Having the Governor’s back

When the Reserve Bank Act was passed back in 1989, decision-making power was taken away from the Bank’s Board and given to the Governor (even as, overall, the Bank gained a greater degree of autonomy). The Board was retained but in a quite different sort of role. Their new role was primarily to hold the Governor to account, on behalf of the Minister and the general public. Later reforms were made to try to strengthen (the appearance of?) that role: somewhat belatedly the Governor was to no longer chair the Board (although he remained a member of a board whose primary role was to hold him to account), and the Board was required by statute to publish an Annual Report. More recently still – in a well-overdue move – the current government amended the Act to provide that the Minister of Finance would in future appoint the Board chair, making it clearer who the Board was responsible to.

Over the years, the powers of the Bank and the range of activities it undertakes has also grown, and the policy discretion exercised by the Bank has grown well beyond what was orginally envisaged. And latterly most of the formal monetary policy powers have been handed over to a statutory Monetary Policy Committee, and the Board is now also responsible for holding them to account.

But through all these changes, one thing has been constant: the Board has never really acted to hold the Governor to account at all, and instead the Board – through numerous waves of different members and different chairs – seems to have acted as if its primary role was to have the Governor’s back, and reinforce the gubernatorial spin. (In previous posts I’ve argued that in some respects this was always likely, since (a) the Board had no independent resources (eg for external advice), (b) the Governor remained a member, (c) the secretary to the Board was for a long time a member of the Bank’s own senior management, and (d) there were no real incentives to rock the boat.)

There seems to have been a belated general acceptance that the Board is useless, and not readily able to be fixed, in its current role. In fact, the government has introduced legislation which will, if passed, scrap the current model and give the Board primary decisionmaking responsibility for most of the Bank’s non-monetary policy functions (it is a hodge-podge model, itself not likely to work that well, but that is a post for another day).

The Bank’s latest Annual Report was released last week. It didn’t get attention. The Board’s Annual Report got even less (pretty sure it was none). That is hardly surprising. The Board buries its report in the middle of management’s report, and the press release the Governor puts out never mentions that there is an independent report by an entity paid and mandated by Parliament to hold he and his colleagues to account.

As it is, had anyone read the Board’s Annual Report (start on page 6 here), they could only have come to the conclusion that the Board was determined to prove its utter uselessness and ineffectualness in any role other than covering for the Governor. It is spin and/or unquestioning acquiescence, from start to finish.

There is, for example, the nonsense inflation of the Bank’s importance:

We are pleased with the decisive actions that have been taken by the Bank to deal with the potential collapse in economic activity.

75 basis points off the OCR, and whatever lowering of near-term government bond rates the LSAP achieved, simply did not – on any serious reckoning – avert a “potential collapse in economic activity”, and could not conceivably have done so, when the shock to economic activity was primarily about things (fear of virus, policy response to virus) that monetary policy has no affect on.

Remarkably they also claim to be “pleased by the communication and transparency the Bank showed in delivering these innovative tools”.

All while making no mention of, for example, the Governor’s substantive interview last year (in the year under review) expressing a strong preference for a negative OCR as a first cab off the rank, or the public comments of one of his own senior managers in March this year playing down what anyone might reasonable expect from a bond purchase programme. Or the failure to release any research/analysis around the LSAP. Or the failure to release the detailed background papers – promised by the Governor in a speech in March – on the various unconventional instrument options. Or the weird pledge the MPC made in March not to alter the OCR for a year come what May.

And, of course, they make no mention of expressing any concern that despite (a) years of lead time, and (b) the Governor’s explicit preferences expressed last August, it only emerged quite belatedly that it was not until the end of January that the Bank took any steps to discover whether the banking system was operationally ready for a negative OCR (perhaps that is because, as they note, “well before Covid-19, we were briefed on the Bank’s preparations”, and presumably none of them asked the question either).

There is no suggestion of any unease around the policy/communications inconsistency from the MPC in the middle of last year (they could perhaps have explained it away as teething issues with the new MPC, but they seem resolutely determined to utter no cautions on anything at all sensitive).

The Board was quite as determined, it appears, to have the Governor’s back when it comes to financial stability as well. They are firmly behind the big increase in capital requirements and seem quite unbothered about concerns and questions raised, and (if anything) even less bothered about the abusive style adopted by the Governor on many occasions during the course of the consultation. Reflecting the Bank’s own lines, the Board both championed the much higher capital requirements – which had not come into effect and made little or no difference to capital levels by the end of last year – and repeat the Bank’s spin about how sound the system is/was in the face of the (large) Covid shock at the old capital levels. Taxpayers’ money is wasted on this.

Lest you thought that they never uttered a challenging word – to encourage or discourage – there is in fact one quiet dissent in the report, although presumably only allowed to get this far because the Governor himself was on board. We learn that

Policy work on the Deposit Takers Act is highly complex and significant for the Bank’s operations; the Board has expressed concern that the policy development process should be thorough and not rushed.

And that is it – and even then a comment on something not largely under the Bank’s control (Treasury and the Minister having a large say).

For the rest of the report, it is just gush. Perhaps the Board is less than enraptured with the Governor’s climate change ambitions – they just get passing mention – but they are all-in with the Maori strategy; this in an institution that operates at a wholesale, not primarily individual-member of the public facing, level:

The Board believes the incorporation of Te Ao Maori into the Bank’s work will help develop a central bank with a distinctive New Zealand approach and character.

Tree god myths and other pandering, but with not a shred of evidence for how any of this expenditure of public resources (from memory of my OIA it was $1m) will enhance macroeconomic or financial stability. But I guess when the Board chair is accused in his day job of fostering “systematic racism” (universities and all that being, in current form, a western development) he probably had to be seen to go along.

The gush continues to the end. We learn that the Governor and Deputy Governor have provided “outstanding leadership” – so much so an accountability body finds no fault at all – and the report ends having lost all touch with reality observing that the Bank is “realising the Bank’s vision to be a – Great Team, Best Central Bank.”

You might conceivably think the Bank does, on the whole, not a bad job. But there is no conceivable basis – in outputs or outcomes (or actually in inputs for that matter) – to think that the Reserve Bank is even close to being the “best central bank”. As I’ve noted previously, in a not-so-wealthy small economy it might not ever be realistic as an aim. But it could do a great deal better than it is on numerous fronts – and presumably if the decisionmakers did not agree they would not recently have decided to throw lots more taxpayers’ money at the Bank to help them do better.

Most likely, there will only be one more of these puff pieces, and by 2022 the new legislation is likely to pass and any pretence that the Board is an accountability body will pass out of law. When it finally does, of course, it will only reinforce how weak the accountability mechanisms are around this very powerful independent agency. I’m still of the view that New Zealand would benefit, slightly and at the margin, from establishing a small Macroeconomic and Finance Policy Monitoring agency, operating at arms-length from both The Treasury and the Reserve Bank.

The final thing of interest in the Bank’s own Annual Report is the higher salaries table. This is an excerpt from this year’s.

RB salaries

As I noted last year, Orr himself seemed to be getting more than the Minister had suggested when the appointment was made. And there seem to be a lot of senior colleagues – in a still not very large organisation – pulling in very high salaries. I’m not one of those who generally thinks top-tier public service salaries are too high in principle. These are probably something like fair salaries for excellence, but there is little sign of consistent excellence at the top of the Bank, particularly not from the Governor.

(Incidentally, government department chief executives earlier this year took a temporary 20 per cent pay cut in the wake of Covid. I’ve seen no hint that the Governor – exercising significant public policy powers, and better paid than most of them, and apparently thwarting a collapse in the economy – followed their lead. Perhaps some journalist might ask why.) UPDATE: Thanks to the reader who drew my attention to the footnote describing the Governor’s temporary pay cut.

The Board itself pulls in a couple of hundred thousand (in total) in fees – the largest chunk going to the chair who, one woud have thought, had a demanding day job. The Governor might be getting his money’s worth, but the public is not.

And so another term passes and nothing changes for the better

A couple of years ago I had my arm twisted and agreed to write a chapter for a new book on New Zealand public policy being edited by a couple of Victoria University academics. My chapter was to be on the economy, and although the general tone of the book was to be rather upbeat, about the public policy and governance frontiers New Zealand had marked out, there wasn’t very much to be upbeat about in the longer-term New Zealand economic story. And so I wasn’t.

The published book finally turned up in the mail last week and I’ve started reading it (there might be a post later about some of the other chapters). In my chapter (a slightly longer version of which is here) I’d highlighted the continuing relative decline in New Zealand’s economic performance. I’d forgotten that I’d ended the chapter this way (emphasis added)

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies). Past experience – 1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand. But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s – it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

That must have been written 18 months ago and finalised later last year. We were a couple of years into yet another government that, while perhaps perfectly competent at overseeing some macroeconomic stability, was quite uninterested in – and had no serious ideas about – reversing the continuing decades of relative economic decline. And that was even though the better of them surely knew that productivity was the best, and only reliable, long-run path to widely-shared prosperity. Another government and, of course, another Opposition. To which one could add, a Treasury – self-described premier economic advisers to the government – that had little to offer and seemingly little interest in the issue, and a Productivity Commission that now seemed less-equipped to offer much of value either.

Since then, of course, we have had a rather dramatic crisis – not economic in origin, but with major and ongoing economic ramifications. Best forecasts – in this case, Treasury’s PREFU numbers such as they are, and no one really knows – suggest it will be years before even the cyclical losses are behind us, and that the economy (ours and others) may just settle on a lower path of real income and productivity. We’ll be poorer than we previously thought, and even if others are too, we would still be lagging a very long way behind the advanced world’s leaders. That means real lost opportunities – whether consumer fripperies, or the health and education preferences that get so much attention.

Faced with a backdrop like that perhaps one might have hoped for an election campaign in which a major theme involved confronting the decades of economic underperformance. Note that I’m not suggesting that it should be the only issue of importance – of course not, there is the government-made housing disaster, and the handling of Covid itself (where to from here) as just two other examples.

But what is striking, sobering, and sad is that – even amid a serious economic downturn, with no end in sight – the decades of economic policy failure seems to command no attention at all. I think it was Matthew Hooton who in a column a few weeks ago suggested that focus groups and polling suggested that the public wanted to hear that parties had “a plan”, but there is little sign any of the parties is offering us one. They use the word often enough, but there seems to be little or no substance behind any of it – even the immediate Covid stuff, let alone the economic failure.

One listens in vain to the debates among political party leaders, and there is no hint of any serious interest in addressing the structural issues at all, no suggestion (of course) that they’d done the hard work and settled on a compelling narrative of what had gone wrong, and what they’d offer that might make a real difference.

In the Herald’s election supplement this morning there was a double-page “Policies at a glance” feature, with a line for economic policy.

Labour seemed to have no clue, and no interest. There were policies for the short-term. They might create jobs in the short-term or even limit immediate jobs losses. I don’t have any particular argument with that – although monetary policy is better and cheaper. But then there were the longer-term policies which – whatever their merits on other grounds might be – are all likely to make us a bit poorer not richer (higher top tax rate, higher minimum wage, higher sick leave). But that is par for the course: even at the last election where Ardern occasionally mentioned productivity, there was never any energy or compelling ideas behind it.

National also has its shorter-term policies (the temporary income tax cut, grants, and depreciation provisions), but the longer-term ones seem to come down to not much more than new roads. Of their claim that they would save $1 billion per annum in Auckland congestion costs I wrote

I guess $1 billion per annum is supposed to sound like a big number.  In fact, it is about 1 per cent of Auckland’s GDP.   Fixing the problems is probably worth doing, but 1 per cent of GDP is tiny in the context of either Auckland’s gaping economic underperformance, let alone that of New Zealand as a whole (recall that the productivity leaders are more than 60 per cent ahead of us).

Perhaps welcome. Certainly not transformative.

And yes, we heard a bit about the technology sector, but the numbers were so modest that no one supposes it was going to be transformative either. But Opposition parties have to have a little bait to throw towards the fish.

Of the other parties, and with productivity in mind, I guess ACT seemed to lean in the right direction in places, while the Greens mostly offer measures that would make us poorer and less productive (then again, no one votes Green for productivity etc concerns). To my surprise, NZ First seemed to a have a few sensible lines – offset by wanting to “ramp up” the PGF – but who cares any more?

But, at best they are all just playing, suggesting doing stuff at the margin and offering no real leadership.

It isn’t just the politicians. Somewhat surprisingly, twice in the last few days I’ve seen media invite several economists to offer their thoughts on what should be done about economic policy. Saturday’s Herald’s contribution was under the headline “What’s the next big idea” in which “Liam Dann asks independent experts what tough policy changes are needed for a fairer, more productive economy”. The six economists they consulted seemed to cover the spectrum from Ganesh Nana (BERL) on the left to Prof Robert MacCulloch (who co-authors papers with Roger Douglas).

Their ideas?

Ganesh Nana: a) tax reform (“taxing income and goods and services, but not property/wealth – is not working and is not fair”), and b) a rent freeze and the government as last resort buyer of houses.

Robert MacCulloch: Saving. (“NZ should introduce mandatory savings accounts for all workers which cover health, retirement, housing and risk (like unemployment)”

Cameron Bagrie: “an unflinching commitment to microeconomic reform…..the little things”. More funding for the Commerce Commission and RMA and Overseas Investment Act reform.

Oliver Hartwich largely agrees with Bagrie, adding in a desire to see “a return to a more rigorous approach to cost-benefit analysis”, and a renewed focus on education (the NZ Initiative has a new report on education failings out shortly).

Christina Leung (NZIER) emphasises equality of opportunity with a particular emphasis on education.

Brad Olsen (Infometrics) wants tax reform “to ensure that investment is directed into productive areas”, and also wants a National Skills Plan and a Digital Business Investment Fund “to accelerate the movement of New Zealand businesses into the digital age.

I happen to agree with some of those points – generally the Bagrie/Hartwich line – but even if some of those proposals would be steps in the right direction almost inevitably they would mostly be pretty small beer (others would mostly likely represent small steps backwards). Some of these economists – notably MacCulloch – really do seem exercised, in other writing, about the shockingly bad economic performance. But none seems to have a model in mind for how the ideas they are proposing would make the scale of difference that the productivity failure – material living standards failure – calls for. One can’t hold people too much to account over a few quotes in a newspaper article, but I’m not aware that in other writings most of these economists have even tried to tell such a story.

That was one lot of economists. Then the latest issue of the new Listener turned up this morning offering the views of nine “leading economists on the way forward”. Leung and Bagrie were in both groups, and the Listener added the bank chief economists, Shamubeel Eaqub and David Skilling.

Mostly the bank economists are focused on short-term data flow and perhaps inevitably their focus was on relatively short-term stuff, about traversing the difficulties the virus poses for the next few years, so I’m not going to focus on them, but Westpac chief economic Dominick Stephens had a comment that caught my eye.

Covid-19 will eventually pass and we will still be a country with solid economic institutions, a highly-educated workforce and First World infrastructure. It won’t be east, but our economy is flexible enough to adapt to the challenges and opportunities. 

Sadly, to the extent that those descriptions are accurate they have been so for 25+ years, and yet we’ve still been drifting slowly further behind, even as other poorer OECD countries have begun to converge quite rapidly.

Of the remaining two economists, Eaqub rightly observes that New Zealanders seem to care about “housing affordability, inequality, climate change, health, education and justice”, noting that many of them are areas in which New Zealand is getting worse, but does not hint at what big things he thinks might be done differently to lift our economic performance. David Skilling has thought a lot about economic performance issues – and I’ve written about some of them including here – and on this occasion emphasises his view that the government should focus on spending on R&D, training and enterprise policy (I think this last relates to his idea of promoting – and picking – a few big companies). There is material worth debating in what Skilling writes, but it is still difficult to see a credible model, or narrative, for catching up again.

Now perhaps – it is just barely possible – that The Treasury has been beavering away from months and is about to deliver to the incoming government some really persuasive analysis and advice on the importance of the productivity failure, and what should be done about it. But it isn’t at all likely. Not only has their capability been degraded, but most of their energy will have been going into short-term Covid stuff. And, realistically, they know that neither party – but notably including their current minister, almost certain to be reappointed – has any appetite whatsoever. On economics they are conservative to the core – in a few good ways, but mostly in dreadful ways, simply preferring not to rock the boat, whatever the long-term cost.

I find it all pretty deeply depressing – even if, and yes I can be a detached observer too – not overly surprising, given the torpor into which policymaking and thinking in and around government has fallen (not just in New Zealand of course, but our long-term economic failure is much more serious, and idiosyncratic, than the situation in most other advanced countries). Of course, the cynics approach would be to observe that the public seem to care much, and that a definition of leadership is finding out what the followers want and getting in front of them. But real leadership – courageous, even costly, leadership is something quite different. It is about the perceptions to recognise real problems, and the drive and energy to find and promote solutions, championing answers, making the case and seeking to take the public with you. That sort of thing seems deeply out of fashion in today’s New Zealand- where holding office seems more important than what you want to do with that power. And such is our economic plight – once affordable housing, once the highest material living standards anywhere, but no longer – that is inexcusable and really rather shameful.

As for me, when I write posts like this I always get asked what my answers are. I don’t like to champion them too often, as writing frequently here I probably can come across as a bit of a stuck record. My “big idea” is, of course, a permanent and substantial cut in the rate of non-citizen immigration, so that public policy is not worsening the disadvantages of being in the most remote corner of the earth. But I’ve articulated other strands of story of response in, for example, this speech, this Covid-contextual paper from early in the year, and in this post from a couple of years ago with a fairly long list of things I’d do (some to boost productivity or fix housing directly, some to free up fiscal resources for better-focused and aligned policies, and some to help support some cohesion and legitimacy for our political process through what would, inevitably, be a difficult and contentious transition.

It is easy for things to drift. One year is (mostly) much like another, but before you know it am electoral term, decade, a generation, or even a lifetime has passed, and nothing has been done to fix, and reverse, the decades of relative decline. Our so-called leaders – whether political or official – really are without excuse now. And yet….nothing.

Bleak passivity

Reading last week’s statement from the not-very-transparent, not-very-accountable, Reserve Bank Monetary Policy Committee I was struck by both the bleakness of the statement and the do-little-or-nothing passivity of the monetary policymakers.

I guess you could argue it wasn’t much different than the previous month’s statement – which wouldn’t be much consolation, since that statement itself was pretty downbeat – but the relentlessness struck me. There was almost nothing positive in the commentary, even six months on from when the Committee belatedly recognised the Covid economic risks and started adjusting policy. The risks, both globally and domestically, are deemed to be to the downside – which seems right to me – and this around a base scenario in which the “the Committee expects a rise in unemployment and an increase in firm closures”. There is, again rightly, an emphasis on the susbstantial uncertainty firms and households face, again here and abroad, as the future course of the virus is really little more than anyone’s guess. We are told – in, I think, materially stronger words than they’ve used before – that “monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit”.

And yet what did they actually do? Nothing.

Seven months on from when they should have been first easing monetary policy, we still have an OCR that is only 75 basis points lower than it was at the start of the year. The Committee continues to cling to their bizarre March pledge – made in a climate of extreme uncertainty – not to change he OCR for a year, a pledge that has/had no solid economic foundations to it. They would prefer people to believe that in some sense they “can’t” move, but all it takes to know that is simply false is a look across the Tasman to Australia where, with a higher inflation target, and higher inflation expectations, short-term wholesale interest rates are 20 basis points lower than those here. Even if you buy the Bank’s claim that the OCR can’t be taken negative yet, there is no obstacle at all to them cutting the OCR to zero now. It should have been done months ago. It should be done now – their own outlook (all that downside talk) tells you as much. (20-25 basis points is, of course, not that much, and not a macro game-changer in and of itself, but in an all-hands-to-the-pump scenario, every little helps – and it would be a third more OCR easing than we’ve had to date.)

And, of course, the claim that the OCR can’t be taken negative now should itself be taken with a considerable pinch of salt. If true, it should of course lead to serious questions of the Bank’s competence and basic preparedness, which don’t yet seem to have been asked (although the Board’s Annual Report must be due out in the next few days, so perhaps…..unlikely as it is …..there will some sign of holding management to account). But it was never very convincing. For a start, had the Reserve Bank simply taken the OCR negative a few months ago it would have (a) rewarded the institutions that had read the – all too visible – international signs and got ready, and (b) encouraged the others to adapt very quickly. Even if the argument was partially defensible in February/March, it is now September….they’ve had months to get it right, and (on the MPC’s own reckoning) the economy could have done with more stimulus over that period. More generally still, a significant part of the way monetary policy works in an open economy is through (a) signalling and (b) the exchange rate: had the MPC moved aggressively months ago, or even now – not next March/April – it would likely have generated a lower exchange rate, supporting the New Zealand economy, and underpinned inflation expectations.

(As a reminder, the exchange rate has barely changed from where it was at the end of last year, real (1 and 2 year fixed) mortgage rates seem to be down perhaps 20-30 basis points since the end of last year, and the inflation expectations – whether survey measures or market measures – seem to be down about 50-60 basis points. Oh, and in case people hadn’t noticed, the unemployment rate has risen and the MPC expects it to rise further. Their August inflation projections – including all that fiscal policy – was also well below target. It is hard to imagine in any other circumstances a central bank doing nothing.)

Now defenders of the Reserve Bank will, of course, point out that the MPC is talking up some sort of “Funding for lending” scheme that it now says “would be ready before the end of this calendar year” (while also noting that “the design of the programme would be agreed and published ahead of deployment” – but there is only one more scheduled MPC meeting before the end of the year). The idea of this scheme is to lend to banks directly at a rate close to the (unnecessarily high) OCR, with the aim to “lower the financial system’s funding costs, and therefore borrowing costs for firms and households, and support the availability of credit to the economy”.

I don’t greatly like these sorts of schemes – although the details, which apparently won’t be consulted on, may matter. By contrast to the OCR, which is an instrument that works pervasively and unconditionally, FFL-type schemes are often available to some market participants but not others (undermining a core principle of efficient policy design, around competitive neutrality), and are often tied to some officials’ preferences around increases in lending to the private sector, whether or not such lending makes much sense in the prevailing economic climate (hint: in an environment of extreme uncertainty, of the sort the MPC talks of, not many firms are going to be voluntarily taking on much debt, and banks would generally be rightly cautious – even if not with the added uncertainty about the Bank’s new capital requirements next year). And an FFL is no substitute for an OCR adjustment when it comes to influencing the exchange rate, typically a really important part of the New Zealand transmission mechanism.

But here’s the thing. They’ve had a scheme like this in Australia since March. Term deposits rates in Australia have for a long time been closer to wholesale rates than has been the case in New Zealand, but – on checking this morning – are still materially higher than Australian wholesale rates. And although our Reserve Bank has been talking up an FFL scheme for some time now there is no hint in the schedule of retail rates banks are offering that, for example, 3-6 months are holding up but that longer-term rates (relevant to the period when an FFL will be deployed) have fallen away sharply, or at all. Big banks seem to be offering much the same rates for six month retail term deposits as they are for 1 to 5 year term deposits, just as they were at the start of this year. It just isn’t obvious that a realistic FFL is likely to make much difference to retail rates – and actual term rates suggest banks rather share that perception. It would be good to be wrong on this – all the evidence and the MPC comments suggest the economy needs the additional support – but nothing at present suggests it is likely.

Meanwhile, of course, months and months into this severe recession, there is no sign that the MPC or the Bank is doing anything about removing the real effective floor on the OCR (at perhaps -0.5 or -0.75), that results from the official provisions – regulatory interventions – that mean deposits are convertible to cash at par in unlimited quantities, with cash paying a zero interest rate. We have interminable debates and commentary on what macro difference a small further cut to the OCR – to just slightly negative – might make, but nothing on making feasible and useful the sort of deeply negative interest rates the economy might actually need. It is a cavalier indifference to the state of the economy and the plight of the unemployed – and to the health of the public finances – that seems to be shared by most central banks – which makes it no more excusable. One can, reasonably, haggle about whether threshold effects mean that,say, a -0.25% OCR would make much difference – although (a) the ECB seems persuaded, and (b) retail deposit rates in NZ would still be well above zero in such an environment. There should be much less room for doubt about the gains from a deeply negative OCR, including for the exchange rate and inflation expectations.

Of course, those on the left are often keen on fiscal policy substituting for monetary policy – especially while they are in power and get to choose the goodies being handed out – but that isn’t a path to an efficient allocation of resources, a wise evaluation of investment options (what do politicians have on the line?) and does nothing at all for promoting the health and growth of the tradables sector of the New Zealand economy. Whatever the merits of something like the wage subsidy scheme initially, fiscal policy initiatives seem to have become over recent months increasingly dependent on who you know, who is in favour, which project rings political bells, and not on a pervasive, fairly neutral, support framework in which politicians aren’t using your resources and mine to pick winners (unlikely to be so in actuality), rewards favourites and so on. Monetary policy operates much better as a countercyclical stabilisation tool for many reasons, if only central bankers would use it aggressively, or their political masters simply insist they do. It is fit for purpose, and respects the proposition that private firms and households are generally better at spending wisely than governments, in a way that handouts to Green schools, Pacific churches, this or that council, or whatever do not.

Complacent and complicit

There hasn’t been much about the PRC/New Zealand issues here recently. That isn’t because I’ve lost interest, or because the issues have become less pressing, but just because my health has been mediocre enough that I’ve only had the energy for the bare minimum of writing. There is an interesting piece on New Zealand firms’ trade with entities in the PRC that has been sitting on my desk for almost two months, although I hope to write about that in more detail before long.

But the election is now almost upon us, and what is really striking about the campaign – and the media coverage of the campaign – is the complete absence of discussion of any aspects of the CCP/PRC issues, domestic or international. There are lots to choose from. all of which should matter, and on which the parties should be challenged and scrutinised.

There is, for example, the overt pressure the PRC is putting on fellow democracies, India and Taiwan, right now (one could add Japan, in the East China Sea). New Zealand media don’t seem to give much coverage to the China-led tensions on the Line of Actual Control in North India that has already led to fatalities, let alone to the (apparently) much greater threat associated with the repeated incursions of PRC military aircraft into or near Taiwanese air space, and the apparent – really more than “apparent”, quite openly stated – PRC determination to take Taiwan one way or the other. And no New Zealand media appear to have made any effort to gauge the competency (around foreign affairs), or moral core, of those vying for political leadership, by asking them for their perspective on these disputes or how they would think about framing possible New Zealand responses to more overt aggression. Both main parties have been more interested in talking up their “friends” in Beijing – a line they might also reasonably be asked about – than about articulating a clear stance opposed to resolution of political disputes by force.

Then there are developments in Hong Kong, where one might – perhaps – give the main parties a grudging near-pass mark, with the government having suspended (and National supported them doing so) the extradition agreement with Hong Kong. But it has hardly been a full-throated condemnation of the rapid erosion of freedoms in Hong Kong or (say) offers of asylum to dissidents fleeing the territory.

But far worse than what is happening in Hong Kong – and clearly convergence to the PRC model was inevitable at some point, though we all might have hoped for a less-bad PRC by then – is the growing evidence of systematic and intensifying repression across multiple fronts in the PRC in the last few years, including in the period since our last election. Xinjiang has had the most attention – the concentration camps, the extreme surveillance and control, the apparent forced sterilisations, and so on. But it isn’t just about one region, or one minority religion/belief. On a regional basis, Tibet is back in the news, as is the intensifying pressure in Southern Mongolia. The evidence of use of political or religious prisoners for forced organ transplants is even better documented now than it was. The repression of Christians, Muslims, and other sects is intensifying, and any scope for freedom of expression – always limited – seems to be now much more limited. And yet what do we hear from Ardern or Collins (or the other small parties) on any of this? From National, a while ago we had senior Todd McClay touting PRC propaganda around Xinjiang and suggesting it was really none of anyone else’s business. Perhaps he knows better now – though surely he always did – but there has been no retraction, and no willingness to criticise his parties “friends” and donors. And Labour really isn’t any better. Defenders of the PM will suggest that “human rights issues” are raised in private but (a) why should we believe this? and (b) it is unlikely that what is said in private, in apologetic diplomatic language, bothers anyone (in the PRC).

You get the sense that both parties are more interested in keeping in with the dreadful regime in Beijing – that really combines much of the worst of Nazi Germany and the USSR – than in articulating the values of New Zealanders. You certainly get the sense that both parties are more interested in serving the economic interests of a few big corporates (including university ones) than in representing the values and interests of New Zealanders. There is no open criticism, there is no talk of trade sanctions (eg on products using concentration camp labour from Xinjiang), there is no talk of putting in place a system of Magnitsky-type sanctions. And no media seem to ask any of the party leaders of their foreign affairs spokespeople about any of this. What, for example, does “kindness” mean as regards the abuses of the PRC.

One little encouraging development in recent months has been the formation of IPAC, the interparliamentary alliance on China, with significant representation from members of Parliament in a range of countries, including many quite senior figures. Somewhat belatedly, two New Zealand MPs joined: National’s Simon O’Connor and Labour’s Louisa Wall. That’s good – and one can’t imagine the National whips etc can have been entirely happy about O’Connor who has been chair of Parliament’s Foreign Affairs committee. But I’ve not seen a single media piece on this development – no attempt to interview O’Connor or Wall on their views, including of what our main parties or governments should be doing about the PRC, or to talk to the party leaders about their stance on IPAC and its calls for the West to take a stronger stand.

And nearer to home, there is no continuing media coverage of the fact that we go into an election with both main parties still embroiled in controversy – and legal investigations – around donations from CCP/PRC-linked figures. This is most stark as regards the charges facing Jami-Lee Ross (who was a senior National MP at the time of the relevant developments), and several ethnic Chinese New Zealand citizens – including Yikun Zhang, who the parties got together to honour for, in effect, services to Beijing – around donations to the National Party. National has not been straight with the public about anything to do with this affair, and no other party seems bothered. Meanwhile Labour has its own issues – former leader Phil Goff, as regards donations to his mayoral campaign, former Cabinet minister Lianne Dalziel over donation to her campaign, and the obscure SFO investigation into some aspect of donations to Labour in 2017. And yet we hear almost nothing of this – not, I’m sure, out of respect for fair trial rights, but because it suits all the big parties to keep quiet. But why does the media let them get away with it? Are they too unbothered about the corruption of our political system, and the suborning of the process by parties linked to the PRC?

Last year we had the political theatre in which the government – with National’s support – rushed through under urgency (keep debate and scrutiny to a minimum) a largely-cosmetic change slightly further reducing the (already severely limited scope) of foreign citizens to donate to directly to New Zealand political parties. It wasn’t a bad change per se, but it consciously and deliberately avoided confronting the much bigger issues: the ability of closely-held New Zealand registered companies owned by foreign citizens to donate (where there have been real and actual issues around PRC-related donations), and around a political culture that has seemed to regard as quite acceptable to take donations – large donations – from New Zealand citizens or residents who are themselves closely connected to the CCP/PRC. Nothing serious has been done about the law, and no party has apparently been willing to take a self-denying vow re PRC-linked donations. And no interviewer or journalist puts pressure on them to do so.

As it happened, I asked about this issue at our local candidates meeting last week. With a bit of a preamble, including noting what last year’s reform had/hadn’t done, I asked National, Labour, Greens and New Zealand First (the parties in Parliament) if they thought their parties should/would take donations from people or companies, NZ citizens or not, with close connections to the Chinese Communist Party (which the PRC operates at the behest, and in the interest, of).

I got no clear and straightforward answer, of the sort one might have expected if, for example, candidates/parties had been asked about people with strong neo-Nazi associations or (one imagines) in days gone by about the USSR or Nazi Germany or the like. It isn’t some obscure party/country I was asking about, but the dominant force in the largest country on earth, a country with a track record of ties – good and ill – to New Zealand.

The young New Zealand First candidate – a researcher in their parliamentary offices – was almost funny. He was desperate not to say the wrong thing and ended up noting that it was a foreign policy question – about NZ political parties taking donations from NZ citizens? – and the question would have to be put to “Winston”.

The Greens and National candidate both get some positive marks. The (very able) Greens candidate noted that her party did not have a specific policy re the CCP and she wasn’t about to make one up on the spot, but noted that she did think New Zealand should be louder in calling out human rights abuses (re the PRC, the Greens this term have been about as silent as the rest). The National candidate suggested – not entirely accurately – that the party is very transparent about all donations, and while he avoided the direct question did suggest we might benefit from some system of registering and disclosing those working for/lobbying for foreign governments (he mentioned the US system, which attracted guffaws from the Green-supporting Newtown crowd). But it was a step up on his National predecessor’s approach at the 2017 candidates meeting.

Labour’s candidate was the only sitting MP, Paul Eagle. His response was that Labour adheres to the law – well, probably mostly – but as he well knew that was not the question. He then went on to suggest that he didn’t know Labour approach to the sort of donations I was asking about and that he would have to check and come back to me. I emailed him the next morning (last Friday) to repeat the question, but – perhaps much as expected – have heard nothing back.

I don’t want to be too hard on individual candidates – all rather junior in their own parties – and it was more telling about the refusal of all the main parties to take this issue seriously, and be quite clear that – no matter how much was on offer – they would not take donations from people with close CCP ties. That said, most of them had little or nothing to lose….and not one was willing to say “but, speaking personally, I think it would be quite inappropriate to take such donations – or those from anyone with close ties with a foreign political party or government”. Not one. It was establishment New Zealand’s indifference, perhaps desperation for dollars, on display. And, of course, no interviewer or debate moderator asks the people with clout – the party leaders – about this, even though it is no hypothetical, and there is a clear track record of such donations in the past. Those donations were, it appears, legal. They were not right (and as Anne-Marie Brady has noted, many forms of PRC influence in other countries, including New Zealand, are legal and yet quite concerning).

The final item on my list of things of which we hear almost nothing in this campaign is the efforts by both main parties (in particular) to ensure that they keep ties in to the PRC’s United Front efforts in New Zealand by recruiting candidates, often to safe list positions, that Beijing will smile on. The grossest example of course was Jian Yang – whose past was finally exposed just before the last election, and who eventually acknowledged misrepresenting his past, at the behest of his then PLA/CCP masters, to get into New Zealand in the first place. National seemed unbothered – Jian Yang claimed they had always known his past, even if the voters weren’t so lucky – and, worse, neither were any of the other parties. On the Labour side, there was Raymond Huo, perhaps not with a past as egregiously awful with Jian Yang’s, but with a present stance arguably worse (the man, who chairing the foreign interference inquiry – extraordinary in itself for Labour – actively tried to prevent Professor Brady for testifying). Rather belatedly this year, both men have decided to move on and spend more time with their families – Yang after having been talked up by National during the year and promised a high list place. But both sides have replaced them. I presume the National replacement for Jian Yang is likely to miss out, but Labour Naisi Chen seems sure to enter Parliament, coming off the back of a past as president of the (PRC-consulate controlled) Chinese students association in Auckland, and who at a recent candidates meeting was reported as also engaging in minimising the Xinjiang abuses. And yet no other party seems bothered, and the media gives the matter almost no coverage.

One could, perhaps, explain away any one of the items on this list. Not all are perhaps quite as important as the others, the economy is not in great shape, the virus lurks etc. But it really isn’t adequate as an excuse – whether from the political parties, who would clearly just prefer the issue didn’t come up – or the media which seems to do nothing to raise it. Those companies trading with firms in China must be delighted. They certainly don’t want any risk that they might fall foul of PRC displeasure – as some industries in Australia have, where the government has taken a somewhat more forthright stand – and simply expect that the rest of us should pay the price while they sup with the devil without even the precaution of carrying a long spoon.

And perhaps it is fair to note that foreign affairs often aren’t central in New Zealand elections but (a) many of these issues aren’t about foreign affairs, but about how we govern ourselves, and (b) that isn’t always so (think of our past whether around nuclear ships, Springbok tours), and (c) on most reckonings the PRC is now a big and threatening presence on the world stage, and in many individual countries. Troubled as the US political system is, it is notable how different the tone of the comment – fact of the comment – is there, whether from Democrats or Republicans.

Our so-called leaders really are a shameful bunch, apparently more interested in keeping their heads in the sand (or those of the public) and keeping the deals and donations flowing, rather than evincing any interest in leading conversations about either emerging geopolitical risks, the nature and character of the PRC, and/or the PRC’s activities here. It should be sobering to recall the break-ins to Professor Brady’s home and office that happened during this parliamentary term. Both National and Labour set out to minimise the potential issue – other parties as bad – and now it seems to suit them for such events to be brushed over and forgotten.

If the politicians are bad – and they are the ones who really matter, who vie to lead and who would like us to believe they have our long-term best interests at heart – the media is (with rare occasional exceptions) little better. It is pretty shameful all round. Beliefs and values that are worth their salt are worth paying a price for, but it isn’t clear that National or Labour (or, as far as I can tell, the rest) have any values worth the name when it comes to the most consequential evil regime now on the planet and its activities here and abroad. That is sad commentary on what New Zealand – once quite clear about its opposition to the Soviet Union or Nazi Germany, under parties of either stripe – has become.

For those with access, there was a good article in the Financial Times last week about coercive economic “diplomacy” by the PRC. The article was by New Zealander Jamil Anderlini, the FT’s Asia editor. He made the case for countries to stand, and work, together to resist the PRC’s attempts to use trade pressure countries – calling for a new and better United Front of democracies with common long-term interests in this area. Our politicians seem to think it is just to cower and defer to the regime, and do as little as possible to ever upset them (which only ever encourages thugs), rather than standing with other countries that share something rather closer to our values than National’s and Labour’s CCP friends do.

House prices

Looking at the polls, or the flow of daily news, in many respects it no longer much matters what policy positions the leader of the National Party is enunciating. Hardly anyone supposes that the government after the election won’t be either Labour alone, or Labour and the Greens. And so if we are at all concerned about policy, what matters for the next few years is what Labour’s leader is saying, and what – as incumbent Prime Minister – she has been doing.

Three years ago we were told by the Prime Minister – and correctly so – that the housing situation in New Zealand was pretty bad (the word “crisis” was often flung around). House prices had risen enormously in the previous few years, as indeed they had under the previous Labour government, and the National government prior to that. She made much of “child poverty”, and most serious observers recognise that a significant contributor to problems in that area was the extraordinarily high level of house prices in New Zealand. A few thought Labour was getting serious about fixing the grossly-distorted housing market – making it a functioning market, rather than a thing rigged by central and local government. The Executive Director of the New Zealand Initiative had even done a joint Herald op-ed with Phil Twyford who was then Labour’s housing spokesman.

I was among those who was on record here as being sceptical. Controversial reforms only happen if they have strong backing from the leader/Prime Minister. But whether under Andrew Little or Jacinda Ardern, Labour leaders in Opposition never highlighted the core problem – the land use restrictions – and only ever cited the palliative or distraction measures Labour was proposing; ones which, if they had any effect at all, might be a few percentage points in a climate in which house prices were perhaps twice what they really should be in a functioning market with abundant land. When, with a functioning land market and the lowest interest rates in a very long time, real rents should have been cheaper than ever.

What were they proposing? There was the proposed foreign buyers ban, the extension of the bright-line test, and ring-fencing. There was the vaunted capital gains tax, and talk about immigration (although the specifics would have changed the net flow for only one year). And, of course, there was to be Kiwibuild. If you dug enough in Labour’s manifesto you might find mention of land-use reform, but it never got much attention or profile at all.

And where are we now after three years in office? The REINZ’s measure of median house prices has risen by another 27 per cent – and real house prices are so high that 27 per cent increase at these levels are much more material, and damaging, than 27 per cent increases might have been 20 years ago. There hasn’t been much general inflation in the last three years – about 5 per cent in total – so real house prices are up in excess of 20 per cent in just three years. In none of that period was the economy performing spectacularly well, and of course this year has been flat out disastrous, mostly due to events beyond the government’s control.

And what has the Labour-led government done in that time? They’ve done some of their specifics – the PM last night claimed the foreign buyers ban had made a difference – while others have just fallen by the wayside. Capital gains tax is no more, and Kiwibuild was one of the government’s more embarrassing failures – not that, even if delivered, it would have made more than a jot of difference to the underlying, land price issue. Oh, and they’ve been consulting on locking up more land – especially on the outskirts of Auckland – as allegedly “highly productive”. Thank goodness we didn’t have that sort of government when Carlaw Park was in use as market gardens or Manurewa or Lower Hutt or…..

Asked about house prices in the debate last night, the Prime Minister seemed reduced to hand-waving. Perhaps the foreign buyers’ ban did make a small difference – it is genuinely hard to tell – but even with it real house prices have still risen in excess of 20 per cent in three years. For a city with median house prices at five times median income – and Auckland, Wellington and Tauranga are far higher than that – that 20+ per cent real increase is equivalent in cost to a whole additional year’s income. (In well-functioning markets, house price to income ratios of three are quite sustainable).

She seemed reduced to claiming that she couldn’t have fixed the housing market in three years – a claim that is not only wrong, but belied by the fact that her government has shown no real sign of trying, and is not promising anything much different in the next three or six years. One might almost believe that the Prime Minister doesn’t really care about the level of house prices at all, so long as she can keep it in check as an electoral concern. And, as a statist at heart, she’ll be happy when lots more people are in state houses – perhaps a reasonable outcome in itself, for a small minority, but hardly a systematic solution to one of the most egregious policy disasters in modern New Zealand history. (On that statist note, did anyone else note that when talking about lifting living standards her only answers seemed to be higher minimum wages and the state paying “living wages”, with never a hint of firing up overall economic performance in a way that would support market-led much higher wages all round.)

But we heard nothing from the Prime Minister – last night or in other speeches or interviews – suggesting she has any sort of vision of much lower house prices in New Zealand. I saw this post on Twitter yesterday afternoon

The Little Rock metropolitan area is bigger than Wellington and Christchurch but smaller than Auckland. These houses are about as far from the centre of town as Upper Hutt is from central Wellington or Orewa to central Auckland. And just look what you get for around NZ$300000. (In a place with interest rates just as low as those in New Zealand with – for the leftwing journalists currently aggrieved at loose macro policy – a central bank doing even more to buy up all manner of assets.)

But you don’t hear the Prime Minister talking of that sort of affordability as something New Zealand should be matching. But think about the sort of difference it would make if we did – not just to people buying a house to live in, but to the cost of supplying rental accommodation as well. It isn’t some silver-bullet to the issues around poverty – 50 years of real economic underperformance aren’t just about house prices – but it would make an enormous difference, and (not incidentally) turn houses back into a (lifetime) consumption item, not something to stress about or speculate on the value of it. Fear of missing out – which has, reasonably enough, driven many younger people – would be a thing of the past.

And even if one granted – what may have been the PM’s point – that writing a robust new land use law might take some time, markets trade in a forward-looking way. If anyone really thought Labour was serious about taking steps that might make a three bedroom house on a decent section affordable again, they’d hold off buying. And those who own the artificially-scarce land available for development would be looking to offload it now – developed or not – before that scarcity premium vanished from the price. But there is no sign of any of that. Instead, we have the government’s official economic advisers forecasting a new surge in house and land prices once the immediate Covid dip has passed.

Now, we know the government has had a report recommending its own rewrite of planning law. Who knows what will come of that, but it is hard to be optimistic. Again, if it were genuinely going to open things up we’d see the smart money moving already and peripheral land prices falling. But no sign of that – any more than there was when the Auckland spatial plan was put in place.

The dominant ideology of Labour (and much more so the Greens) seems to be simply opposed to allowing the physical footprint of our cites to expand much at all, a firm opposition to allowing markets to work in determining where new development takes place (thus, in combination cementing in quasi-monopoly land prices), all while both parties are wedded to driving up the population rapidly. Of course, some of them will tell you they are keen to facilitate greater urban density in existing suburbs near the central city or around transport hubs. I don’t have too much problem with that in principle, but it don’t think it is either right – or probably politically tenable – to ride roughshod over community preferences (many/most new developments run a system of private covenants, and it isn’t obvious why existing neighbourhoods shouldn’t have that possibility if that is what most existing owners want) and – more importantly here – there is little or no evidence that the drive for density, and height, is likely to lower the cost of a constant-quality unit of housing. Sure, you economise on land – even though gardens are what many people would actually prefer (revealed preference illlustrates that) – but the cheapest way to build houses is single-level properties, and (I’m told) the per unit costs of apartment blocks of several storeys are really quite high. Unless the land market is opened, so that there is genuine amd aggressive competition to supply new development sites, it is very unlikely that anything is going to change to deliver land-abundant New Zealand the sorts of real house prices it could, quite readily, have.

And that’s just a disgrace; a shameful reproach on both major parties (and their sidekicks) – but it is Labour which has been in government these last few years and almost certainly will be for the next few. It is inefficient and discourages inter-city labour mobility, but – more importantly to me – it is simply deeply unjust, with the burden falling most heavily on the young and the poor (in New Zealand that means disproportionately Maori), on new arrivals, and on those without wealthy parents, or even just on those who value self-sufficiency and earning their own way in life.

I look at my own teenage children and grow increasingly angry at the indifference of a Prime Minister who endlessly talks about “kindness” but has done nothing to fix the grossly distorted housing market, just presiding over ever-worsening imbalances. My son came home from the church youth group the other night telling me that one of the church leaders had said that he and his wife had purchased their first (inner Wellington) house for $25000 (at what would have been near the peak of the early 70s boom). That is about $250000 in today’s money. I checked that same house this morning – now almost 60 years old – and an online calculator estimates a value of $755000. Sure, real incomes are higher now, but in a functioning market that doesn’t justify higher – constant quality – real house prices. How would almost any early-mid 20s couple today purchase a first home in our cities? That should be a normal and reasonable expectation – looks still to be in much of the US – but this government seems quite content to turn the vast bulk of the country into a nation of renters. I recall going to Switzerland for a central banking course about the time I bought my first house, and being told by our hosts that prices in Berne were so high that really only department heads at the central bank owned their own houses/apartments. I was shocked – and disapproving – then, but never imagined it would be the case in land-abundant New Zealand. But something increasingly close to that is the legacy of National and Labour.

I try to be even-handed on this blog, and thus I should repeat that I have no idea if National would be any better now. They weren’t last time – despite positive rhetoric then too – but perhaps this time would have been different. But it doesn’t matter. They won’t be in government for the next few years. And all the evidence is that we have a Prime Minister who doesn’t care about lowering house prices, is uninterested in spending political capital or making the case to do so, and to the extent Labour has policy ideas in this areas none are likely to deliver real house prices lower than the disgracefully high level they were even three years ago when Labour took office.

Technology

Politicians of whatever stripe seem to want to associate themselves with “technology”. It was then British Labour Party leader – and Opposition leader – Harold Wilson who 57 years ago gave the speech where he talked of the new economy he looked to, referring to the “white heat of technology”. Perhaps it was the same in the 19th century too, but we certainly see and hear a lot about it in 21st century New Zealand. The economy continues to underperform, while same strange alliance of industry lobbyists and politicians want to talk up “technology” and so-called technology industries. I don’t think there is much difference between National and Labour on this one, but National is in Opposition, and yesterday Judith Collins was at it again.

As reported here, she wants to “double New Zealand’s technology sector in a decade, and specifically to double “New Zealand’s technology exports” to “$16 billion by 2030”, complete with talk of the sector being bigger than dairy 10-15 years hence.. Oh, and there was lots of money being flung around, and to top it all off National is promising a Minister for Technology. Presumably, that will be just one more title some other Minister would add to his or her list and – for better or worse – MBIE would carry on providing policy advice much as it does now.

Much of the political rhetoric in this area is fuelled by the annual TIN (“Technology Investment Network) report, a collaboration between MBIE and some private sector groups with an interest in talking up the sector. I took a sceptical look at this report in a post back in 2017. They seem to be the source of the idea that “technology exports” are currently around $8 billion per annum – the sort of line that led former minister in the current government, Clare Curran, to suggest a year or two back that technology was now our third largest export.

But the $8 billion (or thereabouts) is not a measure of exports from New Zealand – and certainly not in the sense that any serious economic analyst or national accounts statistician would recognise. Rather, it is the total foreign sales of the group of companies the TIN report put on their list. Exports, by contrast, are things produced the country concerned. ANZ is an Australian-owned and controlled bank, with significant operations in New Zealand. Last year its total revenue in New Zealand was about $7 billion, but no one thinks of that – or counts it as – an Australian export. But that is the sort of thing the TIN people lead people to do – TIN themselves tend to draft a little more carefully, but in ways that they know will lead people to talk of this revenue as somehow New Zealand exports. Last time I looked, for example, both Fisher and Paykel Appliances and Fisher and Paykel Healthcare were on the list. The former is not even New Zealand owned any more and both companies have substantial overseas operations – Healthcare, for example, does much of its manufacturing in Mexico, selling into the US. That makes it a successful New Zealand business, but those sales from Mexico to the US are Mexican exports not New Zealand ones.

It is difficult to get any sort of precise sense of the scale of (what one might reasonably think of us) “technology” exports from New Zealand, not least because technology is embedded, to a greater or less extent, in so much that is sold, whether locally or internationally.

But in my earlier post, I took a couple of proxies to try and get a sense of trends. I’ve updated some of those.

In the TIN report, for example, many of the companies are in “high-tech manufacturing”. But here is a “elaborately transformed manufactures” have done as a share of New Zealand merchandise exports.

ETM

And from services exports I worked out the share of the total made up of

Services; Exports; Charges for the use of intellectual property nei
Services; Exports; Telecommunications, computer, and information services
Services; Exports; Other business services
Services; Exports; Personal, cultural, and recreational services

The latter because the largest component of it appears to be film and TV exports (Weta workshops, Peter Jackson etc). “Other business services” is going to be quite a grab-bag, but it does include (for example) research and development services.

Here is how those services have done as a share of total services exports

tech exports

That series seemed to be doing quite well for a while, but unfortunately the last few years have not been very impressive and the latest observations are lower than those for, say, 2009. (Of course, there was a surge in education and tourism exports for a while, boosting the denominator.)

So what if we combine these two series and look at them as a share of New Zealand’s GDP?

tech exports 2020

Perhaps I’m missing some important series. But I went looking and I couldn’t spot anything obvious. Perhaps you are thinking of Xero for example, but wherever any of its export revenues from New Zealand might have been, the category of services of exports that mentions “accounting services” has shrunk hugely in real terms over the last 15-20 years. I’m sure there must be some other items some would reasonably label “technology exports” but if they were game-changing they should be easy enough to find.

We can all name various individual successful technology-based companies founded by New Zealanders. Some are even still owned, controlled, and/or based in New Zealand. And there is plenty of technology embedded in many of other exports – including dairy, the one they all seem to hope to rival.

But the overall picture really isn’t very encouraging at all. That is most unlikely to be “fixed” by flinging more scarce public money at the industry, or more visas. And we can be pretty confident that appointing a Minister of Technology would make no difference at all. In fact, if we keep on with the economic policies with run for the last 20 years, perhaps the main role for a Minister of Technology might be to front up to Parliament to explain why transformational change still hasn’t happened, hand in hand with the then Minister of Finance explaining why no progress has yet been made – perhaps another decade on – in reversing New Zealand’s longrunning relative productivity decline.

Of course, there is something of hint that the political parties aren’t really serious in the scale of the promise. National talked of doubling “technology exports” in a decade, which is akin to an average annual growth rate of about 7 per cent. For any really serious technology success story that would be a derisorily low rate of growth. Who knows: perhaps those worldwide sales of the TIN companies will grow 7 per cent per annum over the next decade – when nominal GDP is probably forecast to grow 4-5 per cent per annum – but even if that happens, it is unlikely to be the makings of a seriously stronger New Zealand economy.

Productivity, and politicians who no longer care

I was reminded again the other day both how (absolutely) poor even advanced countries were not that long ago, but also how (relatively) rich New Zealand was. I was reading a fascinating book on Ireland’s (rather shameful) history in World War Two and stumbled across a snippet suggesting that “there were nearly 170000 licensed radio sets in Ireland on outbreak of war”, in a country of almost three million people. On digging around a bit, I found that in New Zealand, then with 1.6 million people, we’d had 317509 licensed radio sets in 1939 (then, apparently, third highest in the world per capita). The licence fees in the two countries appear to have been very similar.

The standard compilation of historical estimates of per capita GDP – that of Angus Maddison – is consistent with my radio anecdote. In 1938/39 GDP per capita in New Zealand was more than twice that in Ireland, with New Zealand in the very top grouping (New Zealand, UK, USA, and Switzerland).

How times change. As even Irish official statisticians acknowledge the idiosyncracies of Ireland’s corporate tax system substantially distort Irish national accounts statistics, but doing whatever adjustments are possible (eg the Irish modified GNI measure) or looking at consumption statistics it is clear that these days Ireland is producing considerably better material living standards than New Zealand is. In terms of standard productivity measures – the OECD’s real GDP per hour worked data – they probably went past us in the mid-1980s.

The OECD productivity data go back as far as 1970. By then, we’d already had a couple of decades of relative decline – even though for most countries, including New Zealand, the 1950s and 1960s had seen really impressive absolute growth rates. Of the 23 countries for which the OECD has 1970 data – not all of them (including New Zealand) then part of the OECD – real GDP per hour worked here was just over 95 per cent of that in the median OECD country. We were a touch behind France and a touch of the UK. These days – pre-Covid – real GDP per hour worked is about two-thirds of the median for that same group of 23 countries.

By far our worst decade since these data start was the 1970s. In that decade we had, by some considerable margin, the slowest growth in labour productivity of any of the countries the OECD has data far. Unfortunately, since then there has never been any sustained period when we have regained ground relative to the OECD pack, and if anything the gaps have widened further.

Relative optimists might look at the New Zealand experience this century and observe that there hasn’t been any material slippage relative to the leading bunch of OECD countries.

But that shouldn’t really be any consolation when:

  • the absolute rate of productivity growth has been so poor (our average annual rate of productivity growth for the nine years to 2019 has been a bit worse than our dismal performance in the 1970s –  see above),
  • we’ve managed no catch-up relative to the leading bunch, even though their productivity rates  –  problems at the frontier –  have also been disappointing to say the least, and
  • our performance relative to other countries that aspired to catch-up has also been dreadful.

I first got systematically interested in New Zealand’s woeful record in a stint at Treasury from 2008 to 2010, in the course of which I was heavily involved with the then-government’s 2025 Taskforce – the one supposedly about catching up (in terms of material living standards) with Australia by 2025. I wrote most of the Taskforce’s first report in late 2009 and in doing so I noticed, and reported that, of the former Communist countries of eastern Europe, Slovenia had then just passed us in terms of real per capita GDP, that Slovakia had real GDP per hour worked approaching that of New Zealand.

There have been some data revisions since then, but if we look at current estimates of real GDP per hour worked, in PPP terms, for 2007, we find that Slovenia was indeed about 5 per cent ahead of New Zealand, although the gap to Slovakia was a bit larger (10 per cent) than those earlier estimates suggested. There are eight former Communist countries in the OECD. In 2007, real GDP per hour worked in New Zealand was already only 16 per cent ahead of the median of those countries, that margin have narrowed markedly in the previous decade. Perhaps that earlier catch-up wasn’t too surprising or alarming – if you stop hobbling your economy and get rid of the state-dominated Communist system, you are almost certain to bounceback to some extent.

But where are things now?

Real GDP per hour worked, 2019, $US PPP
Slovenia 45.2
Slovakia43.8
Lithuania42.5
New Zealand42.2
Czech Republic42.0
Poland41.0
Estonia40.8
Hungary37.7
Latvia37.0

Last year we were really just middle of the pack among these countries, and in another couple of years – on policies, practices, whatever in New Zealand and other countries – you’d have to assume we’ll be struggling to stay ahead of Hungary and Latvia for long. In terms of growth rates over the last decade, Hungary was the laggard of the former Communist countries – still grew faster than New Zealand, but not by that much – but it should be slim consolation if we just manage to stay ahead of Hungary.

Not once previously in the history of modern New Zealand has any of these countries previously had productivity or income per head performances to match those of New Zealand. They still lag quite a way behind the north-west European leaders – although the gap is closing. The standout isn’t them catching up, but us failing.

It isn’t just those former eastern bloc countries. At the turn of the century, New Zealand could console itself that if Korea was growing rapidly, real GDP per hour worked was still not much more than half that of New Zealand. On recent rates of growth, they will move ahead of us in another year or two. Or Turkey – with a history of unstable undemocracy, macroeconomic instability and so on. The old Ottoman Empire was the 19th century’s “sick man of Europe”. In 2017, for the first time in modern history, real GDP per hour worked in Turkey moved ahead of that in New Zealand.

But it isn’t all bad news I guess. If you really want to find advanced countries that have done less well than New Zealand – poorer/less productive and with a slower productivity growth rate – I can offer you Greece and Portugal. But falling on those sorts of comparisons is really head-in-the-sand stuff.

But….in the midst of an election campaign, occurring in probably toughest economic times for an election campaign since 1990, is there any sign that (a) any political parties, or leading figures in parties, care about this dire long-term economic performance, or (b) have either any serious ideas, or a commitment to getting and adopting serious ideas, about making a difference? If there are any such signs I must have missed them.

Presumably, if pushed and at some level, the people grappling for office must know that productivity really matters – here was my story why and how. It is about underpinning higher wages (without pricing people out of the market), about underpinning more leisure opportunities, improving access to better healthcare, underpinning improvements in life expectancy, and underpinning the consumption of the bits and pieces of consumer society that most of us seem to value. Perhaps if you are an extreme Green you might have an excuse not to care about productivity – or, at the other end of spectrum, a zealot for the New Conservatives – but for the rest it is hard to see, at least if they are serious about anything more than simply occupying office.

Perhaps one can find slight and partial excuses for our politicians. After all, it is not as if the government’s self-proclaimed premier economic advisers, The Treasury, have been firing on all cylinders, generating a steady stream of searching analysis and research with suggested solutions to our decades of economic failure. Then again, as things are set up why would they? Successive National and Labour (and even NZ First) Ministers of Finance have had no real interest: bureaucrats respond to incentives to, and the State Services Commissioners have played their part in appointing as Secretary to the Treasury people who weren’t likely to rock the boat.

But, at best, it is a partial explanation, not an excuse. Real political leaders set the agenda, with ideas of their own, drawing on the expertise of others, and demanding – or promising – much better from the public service. There is no sign of any of that at the top of either of our main parties (and, mostly, the others don’t really matter much, but they don’t seem any different either). I’m sure they are all nice people, but what are they doing – or promising – that might make a real difference, in reversing the decline in our relative material living standards, not just for the next year or two (borrowed money, redistributing a static or shrinking pie) but for the next generation or two (your kids and mine, our grand children etc). Short answer – on the evidence of years and years, and on the evidence of what parties are talking about and promising in this campaign – NOTHING. It is shameful. (And it is also not much excuse to suggest there is no huge groundswell of public anger, demanding something better: we don’t expect voters to engage on real GDP per hour worked, but don’t we hear again and again complaints about gaps in what productivity and growth makes more readily possible – health, housing standards and so on?)

Instead, any (expressed or public) concern seems to be limited to same predictably small group. There is me, here – and in a longer-form treatment here. There is Paul Conway, formerly of the Productivity Commission – where he led their work in this area, before frustration got the better of him – and now at BNZ, and there is Kerry McDonald, former economist, former head of Comalco, former leading company director. McDonald’s latest speech pulls no punches in its title, Our Economic Disaster and the Tragedy of NZ’s Political Leadership. And not much beyond that. The point isn’t that the three of us would agree of everything – we wouldn’t – but that our politicians and senior officials, our political parties, aren’t even engaged on the issue at all, let alone on serious options for making a difference.

One area where it looks as though there is some overlap in the policy prescriptions of Conway, McDonald, and Reddell is around immigration, and a sense – more strongly put at least in my case – that decades of high rates of non-citizen immigration, often not of people who are particularly highly-skilled, has not served us at all well in lifting productivity, even though the official case for high immigration to New Zealand asserted that it was a “critical economic enabler”.

I illustrated earlier in this post how the central and eastern European countries have been catching up and overtaking New Zealand. In this chart I’ve shown the populations of New Zealand and the median of these eight OECD countries this century, drawn from the World Bank/UN data.

e europe sept 20

Or this table of population growth rates this century

Population growth, per cent, 2000-19
Lithuania-20.4
Latvia-19.2
Estonia-5.0
Hungary-4.3
Poland-0.8
Slovak Republic1.2
Czech Republic4.0
Slovenia5.0
New Zealand27.5

All these countries have birth rates below replacement (generally lower than New Zealand’s) and all have had outward migration of their own citizens – us primarily to Australia, the Europeans mostly to western Europe. The big difference is that New Zealand – alone – has pursued rapid population growth as a matter of official policy, aggressively running one of the largest (per capita) official immigration programmes on the planet.

(As I’ve argued in numerous previous posts, rapid population growth isn’t necessarily inconsistent with rapid productivity growth, but rarely if ever has rapid population growth been a recipe for sustained rapid productivity growth – arguably the 19th centuries colonies of settlement, with abundant land may have been exceptions. Much depends on the opportunities, and locations matter. And yes, although Korea now has very modest population growth, Turkey’s population growth has been rapid.)

But, even amid the Covid disruptions – which could have been a great opportunity to stop and rethink – no political party seems interested in revisiting whether New Zealand’s large scale immigration policy has worked in the economic interests of New Zealanders as a whole, and all the media chatter is about getting going again with the supply of relatively lowly-skilled workers from abroad into the New Zealand labour market. There is no sign it has worked for New Zealanders for the past 25 years, and no obvious reason to suppose that will change for the better now.

But our political “leaders” show no sign of caring, at least about anything beyond the latest stories of firms in low-wage industries wanting a resumed supply of people willing to work at….low wages.

Perhaps there is an alternative credible model for thinking about how to reverse sustainably our decades of underperformance. But if so, you wouldn’t know it from listening to our politicians, or their officials.

PREFU thoughts

The debt numbers in yesterday’s PREFU are, to me, almost the least concerning aspects of the pages and pages of numbers/charts The Treasury published. My preferred debt measure – net core Crown debt, including the government financial assets held in the NZSF – is projected to peak at just under 40 per cent of GDP. As I’ve noted previously, numbers like that at the start of this year would have put us in the less-indebted half of the OECD countries then. By no obvious somewhat-objective metric is net debt at those sorts of levels particularly problematic, even if bond yields (and eventually, we assume, the OCR) do eventually head back in the direction of more-normal historical levels. And I hope neither main party – whether at this year’s election or that in 2023 – is going to make a fetish of specific timebound numerical targets for a particular debt measure (governments in few other countries do).

That said, the fiscal picture is not a rosy one. And it isn’t just because of Covid one-offs or because of the recession itself. Treasury produces estimates of the cyclically-adjusted balance, and this time gave us numbers that also stripped out those Covid measures. This is the resulting surplus/deficit chart.

CAB ex covid

Treasury estimated that there was a modest structural surplus over the second half of the 2010s, but now reckon the structural deficit will be around 1.5 per cent of GDP once we emerge from the immediate shadow of Covid. A three percentage point deterioration in the structural balance isn’t ruinous in and of itself – and is smaller than the moves in the previous decade – but it isn’t something to be entirely relaxed about either. It is the result of specific choices about permanent spending/tax choices. One would want to be comfortable that spending choices were of a particularly high quality.

I’m rather more bothered by the overall macroeconomic story, and the apparent complacency of The Treasury in these matters – not just as principal macro advisers to the government, but given that the Secretary to the Treasury is a non-voting member of the Reserve Bank Monetary Policy Committee. In four years time, the unemployment rate is forecast to still be materially above the NAIRU (and the output gap materially negative), and inflation is barely getting back to the target midpoint. A standard view of the monetary policy transmission mechanism is that monetary policy works with its fullest effects over perhaps an 18-24 month horizon. And yet on these projections not only has fiscal policy largely done its dash already, but there is hardly any further easing assumed in monetary policy (90 day bill rates drop to 0.1 per cent, but the OCR seems never to go negative). We have macroeconomic stabilisation policy to produce better cyclical outcomes than that. It has the feel of an approach that is just fine with people not likely to lose their jobs – Treasury and Reserve Bank officials – but shouldn’t be counted satisfactory to the rest of the population (and voters). Macro policy can’t solve structural failings, but it can address sustained cyclical weakness. A serious Opposition might make something of this, and reflect on the capabilities and priorities of our macro policy officials, and indeed on those (in the Beehive) who appoint/retain them.

One issue I’ve hammered on about here over the years is New Zealand’s rather woeful foreign trade performance. At the high tide of the latest wave of globalisation, we spent this century to date with the value of exports and imports shrinking as a share of GDP.

Treasury only produces volume forecasts for exports and imports in the PREFU. They aren’t pretty. Of course, (services) exports and imports are currently taking a large hit from closed borders, but Treasury assumes borders are reopened by the start of 2022.

Over the last economic cycle (2007/08 to the end of last year) the volume of New Zealand exports more or less kept pace with the growth rate in real GDP. But on Treasury’s forecasts over the full five years to 2023/2024, real GDP is projected to have risen by 8.4 per cent, while the volume of exports is projected to have risen by only 1.7 per cent. And whereas the volume of imports – things we consume, and use to produce – ran ahead of the growth in real GDP (quite significantly, as real import prices fell), even the latest forecast period to 2023/24 import volumes don’t even manage to keep pace with the subdued growth in real GDP.

As the prices of both exports and imports tend to grow more slowly than general prices (CPI, GDP deflator etc) and since Treasury projects the exchange rate goes nowhere over the next five years, these projections will be consistent with exports/imports falling to around a quarter of GDP. At the turn of the century they were around a third. And yet (growing) trade with the rest of the world is a key element in almost any country’s economic success – particularly for small countries.

The bottom line is perhaps expressed in lost GDP. We could do a simple comparison and look at nominal GDP for the years 2019/20 to 2023/24 from the Treasury’s HYEFU late last year and yesterday’s PREFU. Over those five years, Treasury now expects the value-added from all production in New Zealand will be $140 billion less than they thought just nine months ago. (For what it is worth, there is another $200 billion lost in the following five years, a period Treasury does not forecast in detail). These are really large losses, and on the Treasury numbers the associated wealth is never being made back. Nominal GDP matters for various reasons, including that most public and private debt is expressed in nominal terms.

But, of course, there is also plenty of focus on real GDP per capita. Over the last economic cycle (2007/08 to the end of last year), real GDP per capita. increased by about 1 per cent per annum. That was pretty underwhelming growth, reflecting the poor productivity performance and limited outward-oriented opportunities in turn reflected in weak business investment.

But here is rough comparison between the Treasury projections and a scenario in which we’d continued to stumble along at 1 per cent per annum growth in real per capita GDP.

scenario PREFU

On a rough estimate, the difference between the two lines is just over $100 billion – lost and never coming back. And although the two lines look as though they will eventually converge, my understanding of the Treasury projections beyond the official forecast period is that they don’t. Not only have we lost wealth upfront (that $100 billion) but our real annual income will always be a bit less than we previously thought.

None of these scenarios/numbers looks particularly unrealistically pessimistic to me. If anything, Treasury seems a bit more optimistic than I would be about the wider world economy – given how little has been done with monetary policy, the approaching political limits of fiscal policy, and the way that all societies look to be materially poorer than they would have thought just a few months ago, it is difficult to be very optimistic about the likely pace of sustained economic rebounds anywhere. And while Treasury assumes that we keep on in the medium-term with our modest productivity growht, it isn’t obvious even how that is going to be achieved – it is not as if either political party has any sort of serious economic plan. It doesn’t take aggressive fiscal consolidation here or abroad to think that private spending growth (consumption and investment) is likely to be really rather subdued for quite a long time to come.

Much of the political debate tends to turn on how much more debt governments have taken on, how much more public spending has been done. And there are important issues there, that deserve ongoing scrutiny, but at least as important is just how much poorer we now look likely to be than we thought just a few months ago. Fiscal policy redistributes among people in New Zealand, but even with all that fiscal support, as a country we are in aggregate so much poorer than we expected to be. And that will influence behaviour, choices, appetite for risk etc in the years ahead.

(Oh, and finally, I don’t have space to labour the point, but isn’t there something shameful when The Treasury reckons that – with no new fiscal or monetary stimulus – current structural features of the housing market (land use, immigration and whatever else) mean that they expect 7.4 per cent house price inflation in 2022/23 and a further 8.5 per cent the following year. That, not whether prices fall a bit this year as ,eg, unemployment rises, should be getting a lot more attention that it seems to be.)

Productivity and GDP

Tomorrow morning we finally get Statistic New Zealand’s first guess at June quarter GDP. If I’m being critical in that sentence, it is through the use of the “finally” – emphasising just how long (unusually long internationally) the delays are in producing national accounts data – rather than in the word “guess”. I don’t suppose SNZ will use the term itself, but I think everyone recognises just how difficult it has been for statistics agencies to get an accurate read on what went on in the second quarter this year, when so many economies were so severely affected by some mix of lockdowns and private cboices to reduce contacts/activities. There are likely to be big revisions to come, perhaps for some years to come, and most likely we will never have a hugely reliable estimate – scholars may continue to produce papers on the topic for decades to come. That is also a caveat on the inevitable comparisons that will be made tomorrow, in support of one narrative or another, about how well/badly New Zealand did relative to other advanced countries. Most/all of them – and their statistical agencies – will have had similar measurement and estimation problems.

We do, however, have some aggregate data on the second quarter, including estimates from the Household Labour Force Survey (HLFS) and the Quarterly Employment Survey ((QES) on, respectively, hours worked and hours paid. Each of these surveys – one of households, one of firms (in sectors covering most of the economy) – had their own challenges in the June quarter.

Over time, the growth in hours worked and hours paid tend to be quite similar (unsurprisingly really). From 2014 to 2019, the quarterly growth in hours worked averaged 0.74 per cent per quarter, and quarterly growth in hours paid averaged 0.65 per cent. From quarter to quarter there is quite a lot of variability, which also isn’t surprising given the way the data are compiled (as an example, my household was in the HLFS for a couple of years and I would answer for all adult members of the household: for hours, I’d give them a number for my wife’s hours that broadly reflected my impression of whether she’d had a particularly taxing time in the reference week or not, but it was impressionistic rather than precise). Partly for that reason, when I report estimates of quarterly growth in labour productivity, I use both an average of the two measures of GDP and an average of the two measures of hours.

But in the June quarter there was a huge difference between HLFS hours worked (-10.3 per cent) and QES hours paid (-3.4 per cent). Some of that will be measurement problems and natural noise. But quite a bit of it will, presumably, reflect the wage subsidy scheme. The wage subsidy scheme ensured that most people who were employed stayed employed during the June quarter – although by the end of the quarter the unemployment rate had risen quite a bit – but many of those whose incomes were supported by the wage subsidy may have been doing much reduced, or barely any at all, hours actually worked during the reference week (when they were surveyed). For some components of GDP the QES series had typically been used as one of the inputs, which would have been quite problematic for the June quarter (and, to a lesser extent) in September.

Statistics New Zealand has published a guide to the sorts of adjustments it is going to make to produce its first guesstimate of GDP tomorrow. They seem to be making a significant effort in a number of areas, and presumably this information – and direct contact with SNZ – is what has led private bank forecasters to converge on predictions that GDP will (be initially reported to) have fallen in the June quarter by something like 11-12 per cent (by contrast, in its August MPS the Reserve Bank expected a fall of 14.3 per cent, and that seemed to be a fairly uncontroversial estimate at the time).

I don’t do detailed quarterly forecasts so I do not have a view on what the initially reported estimate of the GDP fall will be, let alone what the “true” number towards which we hope successive revisions will iterate might be.

I have, however, long been uneasy – and think I wrote about this here back in April – but how, for example, SNZ were really going capture the decline in output in the public sector. Output indicators for the core public sector are a problem at the best of times, but there are plenty of stories of government departments that didn’t have sufficient laptops for all staff, or didn’t have server capacity to enable staff with laptops to all work from home simultaneously. And that is before the drag reduced effectiveness and productivity – if it were generally so productive everyone would have done it already – and the inevitable distraction/disruptions of young children at home. All these people were paid throughout, and were no doubt recorded as “working” – in an hours paid sense – but skimming through the SNZ guide I see no indication of any sort of adjustment for this sector. And in respect of public hospitals – much less busy than usual, with elective surgeries cancelled etc – there is also no sign of a planned adjustment to the measured contribution to GDP.

And this note from the guide

  • The method for school education will not be changed. Activity is assumed to be unchanged, with remote learning assumed to be a direct substitute for face-to-face learning.

didn’t strike me as entirely consistent with (a) changes to the requirements for getting NCEA passes this year (reduced number of credits students are required to achieve, (b) reports of the difficulties many students had (or the fact that the government was still trying to dish out free routers to poor households – allegedly mine – as recently as a couple of weeks ago, or (c) my observations from my kids about how relatively little many of their teachers seemed to do during the period. Some kids – including a couple of mine – have even have learned more during time at home than time at school but (a) I doubt that generalises, and (b) it certainly won’t show up in more NCEA credits, since schools actively reduced the number of credits they offered.

So those are just a few straws in the wind that leave me suspecting that whatever is published now is probably something of an overestimate of value-added in the June quarter.

I’m also a bit uneasy when I think about what sort of monthly track (implied) is required to have generated “only”, say, an 11 per cent fall in GDP during the June quarter, bearing in mind that real GDP had already fallen 1.6 per cent in the March quarter as a whole.

There was a pretty strong view back in April/May that during the so-called “Level 4” restrictions economic activity was likely to have been reduced by almost 40 per cent below normal (the Reserve Bank’s 37 per cent estimate was here, and I think The Treasury’s estimate was even weaker).

But even if one assumes that in May and June economic activity was right back up to the level prevailing on average during the March quarter (in much of which there must have been little or no Covid effect, even though by the last few days of the period the “lockdown” was in place), April (almost all of which was in lockdown) must have been no weaker than 67 per cent of the March quarter average level to generate an 11 per cent fall for the quarter as a whole.

And that just doesn’t really ring true. We know, for example, that there were no foreign tourists arriving in the June quarter, and levels 2 and 3 restrictions were in place for quite a while. We know too the firms that swore they met the legal requirements for the extended wage subsidy.

If instead, and for example, we assume that May and June were back up to 95 and 97 per cent respectively of March quarter levels of economic activity – which sounds more or less plausible – then April has to have been no weaker than 75 per cent of the March quarter to generate an 11 per cent fall for the June quarter as a whole. And that doesn’t really square with any contemporary estimates about how binding the so-called Level 4 restrictions were. Perhaps they were all wrong and things just weren’t so badly constrained at all, but count me a bit sceptical for now. We’ll see, but in and of itself tomorrow’s release may not shed much light we can count on.

And on the other hand, there is the question of the implied change in labour productivity (defined as real GDP per hour worked). Assume that the HLFS is a somewhat reasonable representation of hours actually worked during the quarter and one is working with a reduction in hours of 10.3 per cent.

Suppose then that the bank forecasters (I looked at ANZ, Westpac, and ASB) are right and GDP is reported to have fallen by 11-12 per cent. That would produce a “headline” – well, there are no headlines, because SNZ does not report this measure directly – drop in labour productivity of perhaps 1 or 1.5 per cent for the quarter.

That might, on the surface, sound plausible. All sorts of things must worked less efficiently under voluntary or regulatory restrictions around the virus. If anything across the range of sectors that normally involve extensive face-to-face contact it might sound like a reasonable stab – albeit perhaps on the small side – as a representative drop. Remember that even in places where gross output was maintained, often slightly more inputs will have been required to keep up output.

But what do we see in other countries? Finding quarterly productivity estimates for most other countries isn’t easy. The UK publishes an official whole economy series, but with a fair lag (so the Q2 estimates are not yet available, even though they publish monthly GDP). Australia does publish official estimates of real GDP per hour worked in the same release as the GDP numbers. The initial ABS estimate is that real GDP per hour worked rose quite sharply in the June quarter.

aus covid productivity

The US does not report official whole economy productivity, but labour productivity in the non-farm business sector is estimated to have risen by 10.1 per cent. In both cases, output fell, but hours worked fell even faster. Canada also reports a significant rise in average labour productivity in the June quarter even as real GDP also fell sharply.

What is going on here? It isn’t that Covid is suddenly making everyone, or even whole swathes of industry, materially more productive – the longed-for elixir of renewed productivity growth. Almost certainly what is going on is compositional change: the people who were working fewer hours (or not all) will have tended to be disproportionately in relative low wage/low labour productivity sectors/roles. One can think of bar staff, waitresses, office and motel cleaners, barbers and so on. On the other hand, a fairly large proportion of higher-paying jobs could be done, more or less effectively, with little or no face to face contact. And in Australia, for example, the hugely capital intensive resources sector will have been hardly affected at all by the Covid restrictions. Most individual sectors/roles might have maintained – more or less – their productivity, but for many lower paying ones the effective demand (and output) was just no longer there. Averaging those who were still producing/working one ends up with higher average productivity even if no individual is any more productive than ever.

Each country’s restrictions, and underlying economic structures, were/are a bit different. But on the face of it, it is a little hard to construct a story in which average labour productivity hardly changed in New Zealand when in other advanced economies it rose a lot. We were very stringent on shops and cafes/restaurants/bars. We had a large tourism sector that was very hard hit, and typically isn’t a hgh paying sector.

Now perhaps that HLFS estimates of hours worked (-10.3 per cent) is itself all wrong – although presumably other countries must have had similar issues – but if GDP comes out tomorrow with a reported fall similar to the reported fall in hours worked, it will be just another puzzle to add to the mix – and to hope for some significant revisions down the track. Of course, if (a) HLFS hours is a reasonable guide, and (b) other countries’ productivity estimates are a reasonable guide, then all else equal one might have expected a fall in GDP even less than the one those private forecasters are picking. And – even amid the great uncertainty – that really would be a surprise.

What difference did lockdowns make?

I’ve written a couple of posts over the months drawing on work by Waikato economics professor John Gibson. Back in April there was this post, and then last month I wrote about an empirical piece Gibson had done using US county-level data suggesting that government-imposed restrictions in response to Covid may have made little consistent contribution to reducing death rates (in turn consistent with evidence suggesting that much of the decline in social contact, and economic activity, was happening anyway, in advance of government restrictions).

Fascinating as I found that paper, I was never entirely convinced how far the point would generalise, It seemed implausible, for example, that government restrictions and “lockdowns” would never make much difference – even if, in practice, the particular ones used in US counties might, on average, not have. After all, at the extreme, if a population (wrongly) regarded the threat from a particular pandemic as fairly mild, and yet some megalomaniacal government nonetheless banned all cross-border movement and ordered that no one was to leave their home for six weeks it is quite likely that – gross over-reaction as the government’s reaction might be – fewer lives would be lost from the virus under extreme lockdown than with no government restrictions. Then again, if the public was right and the government was wrong, such a lockdown would not save any material number of virus deaths, but would come at an enormous cost, whether in economic terms or personal and civil liberty.

That earlier paper also used only US data, and although there is an enormous richness in US data – since restrictions were imposed at state and county level – there is the entire rest of the world, even just the advanced world, to consider. As it happens, Professor Gibson has now done another short paper looking at (much of) the OECD countries – most of the advanced world. Here is his abstract.

A popular narrative that New Zealand’s policy response to Coronavirus was ‘go hard, go early’ is misleading. While restrictions were the most stringent in the world during the Level 4 lockdown in March and April, these were imposed after the likely peak in new infections I use the time path of Covid-19 deaths for each OECD country to estimate inflection points. Allowing for the typical lag from infection to death, new infections peaked before the most stringent policy responses were applied in many countries, including New Zealand. The cross-country evidence shows that restrictions imposed after the inflection point in infections is reached are ineffective in reducing total deaths. Even restrictions imposed earlier have just a modest effect; if Sweden’s more relaxed restrictions had been used, an extra 310 Covid-19 deaths are predicted for New Zealand – far fewer than the thousands of deaths
predicted for New Zealand by some mathematical models.

Professor Gibson does not seem at all taken with the Prime Minister’s “go hard, go early” catchphrase. He argues that the New Zealand government went hard, but actually rather late. He begins the paper with this chart, comparing restrictions in New Zealand and several other advanced island countries (ISL being Iceland).

Gibson 1

And observes

Up until mid-March the New Zealand response generally lagged the other countries in Figure 1. Moreover, the initial response, from 3 February, required foreign nationals arriving from China to self-isolate for 14 days. In late February, this extended to travelers coming from Iran. Subsequent genomic sequencing of confirmed cases in New Zealand from 26 February until May 22 shows representation from nearly all the diversity in the global virus population, and cases causing ongoing local transmission were mostly from North America (Geoghagen et al. 2020). Thus, aside from self-isolation being poorly policed, restricting travelers from certain countries (for example, China, Iran) is ineffective at keeping the virus out, unless all countries in the world simultaneously impose the same restrictions. Without such coordination, the virus can spread to third countries, from whence it can enter New Zealand. It is like bolting one door on a stable with many exterior doors, with horses free to roam around inside so that a smart horse (aka ‘a tricky virus’) can escape through any of the other doors.

And goes on to note that

The evidence in Figure 1 is open to at least two criticisms. First, different comparator countries may allow alternative interpretations. Secondly, comparing with responses of other countries may not be the right metric. Sebhatu et al (2020) find a lot of mimicry; almost 80 percent of OECD countries adopted the same Covid-19 responses in a two-week period in midMarch: closing schools, closing workplaces, cancelling public events and restricting internal mobility. These homogeneous responses contrast with heterogeneity across countries in how widely Covid-19 had spread, in population density and age structure, and in healthcare system
preparedness. One interpretation of this contrast is that some governments panicked and followed the lead of others, rather than setting fit-for-purpose Covid-19 responses that reflected their local circumstances. So another approach to study policy timing is to compare policy responses with the spread of the virus in each country.

Gibson adopts an approach of working back from data on Covid deaths – imprecise as that it, it is generally regarded as better than direct estimates of case numbers, which are hugely affected by just how much testing has been done – to estimate when there must have been a turning point in infection numbers to be consistent with the observed deaths data. That involves using an estimate, informed by experience, of the lag from infections to deaths (he mentions a couple of papers estimating lags of three to four weeks). Gibson produces results for 34 OECD countries, although unfortunately (for New Zealand comparisons) not for Australia.

The results in Table 1 show that the inferred inflection date in infections ranges from February 23 to 4 June, and for the median OECD country occurred on 23 March. For New Zealand, the approach in Figure 2 suggests new infections peaked on March 16, over a week before the strictest restrictions began on 26 March. Even if a shorter lag from infections to deaths is assumed, the peak in new infections in New Zealand still will have occurred before the Level 4 lockdown began. New Zealand is amongst 17 countries whose peak policy stringency occurred after the likely turning point in infections. So based on comparing policy
timing with likely progress of the virus, the ‘go early’ claim seems untrue.

He argues that it matters

It matters that policy restrictions are applied too late. Over two-thirds of variation in Covid-19 death rates (as of August 18) across these 34 OECD countries is due to baseline characteristics: deaths are higher in more populous countries, with higher density, higher shares of elderly, immigrants and urbanites, and fewer hospital beds per capita and having land borders (Table 2). If the country-specific mean of the OxCGRT policy stringency index is included it provides no additional predictive power. However, if the time-series of policy stringency is split at the inflection point in infections for each country (based on Table 1), prepeak policy stringency is negatively associated with Covid-19 death rates while post-peak policy stringency has no statistically significant effect on death rates. A similar pattern is apparent if the (likely) dates of peak new infections are controlled for, or if the maximums of the stringency index are used rather than the means. Thus, it seems to matter more to ‘go early’ than to ‘go hard’.

Gibson goes on to deal with concerns about endogeneity, re-running tests looking at policy responses relative to those of other nearby countries. Doing that tends to confirm the thrust of the earlier results.

there is a precisely estimated negative elasticity of death rates with respect to the policy stringency that was in place prior to the peak of new infections and an insignificant effect of policy stringency after the inflection point in infections has occurred.

But even then the effects appear to be quite small

gibson 2

And what of New Zealand?

gibson 3

or, in the slightly less-loaded framing from the abstract

if Sweden’s more relaxed restrictions had been used, an extra 310 Covid-19 deaths are predicted for New Zealand – far fewer than the thousands of deaths predicted for New Zealand by some mathematical models.

Of course, all those 310 would have been people, with grieving families, but on this model, we would have had a rate of deaths per million still in the lower half of OECD countries (rates akin to many eastern European countries, and Norway) not to those of (most of) northern Europe, including Sweden.

Having read and reflected on the paper, and engaged on a couple of points with Professor Gibson, I thought there were still several points worth making in response:

  • unlike his earlier paper, this paper makes no claims about what was known, or not known, by New Zealand and other countries’ governments in mid-late March. Even if the true number of new infections had started to decline even prior to the New Zealand “lockdown” policymakers could not have used this methodology at the time (since the deaths – the foundation of the timing estimate – had not yet happened). Reviews with the benefit of hindsight are not without their considerable uses – most real-world reviews are of that sort – but it is important to be clear that that is what this paper is. Politicians, of course, use their own take on hindsight to reinforce their preferred narratives,
  • the results may depend quite a bit on the correct specification of the model, and in particular on whether the other variables included (country population, population density, elderly share of the population, foreign-born share of the population, per cent living in urban area, available hospital beds per capita, and the presence/absence of a land border) have a robust foundation. The one I was particularly sceptical about was country population, as I could not see a good reason for it to affect Covid death rates. I asked Gibson about it and he re-ran the model without that variable and in summary “the basic pattern of results in terms of the policy variables stays the same, and particularly the contrast between pre-peak and post-peak stringency”. As it happens, this variant produces a lower estimate of New Zealand deaths with Swedish-level restrictions than the models reported in the paper itself. (Gibson, however, continues to think a population variable has a sensible structural interpretation.)

If we take Gibson’s results at face value they seem pretty appealing (and, in many respects, not that surprising, since we know – from papers since released – that officials in mid-late March were not recommending a lockdown of anything like the stringency of what the government actually imposed).

That said, it isn’t clear to me what the nature (and quantification) of any tradeoffs around economic costs and loss of liberties might be. There is a reasonable argument – and it is the stance I take myself – that the extreme restrictions on economic activities and liberties should be counted as a very large cost, justifiable (if ever) only in the face of the most severe and near-certain threat. What sort of society are we when we tolerate a government banning a swim in the sea, banning funerals, banning any public celebration of Easter, banning utterly safe economic activity (a sole practitioner going to his or her place of business)? But perhaps there is a counter-argument if maintaining the sort of moderate death rate Gibson envisages also required that we kept Swedish-type restrictions in place right through the last six months? It is possible – but needs for work, more modelling – that the total economic costs might have been similar or even higher. But then should one put a higher price on the most extreme episodes not just weight all losses equally? Perhaps there is a clearer-cut argument there in respect of restrictions on liberties than on the narrower GDP effects, perhaps especially when we recognise that different people value different things, different freedoms, different obligations in different ways. And that arbitrariness and unpredictability of use of extreme controls should itself be represented as carrying, and imposing, a heavy cost.

My position all through has been that the government over-reacted in adopting the full extent of its so-called “Level 4” restrictions. But the issues in my mind then was a difference between a New Zealand “level 4” and the somewhat less severe approach adopted in Australian states. With the benefit of hindsight, a paper like that of Professor Gibson poses more questions – and the sort of the questions that need to be posed, since the virus hasn’t gone away and (for example) we see Israel being forcibly locked down again. I hope his paper gets some scrutiny from, and engagement with, some of the more thoughtful of the champions of the New Zealand government’s approach. Perhaps he is quite wrong and his conclusions just aren’t sound, but they look like results that should warrant serious engagement, perhaps even a question to the Minister of Health, the one who the other day was trying to pretend the government does not (implicitly or explicitly) put a dollar value on human life in making its spending/regulatory decisions.