Ruminating on Auckland

Perhaps not many other long-term residents of Wellington share my taste, but I’ve always been fond of Auckland.  Partly that might just be good memories from five years there in my youth, but there is also the great physical location, a better (and certainly warmer) climate, deciduous trees, flourishing citrus trees in so many suburban gardens, and so on.   We’ve just had a family holiday there, and I was reminded again of what I liked about our largest city.  By contrast, I’ve always regarded Wellington as the public’s revenge on the public service.

Of course, as holidaymakers we didn’t have to grapple with the horror of the housing market, and between reduced school holiday traffic, the new Waterview tunnel, and largely avoiding the rush hour, not even the traffic was too problematic for us.  Coming from cramped Wellington, we were staying just off a not-overly-busy road that seemed wide enough that a whole new subdivision could have been constructed down the middle of the road.   We were mostly being tourists, but a curious and analytical 14 year old prompted discussions around the absurdities of housing supply restrictions –  explaining the oddities of the isolated high rise apartment blocks on Jervois Road, or Stanley Point, or Remuera Road, sticking out now just as those same buildings did when I was his age in the 1970s.

But staying in an older part of town I was also reflecting more generally on both past and present Auckland. 100 years ago, Auckland was the largest city in one of the two or three wealthiest countries in the world.  By the standards of the day, it must have offered ordinary working people some of the best material living standards on offer anywhere.  And if Auckland was our largest city then, it certainly wasn’t a dominant one.   In the 1911 census, the total New Zealand population had just crept above 1000000 (1008468).  And here were the total populations of the main urban areas (encompassing surburban boroughs, not just the respective city council areas).

Greater Auckland 102,676
Greater Wellington 70,729
Greater Christchurch 80,193
Greater Dunedin 64,237

Auckland’s population was just 10 per cent of the total.  At the same time Hamilton borough had a population of 3500, and Tauranga a population of 1300.

These days, Auckland makes up almost 35 per cent of the total population.   These days, with New Zealand GDP per capita around 30th in the world (depending which list one uses), there are likely to be many many cities (perhaps 100 or more, given that big countries such as the US, Germany, Japan, France, and the United Kingdom are richer than us, as well as many small countries) offering better living standards to ordinary working people than can be found in Auckland.  That would be true even on metrics like GDP per capita, with the problems accentuated by the disastrously unaffordable housing market.

Of course Auckland’s relative decline is largely part of the overall stark relative decline of New Zealand.    I’m sure we’ll see plenty of bluster from the current government in the election campaign that is getting underway, but I dug out the Prime Minister’s campaign statement from the 1911 election campaign published in the Herald on 6 December 1911.  It is partisan of course, but when Joseph Ward asserted that

The Liberal Government can claim without fear of contradiction to have made New Zealand in every department of social activity the most advanced country in the world.

Present and Future. New Zealand’s prosperity is solid and beyond question. Its population today is greater by 400,000 people than in 1893 and obviously the work of the Government has greatly increased. In the history of every country there are periodical fluctuations, seasonable ups and downs. We are influenced by the conditions ruling in other parts of the world. We cannot be always on the crest of the wave. But look round on the other countries. Mark what vicissitudes and oppressions they have passed through. Familiarise yourselves with the facts regarding the rich and resourceful United States of America, and then decide whether I am not justified in my reiterated assertion that New Zealand to-day is the most prosperous country in the world.

It is hard not to think that, even with the benefit of hindsight and the best efforts economic historians can do to compare living standards across countries, Ward was speaking the truth.   (It didn’t do his party much good, as they lost office –  after 20 years –  shortly afterwards).

These days we get fatuous comparisons of growth rates across countries, rarely adjusted for rapid population growth, but no one dares to claim New Zealand is even close to the most prosperous country in the world.

Wandering around Auckland was also a reminder of the extent to which Auckland’s economy is largely about supporting its own rapid population growth.  Check out the names on the high rises in the central city and you’ll struggle to find many New Zealand owned brands or companies (the banks and insurance companies, eg are almost all foreign-owned), and especially not if one is looking for firms making it in the international markets.  I’m all for foreign investment, but in a thriving economy it would be a two-way street –  not only would we have much more inward foreign investment but there would be a lot more offshore foreign investment too, as successful New Zealand firms took themselves to the wider world.  The pictures are never entirely black and white.  There are success stories like Air New Zealand (although with majority state ownership and the constraints of that industry who knows if it would still be New Zealand owned and run in a fully competitive market).  On a (much) smaller scale, I noticed billboards for ACG, which has taken its educational offerings abroad.

And there is, of course, the export education industry.  But even the reputable bits of that industry have the ground skewed in their favour by “industry subsidies” –  whether it is cheap access to PhD programmes for foreign students, or the way export education is bundled with preferential access to work rights and residence options in New Zealand.  And then there are the less reputable bits.  We took the kids ice-skating in Aotea Square and while they skated I contemplated the prominent building across the street with the big Cornell name and crest.  Not, surely, we thought the top US university with an operation here?  And no, it was the Cornell Institute of Business and Technology about which the authorities (and former staff) seem to have some pretty serious questions.  It was the most prominent tradables sector building I noticed in Queen St.

And yet, this is the city in which the hopes and dreams of the New Zealand agglomerationists are invested.   If the strategy –  putting more and more people into Auckland, even as New Zealanders have been leaving –  was any sort of economic success, surely we’d be seeing a succession of strong outwardly-oriented private sector businesses increasingly dominating the Auckland skyline?   But there is simply no sign of it.   Perhaps these successful firms are skulking in the suburbs and industrial areas?  I’m sure there are some highly successful examples, but there is no sign of it happening on the sort of scale needed if a non-natural resource based economy, successfully taking on the world and winning, is to develop in ways that would support top tier living standards for many more people.    If the model were correct, Auckland should be leading the way.  But it isn’t.

Really successful cities internationally, in economies that have gravitated away from dependence on (fixed) natural resources, tend to have GDP per capita a long way above that in the rest of the country.  And, typically, that gap is widening.

I ran this chart last year

gdp pc cross EU city margins

Here is the Auckland chart for the years since the regional GDP data began in 2000.  It shows average GDP per capita in Auckland relative to that in the rest of New Zealand (so the margin is larger than in the chart above, which uses the relationship between the biggest city and the whole country –  the biggest city typically being a large chunk of the country).

Akld GDP pc

The ratio does appear to be somewhat cyclical.  Probably what is going on is that when there is a big surge of immigrants (as in the early 2000s and recently) there is a big increase in the activity required simply to accommodate the new arrivals (building houses, roads, schools etc), but the trend is downwards.  Average incomes in Auckland are higher than in the rest of the country, but the margin is small and has been shrinking.

In the annual regional GDP data, SNZ also provide an industry breakdown.  As regular readers know, I’ve highlighted previously the pretty dismal state of the New Zealand tradables sector –  the main bits (agriculture and mining, manufacturing, and exports of services (mostly tourism and export education)) that compete with the rest of the world.   In real per capita terms, there has been no growth in that measure since around 2000.

We can’t do that calculation at a regional level.  But here is another proxy.    In this chart, I’ve included agriculture, forestry, fishing, mining, manufacturing, and education and traning as a loose proxy for Auckland’s tradables sector.  Of course, lots of education is totally domestic-focused, but export education is probably the main export sector centred in Auckland.   It has grown quite a bit in recent years.

akld tradables

There will be successful internationally-oriented Auckland-based firms lurking in some of the other services sectors, but (I’d assert) not many and not very large.   This simply isn’t what one should be expecting to see if the Auckland-focused (de facto, since that is what a large immigration target amounts to in practice) Think Big policy were working for New Zealanders as a whole.

It is close to a tragedy.   A deeply misguided policy, however well-intentioned, has reduced what was once one of the richest cities in the world to a rather mediocre mess: with few industries successfully competing internationally (in a small country the only long-term basis for prosperity), economic activity doing well only when a lot has to be built to accommodate yet another huge surge of new people, and houses so expensive that ever-fewer of the inhabitants can afford to buy.   It is still a great location and a wonderful climate but think how much better material living standards Auckland might offer its ordinary working people if, say, in a country of 3.5 million people, we had an Auckland of perhaps 750000.  Quite plausibly, that is how things might have played out with less overall population pressures –  deferring to the wisdom of the New Zealanders leaving, rather than superimposing politicians’ and bureaucrats’ judgements –  and a much lower average real exchange rate.

It isn’t too late to fix up New Zealand, but it does require a pretty dramatic change of course.  Wouldn’t it be wonderful if in thirty years time some campaigning Prime Minister could once again honestly make the sorts of assertions about economic and social success that Joseph Ward was making in 1911?  Sadly, judging by the political rhetoric this year none of our politicians is interested.


House prices and population

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

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

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


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

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

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

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


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

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

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

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

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

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

akld rel to nz gdp pc

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


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

South Taranaki
Central Hawkes Bay
Grey   (-27.2 per cent)

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

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


What’s wrong with Auckland and Wellington?

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

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

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


Auckland and Wellington were, in fact, the outliers.

Here is a  more aggregated look at the same data.


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

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

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

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

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

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

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


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

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

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

Other interpretations/perspectives most welcome.


I was participating in a debate the other day with a prominent economist and a leading business person.  Both seemed keen on actively growing New Zealand’s population further –  the economist in particular calling for a “population policy”, and appearing to argue that a much larger population was a critical element in improving New Zealand’s productivity outcomes.  The principal channel that he appeared to have in mind was better physical infrastructure, notably (because he explicitly mentioned them) high speed trains between our major cities.  Both my interlocutors seemed keen on a much larger population for Auckland –  to which my response was along the lines of “what, and dig an even deeper hole than we’ve already dug”, given the economic underperformance of Auckland relative to the rest of the country over the last 15 years.  None of this advocacy for an active policy role in growing population further appeared to give any recognition at all to

  • the economic underperformance of Auckland
  • the lack of any evidence that countries with smaller populations tend to be smaller or less productive than those with larger populations, and
  • the lack of any evidence that small countries have been achieving less productivity growth than large ones.

As far as I can see, the only OECD country where there might –  just might –  be a strong case for an active government role in trying to grow the population is Israel, surrounded by much more populous hostile states.  And even then, Israel’s survival so far  –  I remain a little sceptical that it will last longer than the Crusader states of earlier centuries – is more down to technology, organisation, institutions, and embedded human capital than to numbers of people.

But what prompted this post was a comment from the economist that not only should Auckland’s population be markedly further increased –  and the residents urged into apartments –  but that governments should be actively aiming to increase the population of our other cities and regions.  The specific aspiration that caught my attention was the suggestion that our second biggest city –  at present, Wellington and Christchurch have similar populations –  should have a population around half that of Auckland.  I was somewhat taken aback and responded “but that isn’t typically how things are in other countries”, to which the confident response was “oh yes it is”.  So I thought I had better check the data.

I set aside very large countries, and extremely small ones.  Most of Malta, for example, is Valetta.  Even among the large countries there is quite a range of experience: Britain, France and Japan have single dominant city, while Germany, Italy, and the United States don’t. But I found 22 advanced (OECD or EU) countries each with a total national population of between 1.3 million (Estonia) and 17 million (Netherlands), and I dug out the data, as best I could, for the populations of the largest and second largest urban areas in each of those 22 countries.  20 of the 22 countries are in Europe, and Israel and New Zealand are also in the sample.

Here is the share of the total national population accounted for by the largest city in each country.


Among these smaller advanced countries, our largest city’s share of total population is a bit above the median, but nowhere near the highest share.  Of course, as I have noted previously, except for Israel (Tel Aviv), our largest city has grown faster than any of these countries’ largest cities in the post-war decades.

But what about the specific point at issue: the size of the second largest city relative to the largest city.  Here is that chart.

cities 2.png

There is huge range of experiences even among this group of relatively small advanced countries –  from Latvia and Hungary where the second city is tiny relative to the largest, to the Netherlands and Switzerland at the other end.  In those two countries, the largest city is quite small relative to the total population.  There isn’t an obvious correlation between economic success and the relative size of the second largest city.  Ireland and Denmark are much richer than New Zealand, but so are the Netherlands and Switzerland.  And Latvia, Hungary, Slovakia, Portugal and Bulgaria are poorer than us.  New Zealand’s number isn’t much different from the median country’s experience.

One thing worth bearing in mind in this sample is that in most of these countries, the largest country is also the capital.  That isn’t so in New Zealand, Israel, or Switzerland – or, for practical purposes, the Netherlands.  All else equal, one might hypothesise that Wellington would be smaller if it were not the capital –  but that might just have left Christchurch as the clear-cut second largest city.

Since there is a wide range of experiences across similarly wealthy countries in the relative size of largest (and second largest) cities, it might be wise to be rather cautious in concluding that government policy should be actively directed to altering the relative size of some or other groups of cities.  Patterns across countries are likely to reflect some mix of history, geography, and economic opportunities.  In some countries, outward-oriented economic activity is heavily concentrated in big cities (one might think of London), in others it derives largely from non-urban natural resources (one might think of Norway).

As it happens, as a matter of prediction rather than prescription, I do think that a successful reorientation of policy in New Zealand would increase the relative size of second and third tier cities relative to Auckland.  But it would do so because (a) Auckland’s population would no longer be supercharged by an aggressive immigration policy, and (b) because, as a result, overall population growth would be lower, there would be less pressure on real interest rates and the real exchange rate, and the outward-oriented economic opportunities, which are at the heart of the provincial economies, would be more attractive, and would see more business investment taking place.

If, instead, governments persist with large non-citizen immigration programmes then, for all the talk of the attractive lifestyle the regions offer, it is a recipe for even more of the same.   Why wouldn’t that happen –  doing the same thing again and again and expecting a different result doesn’t, to put in mildly, make much sense.    For the last few decades, Auckland’s population has grown rapidly relative to that of most of the rest of country.  And its relative economic performance appears to have languished –  there is  certainly lots of activity to keep up (more or less) with the needs of a growing population, but little productivity growth.  Indeed, the large productivity margin one might normally expect to see in the data for largest cities is quite small in Auckland, and has been shrinking further.  There is no sign of some critical tipping point being reached in which –  say – high speed trains are about to transform our economic prospects.

As for the regions, one hears enthusiastic talk from time to time of encouraging migrants to the provinces –  and last year the rules were further tweaked in that direction.  But that is simply a recipe for further undermining the quality of the migration programme –  less able people who are desperate to get in will go to the provinces, to pick up the additional points on offer.  We want people to move to Invercargill or Napier –  if they do – because the business opportunites there are sufficiently good to attract people, not because the government puts points “subsidies” on offer, which simply mask the serious structural imbalances in the economy.  The best path to better provincial performance –  not an end in itself, but probably part of a more successful New Zealand –  is likely to be the removal of the distortions and policy pressures that have given us such a persistently overvalued real exchange rate for so long.  Using policy to simply bring in lots more people won’t do that –  any more than it has for the last 25 years.

The Treasury on Auckland and immigration

The Treasury yesterday released its latest Long-Term Fiscal Statement.  These documents, in some form or other, are now required under the Public Finance Act to be published at least every four years.  I was once a fan, but I’ve become progressively more sceptical about their value.  There is a requirement to focus at least 40 years ahead, which sounds very prudent and responsible.    But, in fact, it doesn’t take much analysis to realise that (a) permanently increasing the share of government expenditure without increasing commensurately government revenue will, over time, run government finances into trouble, and (b) that offering a flat universal pension payment to an ever-increasing share of the population is a good example of a policy that increases the share of government expenditure in GDP.  We all know that.  Even politicians know that.  And although Treasury often produces an interesting range of background analysis, there really isn’t much more to it than that.  Changes in productivity growth rate assumptions don’t matter much (long-term fiscally) and nor do changes in immigration assumptions.  What matters is permanent (well, long-term) spending and revenue choices.     And from a purely technocratic perspective – and Treasury are supposed to be technocrats, not politicians – the headline out of yesterday’s release should probably really be “there is no great urgency about doing anything much over the next 20 years”.  In this chart, from the report,  in 2035 spending as a share of GDP, on historical patterns and existing laws, is only around where it was in 2010.   ltfs

John Key –  the Prime Minister who refuses to do anything about NZS – almost certainly won’t be in office that long.

There were several interesting background papers Treasury released yesterday.  If I get time over the next few weeks, I might write about some of them here.  For now though, I simply wanted to highlight some interesting material in the main report on a couple of my favourite topics: Auckland’s economic (under)performance, and immigration policy.   I’m not entirely sure why either section was included in the report –  which is about fiscal projections – but there they are.

First, Auckland.  Here there are some encouraging signs that Treasury is finally recognising the problem.  A few months ago I was quite critical of a cheerleading speech about Auckland given by the Secretary to the Treasury.  And in the LTFS, the text starts off quite upbeat

akld text.png

I was drumming my fingers at this point, but then I got to the second half of the paragraph.


There was much more that could have been said, but for Treasury to acknowledge quite openly –  the plain statistical fact –  that Auckland incomes have been falling relative to those in the rest of the country, despite the huge infusion of additional people (“most skilled migrants anywhere in the OECD” as I heard Steven Joyce say again this morning) should be seen as pretty damning.  There is something very wrong with the model: as they add “this suggests we are not seeing the agglomeration effects we would expect from Auckland’s size and scale”.  Perhaps there is no guarantee –  or even reason to think –  that putting an extra million people or so (the increase in Auckland’s population in the last 50 years or so)  in a remote corner of the South Pacific would generate particularly favourable productivity results.

As I’ve noted previously, not only is Auckland’s GDP per capita less high relative to the rest of the country than it was even 15 years ago –  the point Treasury now acknowledges –  but that margin is small compared to what we see in other countries.  I ran this chart, looking at other large cities, in a post a few months ago.

gdp pc cross EU city margins

Auckland does poorly.  To me, that isn’t surprising.  This is a strongly natural resource based economy.  There is no sign –  and no sign Treasury points to –  that it has needed lots more people, and especially not in Auckland.

But Treasury, while clearly a bit troubled, isn’t willing to abandon the faith just yet.  The section on Auckland goes on.   There are a couple of anodyne paragraphs on Auckland as gateway (people and goods), and Auckland’s transport system,  and then we are right back to credal statements.


Perhaps diversity does bring advantages, but in the specific case of Auckland, there is just no evidence of solid economic gains.  As Treasury notes, Auckland has a fast-growing population, a young population, a culturally diverse popuation, and a very high proportion of people born overseas.   But it has a disappointingly poor-  and worsening –  relative economic performance.  In my hard copy of the report I had scrawled next to the comment about London “just a shame, we don’t have their GDP performance”.  In the chart above, you can see the contrast between London and Auckland.    We really should expect more than faith-based claims from the government’s premier economic advisory agency.  As Treasury knows, for example, there is no evidence of a causal relationship between immigtration to New Zealand and growth in innovation, productivity or exports.

(For those interested in the Auckland underperformance issues, the October issue of North and South magazine had a nice article on  The Delusions of Aucklanders (and perhaps those advising governments). The article is now available on the new Bauer Media website, Noted.)

Some pages on from the Auckland discussion, Treasury has a page on immigration.  It also starts off with a strongly credal tone –  keep the faith.


After finishing guffawing at the rather desperate “Auckland as a city of global significance” –  had the 9th floor of the Beehive requested that touch, or did they not need to ask? – we might simply ask for some evidence.  You might think it would trouble Treasury, even a little, that with one of the largest immigration programmes in the world –  of people who, by world standards, are not that badly skilled –  we’ve had 25 years of one of the lowest rates of productivity growth in the world.  Even Treasury acknowledges that failure.  Perhaps there isn’t a causal relationship.  Perhaps the productivity performance would have been even worse without the immigration.  But not a hint of doubt is allowed into this discussion from our premier economic agency.

But then the drafting gets a little more cagey.

akld 5.png

Note very carefully the “can”.  Yes, in principle, a good immigration policy can support productivity etc in the right places/circumstances.  But Treasury can, and does, advance no evidence that it has, in fact, done so in New Zealand.   They really want the public to believe in the programme, while being skilful enough drafters not to allow themselves to be pinned down to have made claims that the economic performance of New Zealanders is actually better as a result of the large scale immigration programme.   There is no hint of any evidence that using immigration policy in “addressing short-term skill shortages” makes any difference to longer-term per capita growth and productivity (and I’ve seen no literature on that point internationallly either).  And actually, Treasury’s own scenarios suggest that immigration also makes very little difference to the longer-term fiscal challenges.

They conclude, perhaps a little uneasily, reverting to rather more jargon-ridden text.


Be very wary of bureaucrats proposing “integrated system responses”, when markets have ways of dealing with issues.  Typically, when demand for additional labour and human capital is high, returns to that sort of labour rise, which attracts more people into those jobs, and to developing those skills.  “Skill shortages” –  or even “workforce planning” – just aren’t some sort of a chronic problem governments need to address.  Excess demand for labour is either a sign that monetary policy is a bit loose, or that wages (for that sector or industry, or across the board) should be rising.   And if Treasury –  or MBIE or ministers –  could produce strong evidence that our immigration policy really had boosted productivity and the material living standards of New Zealanders, that would be one thing.  But they can’t –  and don’t.   And don’t forget, that the same OECD survey Steven Joyce was citing again this morning shows that native New Zealanders already have some of the very highest skill levels in any OECD country.

Overall, I guess one gets a sense that Treasury is slowly losing confidence in bits of its story.  They now are prepared to acknowledge (at least part of) the sustained underperformance of Auckland.  They have raised some doubts about excess reliance of some industries on immigrants.  And they still can’t cite any real evidence of sustained gains in the living standards of New Zealanders from the large scale non-citizen immigration programme.  But rather than openly addressing the genuine uncertainty – and in what seems a slightly desperate attempt to keep spirits up, and encourage people to “keep with the programme”  – we are left with what are little more than slogans, simply asserting the alleged economic gains to New Zealanders from diversity and high rates of non-citizen immigration.  A reasonable response should be “well, show us the evidence”.

At the session Treasury hosted yesterday for the release of the LTFS, we were informed that the Productivity Commission is releasing next Monday its “narrative”, in which they will attempt to explain why the New Zealand economy has underperformed for so long, and (presumably) some thoughts on how best to reverse that.  I will look forward to that document –  there aren’t enough developed competing narratives around a really important issue – and I will no doubt be writing about it here.  Given the Productivity Commission’s statist tendencies, I’m not optimistic, but I will be particularly interested in how they deal with the immigration policy and Auckland issues, both in explaining the underperformance of the last few decades, and in contemplating a better way ahead.

Even Treasury has lost hope?

Pottering around the web, and working my way through my emails, on my return from holiday, I found a couple of things from The Treasury that caught my eye.

The first was the release of new risk-free rates and CPI inflation assumptions –  inputs that are required to be used in preparing the government financial statements.  Treasury releases these every few months.  They don’t get much attention –  presumably outside government agency accounting departments –  but out of curiosity I opened the latest one.  And as I dug into the history of these assumptions what I found was really quite startling.

When I was at the Reserve Bank we often used to bemoan the fact that Treasury’s published inflation forecasts never seemed to settle anywhere near the midpoint of the target range.  In fact, for a long time the Treasury approach seemed quite reasonable –  after all, in the first 15 years or so of inflation targeting, the average annual inflation outcomes had been around 0.5 percentage points higher than the (successively revised) target midpoints.  Reasonable people can debate why that happened, but it did.  It was unusual –  in most inflation-targeting countries, out-turns had averaged nearer the midpoint of the respective targets  – but as the midpoint wasn’t mentioned in the PTA it wasn’t a major accountability issue.  Don Brash took the midpoint quite seriously, while Alan Bollard wasn’t too bothered by it, but under both Governors inflation had averaged higher than the midpoint.

The Treasury’s continued assumption/forecast that inflation would settle back to around 2.5 per cent had become more frustrating, and questionable, in the years since the 2008/09 recession.  Actual inflation outcomes had begun to persistently undershoot the midpoint of the target, and the midpoint of the target range had been explicitly added to the Policy Targets Agreement in 2012.  The Bank, the Treasury, and the Minister of Finance all agreed that the focus of monetary policy should be the midpoint.

These are the assumptions Treasury published two year ago.

tsy inflation 1

At the time, it seemed like the ultimate in very slowly adapting, backward-looking, expectations.  By this time last year, they had markedly revised down their assumptions for the next few years (it wasn’t until 2030 that they assumed that inflation got back above even 1.75 per cent), but still assumed that in the very long-term inflation would eventually revert to 2.5 per cent.    If the Reserve Bank was, as it said, concerned to see long-term expectations centre on 2 per cent, there was still some (rather limited) cover in the Treasury assumptions for a moderately “hawkish” stance.  “Not even Treasury yet takes the 2 per cent midpoint that seriously” they might have argued.

But not any more.  Here are latest CPI inflation assumptions from The Treasury.

tsy inflation 2

They have had to dramatically extend the horizon they provide numbers for to encompass the eventual return to their long-run assumptions.  But it is 30 years from now before they assume inflation gets back even to 1.75 per cent, and almost 40 years to get back to 2 per cent.

I’m not sure quite what is going on here.  On the one hand, Treasury is the chief adviser to the Minister of Finance, who has signed a Policy Targets Agreement with the Governor of the Reserve Bank requiring him to focus on a 2 per cent midpoint.  And on the other hand, it is pretty much common ground that monetary policy works with a lag of perhaps a couple of years.  Anything beyond, say, 2018 is definitely an outcome monetary policy can control.  The PTA needs to be renegotiated next year, but not long ago the Secretary to the Treasury was quoted saying that he didn’t think Treasury would be suggesting major PTA changes. And yet Treasury thinks the best guess for inflation for the next 25 to 30 years is something well below the target they and the Minister are asking the Reserve Bank to achieve.

Of course, with yet another surprisingly weak CPI outcome just released, building on years of undershooting the target, Treasury might yet be right (between Reserve Bank policy (mis)judgements and the global deflationary environment).  But whether they are or not, what should disconcert the Governor –  and the Board, and those monitoring the Bank, such as Parliament’s Finance and Expenditure Committee –  is that not even Treasury believes him any longer.  They might say otherwise in their official advice – which we haven’t seen –  but these are the numbers they consciously chose to publish.

And, of course, it is not as if Treasury is alone in its doubts.  For all that the Reserve Bank likes to quote surveys of a handful of local bank economists, the market has its own approximate “price” for implied future inflation.  This chart takes the 10 year nominal government bond yield, and subtracts the yields on inflation-indexed bonds.  It isn’t a precise measure for various reasons, including the changing maturity dates on the various bonds, but the picture is pretty clear and persistent.

iibs july 16

As late as two years ago, the implied inflation expectations for the next 10 years were very close to 2 per cent.  Now they are around 0.65 per cent.

A persistently easier stance of monetary policy is much overdue.  Not even Treasury seems to take the 2 per cent midpoint very seriously now.

(UPDATE: Someone at Treasury pointed me to their relatively recent –  and useful – methodology note, which explains the relatively mechanical approach they currently take to updating the CPI inflation asumptions.  I don’t think it really changes my story, since the considered judgement has gone into the decision as to how best to represent a reasonable future path for inflation.  The Treasury has consciously chosen to put a considerable weight on indexed bond pricing, while the Reserve Bank excludes that information completely from the inflation expectations curve it regularly cites in its updates.)

On another matter, I have lauded the Treasury’s approach to the Official Information Act issues. They seem to take seriously their obligation under the Act, and although they receive a lot of requests (about 350 in the last year) have not sought to charge anyone.  They withhold material from time to time, but I’ve had enough confidence that they were playing by the rules that I have never sought to challenge those decisions, asking the Ombudsman for a review.  That changed this morning.

A while ago I asked for

Copies of any material prepared by The Treasury this year on regional economic performance, particularly in New Zealand. I am particularly interested in any analysis or advice –  whether supplied to the Minister or his office, or for use internally – on the economic performance of Auckland relative to the rest of the country (whether cyclically or structurally).

I wasn’t expecting much; perhaps some anodyne comments on some or other aspect of recent data, including perhaps the regional GDP data released in March.  But while I was away, I got this reply

oia akld 2

It is all very well and good for Treasury to be updating its analysis and advice.  But I asked for what they have already provided, not what they might (or might not) include in future “strategic documents”, such as the next Long-Term Fiscal Statement, which does not have to be published until July next year.

Given that they are not even willing to publish the titles or dates of any documents (whether internal or provided to the Minister) it does raise the question as to what Treasury has to hide.  Given the woeful underperformance of Auckland –  considered in per capita GDP terms – perhaps Treasury is finally awakening to the fact that something is wrong with the Think Big Auckland strategy?  That might be awkward for the government, but isn’t a good basis –  under the OIA –  for withholding material, especially in such a blanket way.

As a reminder, here is how badly Auckland has done

Over time

akld rel to nz gdp pc

And in comparison to the largest cities in other advanced countries

gdp pc cross EU city margins

I’m not sure what Treasury is hiding, or why. Perhaps the Secretary is reacting defensively to my criticisms of his recent speech?  But it was that speech that prompted my original request, to see what analysis lay behind his upbeat claims about Auckland.

As an organization Treasury is better than the standard being displayed here: we see the good side of Treasury again in the recent pro-active release of Budget background papers. It is time for them to reconsider, and to release any analysis or advice they have prepared on the Auckland’s economic performance.  I’ve asked the Ombudsman to review the decision.

Makhlouf again

In almost any well-functioning country, The Treasury should be one of the very best government agencies: a repository of wisdom, experience, rigour, and the skepticism that comes from seeing all too many “bright ideas” put forward over the years.  If the Secretary to the Treasury is going to give public speeches –  and there are reasonable arguments that someone in that role shouldn’t (one doesn’t come across public speeches from the chief executives of MBIE or MFAT, two other major departments) –  we might reasonably expect something judicious and rigorous, and which provides at least some fresh and interesting insights on the issues he is addressing.    It should be a public reflection of the very best of the sort of insight and advice The Treasury is offering their primary “customer”, the Minister of Finance.

As an example, speeches by Ken Henry, the former head of the Australian Federal Treasury, almost always met that standard –  I looked forward to reading them, and expected to see some or other issue or argument a little differently as a result.  It isn’t about whether or not one agrees with the points the speaker is making – often one learns most from thinking hard about cases made by able advocates of an alternative view –  but about the quality of what is on offer.

The speeches of our current Secretary to the Treasury simply don’t reach that standard.  On Thursday I wrote about Gabs Makhlouf’s recent speech about disruptive technological change.  Only a true believer can have felt better for reading it –  deriving, perhaps, a sense of validation in having such a senior official, a pillar of the establishment, say it.

Perhaps more disconcerting was Makhlouf’s speech earlier this week titled (apparently with reference to the title of Oscar Wilde’s famous play, The Importance of Being Earnest: A Trivial Comedy for Serious People) The Importance of Being Auckland: Strengths, Challenges, and the Impact on New Zealand, delivered to something called the “Committee for Auckland Advisory Group Summit”.

It is a disappointingly poor speech –  I wish I could say I was surprised, but I wasn’t really.  It was a piece that combined lightweight analysis, (very) selective choices of evidence, and a use of rhetoric that might have been becoming from a Cabinet minister pursuing voters, but should have been beneath a senior public servant.  It was all too similar to previous speeches: not just one bad example amid an otherwise solid record.

There were three main parts of the speech.  I don’t have anything to say on the material on infrastructure, much of which is simply a list of points from another report.

Makhlouf begins with a celebration, in a section headed “Auckland’s Strengths”.  The text reaffirms Makhlouf’s position as a true believer: a rapidly growing population is apparently something to celebrate, and the cultural/ethnic diversity of the city is “exciting”.  Here is what he has to say

Why do I find this exciting? It’s because high levels of diversity provide dividends including through increases in innovation and productivity.

Auckland’s diversity is particularly critical for our international connections. There’s much more to international connections than trade. It’s the other international flows – flows of capital and people, and the accompanying flow of ideas – which are the key to reinventing trade, and which will lay the foundation for a more prosperous New Zealand in the long-run.

The high number of overseas-born Aucklanders can bring new skills, new ideas and a diversity of perspectives and experiences that help to make our businesses more innovative and productive. And perhaps most importantly, they often retain strong personal and cultural connections to other parts of the world, which opens up, and helps us to pursue, new business opportunities.

Auckland is truly New Zealand’s gateway to the world. It’s not just that there is a big number of companies here doing business internationally. It’s the port and airport linking the country to global markets; and tertiary institutions, researchers and innovators linking us to global knowledge.

Which might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

He might also have linked to the recent presentation by Jacques Poot (in a Treasury guest lecture), in which Poot was keen not to sound very optimistic about just how large those economic benefits of diversity really are, or to the work of Bart Frijns – an (immigrant) professor in Auckland (see last sentence of the extract above) –  whose recent work suggests that on some measures, in some contexts, there may be net costs, not benefits at all.

Of course, one can’t say everything in a single speech, but when a credible case could be made that the Auckland-centred model is in serious trouble, it is bordering on the seriously unprofessional to not even allude to any of these sorts of points, even if only to explain why the Secretary interprets then differently than, say, I might.

So keen was Makhlouf not to undermine his good news creative fiction about the Auckland economy that the one difficulty he does allude to is buried under a different heading “Social Outcomes”.

Let me start with social outcomes. Auckland scores well on quality of life indicators but other measures suggest not everyone is able to enjoy what Auckland has to offer. Social outcomes vary significantly across Auckland, highlighting the potential importance of sub-regional thinking and analysis to lift social outcomes across the board in Auckland.

Issues with the labour market contribute to patchy social outcomes across the city. While Auckland has higher productivity than other urban centres in New Zealand, it also has an underutilised labour force. For example, the five year average unemployment rate in South Auckland is 11.7 percent compared with 6.3 percent for the rest of Auckland and 6 percent for New Zealand overall. That’s the sort of discrepancy that has a real impact on the quality of life of families and communities.

To the first paragraph one can only say “And?”   In what city –  or decent-sized town –  ever did “social outcomes” not “vary significantly”?

Similarly, differences in the unemployment rate across groups within cities will occur everywhere –  if we had the data, I’m sure the unemployment rate would be higher (and probably the participation rate lower) in Porirua than in Karori/Kelburn.  It might be good if were not so, but it isn’t obviously an Auckland-specific issue.   After all, across the country as a whole, the average unemployment rate over the last five years for Europeans has been 4.3 per cent, while that for Maori has been 14.7 per cent, and that for Pacific populations has been 13.4 per cent.  Given that the population of South Auckland is disproportionately Maori/Pacific, the issues in South Auckland seem most likely to be mainly national than (intra-Auckland) suburban.

But there is an Auckland underperformance that might almost escape you if you didn’t read that second paragraph quite slowly and carefully.  The unemployment rate in Auckland is higher than that in the rest of New Zealand.   For a long time, that wasn’t so.

auckland U makhlouf

The chart shows the gap between the unemployment rate for New Zealand as a whole.  Over the history of the HLFS until around 2007, Auckland’s unemployment rate averaged a bit below that of the rest of the country.  There was some clear cyclicality to the gap –  Auckland’s economy/labour market seems to have been more badly hit in recessions (I’ve highlighted the 1991 and 1997/98 recessions) and does relatively better in good times.  In a well-functioning economy, that better performance is what I’d expect.  After all, the Auckland labour market is so much deeper, and more diversified, than that in other centres, that it should be easier for workers and firms to find each other, matching the  skills offered and required, than in a smaller area, typically prone to more idiosyncratic shocks.

But even by the end of the last boom, Auckland’s advantage seemed to be fading.  And in every single quarter since the start of 2007 –  nine years now –  Auckland’s unemployment rate has been above that in the country as a whole.  The gap is slowly closing again –  but the operative word is “slowly”.  It is a quite stunning example of the (frankly rather surprising) extent of Auckland’s economic underperformance.  It certainly has “social” implications for the people adversely affected, but make no mistake, it is a striking economic issue.    And with barely a mention by the government’s chief economic adviser in a speech on the importance of Auckland’s economy.

I was going to write quite a bit about the second half of Makhlouf’s speech, on house prices and housing supply.  I have lots of scrawls in the margins of those sections, about both substance and style.    Like Graeme Wheeler, Makhlouf appears to have it in for “speculators”.  And I’m sure, for example, that Makhlouf’s comments that central and local government have “been working well together” in “addressing the housing challenge” must be a great comfort to those priced out of the market by the combination of central and local governments rules and policies.  They are probably more interested in outcomes –  which are shockingly bad – than in knowing that the bureaucrats are working well together.

But perhaps the line that caught my eye most was one that Treasury consciously chose to highlight on its Twitter feed: “Auckland NIMBYism hurting New Zealand”.    Perhaps “NIMBY” is a convenient shorthand in the popular press, and among sloganeers.  One might have hoped that the Secretary to the Treasury might have avoided clearly pejorative labelling of people, whose interests stands in the way of his preferences.  There is no analysis –  even by way of allusion – to the fact that in most new residential developments, private covenants (voluntary contracts) provide exactly the sorts of binding protections (and more) that residents of Orakei or Epsom might be looking to councils for in the current Auckland debate.  Reasonable people might differ on where the lines should be drawn, and quite which existing features of communities should be able to be protected.  But to simply decry the interests of property owners seems closer to demagoguery than to detached analysis and insightful policy advice.  It also occurred to me to wonder quite what the longstanding residents and property owners in existing suburbs might make of someone fairly fresh off the plane from the UK telling them how their suburbs should be changed.  I’m quite sure that Makhlouf has the best interests of New Zealanders at heart, but when you are a newly-arrived outsider, sometimes you need to be conscious of quite how you sound, and quite what your stake is in the country you are advising on, relative (say) to those who have lived their whole lives in Auckland.

In closing his speech, Makhlouf offered this odd paragraph:

The famous photographer Sir Cecil Beaton once appealed to people to “be anything that will assert integrity of purpose and imaginative vision against the play-it-safers, the creatures of the commonplace, the slaves of the ordinary.”   From what I can see, many Aucklanders are heeding that call in their own way.  And having the right infrastructure, supported by economic incentives that send clear, efficient and effective signals, will enable Aucklanders to continue to exercise their dynamism and diversity and to do the best that they can do.

When I looked up Beaton, his seemed a somewhat reckless life, ending in financial stress.  Perhaps it is the style the dreaded “speculators” emulate –  but then we already know Makhlouf disapproves of them.  Surely most people, in most places, in most times, crave the security of a home, an income, a family, the commonplace things that mostly conduce to sustained happiness (and prosperity for that matter). Risk is, of course, part of life, and many of the great financial successes involved some mix of great risk and great luck.  But we seem to be in an upside-down world in which a Secretary to the Treasury (self-described cautious guardian of the government’s finances) scorns the natural concerns of the vast mass of people.  One might add, that  –  with the full support of the Treasury –  we’ve been eschewing the commonplace, and the “play-it-safers” in our Think Big policy for Auckland over the last 25 years.     And there is little good –  for the vast mass of Aucklanders (and New Zealanders) – to show for it.

Makhlouf quotes various English figures in his speech.  I’ve always been quite keen on Kipling.  In his famous poem “If” comes the lines

If you can make one heap of all your winnings
    And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
    And never breathe a word about your loss;
you’ll be a Man, my son!
I’m not sure that giant policy experiments, showing no sign of paying off 25 years on, are really quite what Kipling had in mind.  But I’m sure that simply ignoring the signs that things aren’t going well wasn’t.
New Zealanders deserve a great deal better from the Secretary to the Treasury.