for the average OECD country.

But how about the more recent decades.   As Mr Brennan implies, there were various countries still ravaged by war in 1950 that did quite a lot of catching up subsequently.  The OECD data start from 1970, which largely deals with that particular issue.

Here are two comparisons since 1970: first, Australian real GDP per capita relative to the G7 average, and second Australia relative to the average for the 27 (now) OECD countries for which there is complete data.

aus 19 1.png

As recently as 1970, Australia had real GDP per capita almost 20 per cent above the average in this core older group of OECD countries.   Now, it is almost bang on the average.   Relative to the G7 countries there has certainly been some recovery since 1990 –  Australia really has grown faster than each of those countries –  but (a) relative to the wider OECD grouping Australia now sits about where it did at the end of the 1980s, and (b) both lines have been falling fall, at least a bit, in the last half dozen years.

(Relative to the whole OECD –  the metric Brennan quotes –  Australia’s real GDP per capita is certainly above that of the average OECD country, but given the pace of convergence of many of the former eastern bloc OECD members that margin is narrower than it was in 1995 (when the complete data for all countries is available).

All those comparisons were about real GDP per capita.  But, as I noted, Brennan’s case had been about the power of productivity growth.  And yet there were no data in the speech about Australia’s productivity performance.

Those data are even less favourable.

aus 19 2.png

Whether the comparison is to the G7 countries or to the wider group of 27 OECD countries, average labour productivity in Australia is below the median of the other advanced countries.   There has certainly been some improvement relative to the G7 countries, but even then Australia does less well than it was doing in the early 1970s.

(Relative to the full OECD, for which there is data only from 2000 onwards, Australia is a little above the median, but has managed no improvement this century to date.)

A little further on in his discussion, Brennan notes that Australia does not face the “stagnation of Japan”.   Well, maybe.  Here is a chart showing Australia’s real GDP per capita relative to that of Japan (and also relative to the US, a common comparator in Australian debate).

aus 19 3.png

1989 was the peak of the Japanese share market boom/bubble.    Australia’s productivity is no higher now, relative to that in Japan, than it was in 1989  (no higher relative to the US either).

In various posts this year I’ve used as a comparator on productivity a grouping of leading OECD countries.  Here is how Australia compares.

Aus 19 4

It would take a 25 per cent lift for Australia to match the median of that leading bunch.

And all this against the backdrop of the abundant natural resources, new waves of which Australia has been able to begin to bring to market in the last decade or so.    I don’t show Norway in these “leading group” charts but it is the other advanced OECD country really blessed by nature with natural resources, and its real GDP per hour worked is almost another 15 per cent higher than that in Belgium.  In many respects, given what it had going for it, Australia’s productivity performance has been woeful.

I reckon there is a pretty straightforward explanation –  over and above all the normal areas any country could improve policy on –  around the interaction between distance (in an era when personal connections, integrated value chains etc have often become more important not less) and the renewed determination of Australian policymakers to drive up the population more rapidly than almost anywhere in the OECD.  But when he mentions geography is his speech, Mr Brennan refers only to the

mysterious but very real spill-over effects of agglomeration, particularly in large, dense cities.

perhaps not aware that, unlike the situation in typical (non natural resource dependent) OECD countries, in Australia real GDP per capita in the big cities –  Sydney and Melbourne –  barely matches that for the country as a whole.

Of course, writing from this side of the Tasman it behooves me to point out that New Zealand’s economic performance has been consistently materially poorer even than that of Australia, that the ability of hundreds of thousands of New Zealanders to move to Australia has helped many New Zealanders……and that Australia continues to have a consistently better cricket team.

But were I Australian I’d be a little uneasy at just how relatively poorly my economy had done, and is still doing, on the counts that matter –  productivity –  especially when the economy had been able to ride a mineral investment/export wave in a way open to few other OECD countries.  And I might be asking questions about the quality of the economic analysis and advice from leading official institutions.