Rygbi

My 12 year old daughter has been teaching herself Welsh –  a recent birthday present was a good Welsh-English dictionary – we’ve recently been watching a rather bleak Welsh detective series together, and this year she has also become (unlike her father) a bit of a rugby (“rygbi” in Welsh apparently) fanatic so I promised her that if Wales made the World Cup semi-finals I’d do a Welsh-themed post.  That’s economics rather than rugby though.

One of the themes of much modern economics literature is things about cities, location, agglomeration, distance and so on.  According to Eurostat data, London has the one of the very highest GDPs per capita of any region in the EU¹.  The two largest cities in Wales –  Cardiff and Swansea –  are each less than 200 miles from London.  And yet estimated GDP per capita in Wales is only about 40 per cent of that in London and 75 per cent of that in the EU as a whole (71 per cent of the UK as a whole).  Productivity in Wales (GDP per hour worked) might be about that of New Zealand.

And yet Wales has much the same policy regime as London.  Much the same regulatory environment, same income, consumption, and company tax rates, same currency (and interest rates and banks), same external trade regime, same national government (and as I understand it the Welsh regional administration doesn’t have control of very much), and the same immigration regime.  Most of the people are native English speakers (even many of those who also speak Welsh).

Huge populations are free to move to Wales.  There are 66 million people in the UK who face no regulatory obstacles to doing so.  They could set up firms in Wales.  So –  for the moment –  could people in most of the EU, and all legal migrants to the United Kingdom (with no particular ties to any other UK region) could move to Wales.  It isn’t open borders but in practical terms it is much closer to it than almost any sovereign state.

And yet……by and large they don’t.  The population of Wales today is only 50 per cent larger than it was in 1900 and only about 5 per cent of the population is born outside the British Isles.  Here is the share of Wales in the total population of the Great Britain.

wales 1

Wales used to have things going for it: plenty of room for sheep (wool and meat were two of our big exports to the urban population of the UK), the world’s largest slate industry,  and coal (lots of it) and the associated iron and steel (the latter booming from the start of the 20th century) industries.

But not, it appears, very much at all these days.   There is some tourism, some electricity exports (to the rest of Britain) and, of course, a variety of other industries.  It all generates tolerable living standards. albeit supported by significant inward fiscal transfers.  Unemployment is low, and (by New Zealand or London standards) house prices are fairly low –  Swansea (second biggest city) has median house prices around $350000.  But people in the rest of the UK, migrants to the UK, and –  importantly – actual/potential entrepreneurs don’t seem to find it terribly attractive.  Perhaps it would be different if it were an independent country –  the Irish company tax regime is apparently eyed up by some. But as it isn’t, one gets a cleaner read on the pure economic geography effects.

It is interesting to wonder what might have happened to Wales if it were an independent country and, all else equal, had had control of its own immigration policy.  What if they’d adopted a Canadian or New Zealand immigration policy –  or something even more liberal –  20 years ago?   Since there are plenty of places in the world much poorer than Wales (or New Zealand), and Wales itself is a small place, presumably they’d have had no trouble attracting people –  at least modestly qualified people from places poorer, or less safe, again: China, India, South Africa, the Philippines (to name just four significant source countries for New Zealand).   Even if many of the migrants initially saw Wales as backdoor entry to England, if New Zealand’s experience is anything to go by (become a citizen here and you can immediately move to much wealthier Australia) most wouldn’t.  Presumably the Welsh building sector would have been a lot bigger, but it isn’t obvious that many more outward-oriented businesses would have chosen Cardiff or Swansea over London or Paris or Amsterdam, even with the rest of Europe more or less on the doorstep.

Tasmania is another interesting example.  Like Wales, it shares essentially the same  policy regime (taxes, currency, external trade, most regulation) with the sovereign country it is a part of, in this case Australia.  There is unrestricted mobility for people within Australia, and external migrants –  including those from New Zealand –  can as readily settle in Tasmania as anywhere else in Australia. Hobart always looks like a really nice place.

Oh, and the population share of the total country is also small.  But the fall in the population share has been much sharper than for Wales.

wales 2

People –  and firms –  could choose to go to Tasmania but, by and large, they choose not to.  It is, after all, quite a way from Melbourne, and you can neither drive nor take a fairly-speedy train.   And unlike Wales, Tasmania is close to nothing else: Cardiff is much to closer to Dublin, Paris, Brussels, Amsterdam or even Frankfurt than Hobart is to Adelaide or Sydney.  Perhaps even more than Wales, the economic opportunities seem to be mostly in the natural resources (and no big new developments there in recent decades) and a few niche industries that might be there because the founder happens to like living there.   GDP per capita in Tasmania is just under 80 per cent of the whole of Australia average.

One could also do an interesting thought experiment as to what might have happened if Tasmania had been an independent country and had its own immigration policy.  Even had they just adopted the same policy as Australia did, almost certainly their population today would be materially larger than it now is (Tasmania now has three times the population it had in 1900, while Australia as a whole has more like seven times the 1900 population).  Being even smaller than Wales they’d have had no trouble attracting people.   But –  even more so than for Wales –  you are left wondering how many more outward-oriented businesses would have chosen to stay based in little Tasmania (few enough outward-oriented businesses are based in even the big Australian cities).

Are there lessons for New Zealand.  Our population has increased almost sixfold since 1900. In that time, we’ve fallen from (roughly) the highest GDP per capita anywhere to somewhere badly trailing the OECD field –  and maintaining even that standing only by work long hours per capita.

wales 3

It looks great to the strain of “big New Zealand” thought that has been around since Vogel at least.  But to what end, for New Zealanders?

Think of one last thought experiment.  What say we’d agreed a completely common immigration policy with Australia and held that in place for the last few decades?  More or less exactly the same number of people would probably have come to Australasia in total, but what do we supposed would have been the split between Australia and New Zealand.   It seems only reasonable to assume that a much larger proportion would have gone to Australia (than did).  After all, even those who went to Australia had a choice of Tasmania if they wanted cooler climes and a slightly slower pace –  but, to a very large extent they didn’t.  And we know what New Zealanders themselves –  who had ties to this physical places –  were choosing over the last 50 years, as hundreds of thousands left for the other side of Tasman.

And had that happened –  and perhaps New Zealand’s population was 3 million not almost 5 million –  is it likely that any fewer market-driven outward-oriented businesses would be based here than are today.   The land, the water, the minerals and the scenery would all still be there.  And how much else is there?

As a best guess, if by some exogenous policy intervention there had been another two million people –  of moderate skills etc – put in Wales, or another half million in Tasmania, it is difficult to have any confidence that average real incomes in either place would be any larger than they are now.  Most probably, they’d be worse off –  as say, the residents of Taihape probably would be if some exogenous intervention put another 5000 people there.  Having put an extra couple of million people in New Zealand – more remote than Tasmania, much more remote than Wales –  and not seen the outward-oriented industries, based on anything other than natural resources growing – we might reasonably assume we (New Zealanders) are poorer as a result.

Smart people are almost always a prerequisite to high incomes, but globally the top tier of incomes seems to focused on industries located in or near big cities, near big population concentrations, or on (finite) natural resources.   You can earn a very standard of living from finite natural resources –  it is the edge Norway has over the rest of Europe – but it looks pretty insane to confuse the two types of economies (when you have no realistic hope of transitioning from one to the other) and spread natural resource based wealth much more thinly by using policy to actively encourage rapid population growth.

From a narrow economic perspective –  and it isn’t of course, the only one the matters – the best thing for people from a lagging economic performance area is to leave.  It is what people did from Taihape or Invercargill, from Ireland for many decades, and (more recently and on a really large scale) what people did from New Zealand as a whole.   Governments can mess up that picture. In a way the Welsh are fortunate to have a rugby team but not an immigration policy, at least had they had the misfortune to have had policymakers like New Zealand’s.

 

  1.  Technically Luxembourg tops the table, but since a very large chunk of Luxembourg’s workforce doesn’t live there the numbers aren’t particularly meaningful (sensible comparisons need to take account of all the  – typical modest-earning –  support services populations need/use where they live).

Productivity (lack of it) and other things

When I was writing some comments last week on Reserve Bank Deputy Governor Geoff Bascand’s speech in Australia I was playing round with some comparative data and stumbled on this chart.

nzau 1

Over the entire period (since 1991) real GDP per capita has grown at exactly the same rate in Australia and New Zealand.   And I haven’t even cherrypicked the starting point: my chart starts when the SNZ quarterly GDP per capita series starts.

Of course, even in 1991 we were materially less well off than Australians, but should we take some comfort from having kept pace over now almost 30 years?  I’d say not.

Here’s why.   Look at the employment rates in the two countries

nzau2

You might be among those who think the more employment the better but (a) working is a cost (an input) to the employee and (b) wouldn’t it have been much preferable, even if you think higher employment rates are some great thing, for it to have resulted in more growth in average per capita income than in the country where employment rates didn’t increase as much?   Australia’s unemployment rate is a bit higher than ours, and that is a mark against them, but it is only a small part of the difference in the employment rates.

And here is a chart that is perhaps even more stark.

NZau3

Across the whole population, the average Australian is now working 5 per cent more hours than in 1991, while the average New Zealander is working 22 per cent more hours.

And yet the bottom line, growth in average real output per capita, is the same.

The difference is productivity – or, more specifically, in our case the lack of anywhere near enough productivity growth.

I’ve got other things on today, so that is it for original content.  But earlier this morning I was rereading my submission to the Reserve Bank consultation on the Governor’s plans to require large increases in bank capital.   There wasn’t anything in it I would now resile from.  I also skimmed through former colleague, and expert in bank capital modelling, Ian Harrison’s papers (here and here) and I doubt he would resile from anything in there.

But what remains striking is how little engagement there has been from the Governor on his proposals.    He has only given four on-the-record speeches this year, not one of which has involved a serious sustained attempt to make his case, let alone engage with alternative perspectives.  The only attempts I’ve seen to respond to alternative perspectives seem to simply involve suggesting that anyone who disagrees with him is somehow bought and paid for, and therefore their views aren’t worthy of serious notice or scrutiny.

At one level, it shouldn’t be surprising, given Orr’s personality and intolerance of challenge or disagreement –  and the fact that, formally at least, he doesn’t have to convince anyone but himself (since he is prosecutor, judge, and jury in his own case, and there are no rights of appeal). But as matter of good governance, in a democratic society, it reflects very poorly on him, on his handpicked senior managers, and on the Bank’s Board and Minister of Finance who are paid to hold the Governor to account but in fact act as if there role is to simply get out of the way and let the Governor get on with it, poor as the process and substance have been, poor as Governor’s conduct increasingly seems to have been.

And so I’ll leave you with some of the unanswered points from my submission

An unbiased observer, looking at the New Zealand economy and financial system, would struggle to find a case for higher minimum capital ratios.   Among the factors such an observer might consider would be:

• The fact that the New Zealand financial system has not experienced a systemic financial crisis for more than hundred years (and to the extent it approximated one in the late 1980s, that was in the idiosyncratic circumstances of an extensive and fast financial liberalisation which left neither market participants nor regulators particularly well-equipped),

• Our major banks – the only ones that might pose any serious economywide risks – come from a country with very much the same historical record as New Zealand,

• Despite very rapid credit growth in the years prior to 2008 (increases in the credit to GDP ratios among the larger in the advanced world, spread across housing, farm, and other business/property lending), and a severe recession in 2008/09 and afterwards, the banking system emerged with low loan losses,

• Since then, banks have not only increased their actual capital ratios (and been required to calculate farm risk-weighted assets more stringently) but have also substantially improved their funding and liquidity positions (under some mix of regulatory and market pressure).

• Over the decade, bank credit growth (relative to GDP) has been pretty subdued and there has been little or no evidence (in, for example, Reserve Bank FSRs) of any serious degradation of lending standards.

• The balance sheets of the large banks remain relatively simple, and there has been no sign (per FSRs) of the sort of financial innovation that might raise significant doubts about the adequacy of existing models.

• In terms of the wider policy environment, government fiscal policy remains very strong, we continue to have a freely-floating exchange rate, and there has been neither legislation nor judicial rulings that will have materially impaired the ability of banks to realise collateral.

• And the Open Bank Resolution option for bank resolution has been more firmly established in the official toolkit (note that if OBR were fully credible then, in the absence of deposit insurance, there would be little case for regulatory minimum capital requirements at all).

• And repeated stress tests –  over a period when the regulator had no incentive to skew the tests to show favourable results –  suggested that even if exposed to extremely severe adverse macro shocks, and associated large price adjustments for houses, farms, and commercial property, not only would no bank fail, but no bank would even drop below current minimum capital requirements.

• Consistent with this experience – also observed in Australia, the home jurisdiction of the parents of our major banks – the major banks operating here continue to have strong credit ratings (consistent with a very low probability of default), and the ratings of the parent banks are even higher.

• There has been no change in the ownership structure of our major banks, or in the implied willingness of the Australian authorities to support the (systemically significant) parents of the New Zealand banks were they ever to get into difficulty.

Add into the mix indications that New Zealand banks CET1 ratios, if calculated on a properly comparable basis, would already be among the highest in the advanced world –  in a macro environment with more scope for stabilisation (floating exchange rate, strong fiscal position, little unhedged foreign currency lending) than in many advanced countries –  and there would be a fairly strong prima facie case for leaving things much as they are.

But the Reserve Bank’s consultative document – and associated material, including speeches and interviews – engages substantively with almost none of this context.

And

It is grossly unsatisfactory that throughout months of consultation the Bank has made no effort to illustrate how its proposals for minimum CET1 ratios and the associated floors around the calculation of risk-weighted assets, compare with those planned by APRA for the Australian banks.

Such an exercise should have been relatively straightforward, especially if the Reserve Bank had done what most New Zealanders might reasonably have expected, and worked closely together with APRA in formulating its proposals.  Of course, New Zealand is a sovereign nation and the Reserve Bank (regrettably) has final decision-making powers in New Zealand but:

• APRA has a considerably deeper pool of expertise, including at the top of the organisation, than the Reserve Bank of New Zealand,

• The nature of the risks in the two economies and markets is quite similar (including similar legal institutions, and similar housing markets),

• If anything there is a case for thinking that APRA minima would be ceilings below which New Zealand requirements for our large banks should be set (since we have the benefit of strong parent banks, and well-regarded supervisor of those banks, whereas the parents  – and parents’ supervisors – themselves are on their own, and we have also chosen to have the OBR as a frontline resolution option),

• For the institutions that might pose potential systemic issues in New Zealand, any substantial increase in capital requirements can reasonably be seen as an attempt to grab group capital for New Zealand.  Why not work these things out together?

The onus should, surely, be on the Reserve Bank of New Zealand to demonstrate – make the case in detail – why the New Zealand subsidiaries of Australian banks should be subject to more onerous capital requirements than the parents, and banking groups as a whole, are subject to.  But not once has the Reserve Bank attempted to make that case.

I ended

New Zealanders deserve better than they have had in the poor process and weak substance that together made up this consultation.

To which one can only add that the repeated reports  –  some of things in public, others less so –  of the way the Governor has handled himself, his own conduct, through this episode are deeply disquieting.  There is little sign of the sort of character and temperament we should expect from a senior public servant exercise so much barely-trammelled power.  The Minister of Finance may declare that he has full confidence in the Governor.  The public should not, and if the Minister continues to sit on the sidelines doing nothing but expressing full confidence that should probably raise more questions about the Minister himself.

Meanwhile, one wonders what our new Australian Secretary to the Treasury makes of her first encounters with national policymaking and advice.

New Zealand and Australia

Yesterday’s post unpicked some of Reserve Bank Deputy Governor Geoff Bascand’s speech in Sydney earlier this week.  As I noted, the goal of the speech seemed to be to leave readers with a sense that there really were good grounds for New Zealand to impose materially more onerous core capital ratios on locally-incorporated banks (recall that none of these requirements apply to any other lenders, banks or otherwise) than those imposed in Australia.   The gist of the case was, we were told

Our conservatism, relative to Australia, in our bank capital proposals reflects the higher macroeconomic volatility that we have endured, as I pointed out earlier.

Even over the nearly 30 years Bascand asked us to focus on, this wasn’t a very convincing argument.

As I pondered further the claim that New Zealand was exposed to materially more macroeconomic volality than Australia –  and the differences have to be “material” to support the material differences in proposed core capital requirements –  and conscious of the huge and wrenching Australian crisis of the 1890s, I’d just decided to look at a rather longer run of data when a reader, an academic economist, sent me an email making exactly the same point, and conveniently drawing my attention to this chart (from the Phil Briggs NZIER compilation of charts and text in New Zealand economic history).

briggs.png

It uses smoothed data because the estimates for the earlier decades, for both countries, are incredibly noisy.

But, if anything, over that 150 years, the Australian experience was more volatile than that of New Zealand.    Their financial crisis was much more severe than ours in the 1890s, and their experience of the Great Depression (including in the financial sector) is generally regarded as having been worse than ours, as examples.

You’ll recall that the Governor has chosen to attempt to calibrate his capital requirements so that, in principle, New Zealand experiences a financial (banking) crisis no more than once in 200 years.  We don’t have 200 years (of data, or experience) for New Zealand –  although the Australian data start from 1820 –  but if you want to mount arguments that we are (and will be) exposed to materially higher macro volatility than another country, it surely is only reasonable to look at as long a history of those two countries as one can reasonably get.  Unless, that is, one is using statistics/history for support –  for the boss’s whims –  rather than for illumination.

One can always discount history –  this, that or the other thing will always have been different, even if human nature isn’t –  but to mount a major policy case on a carefully chosen subset of history seems more akin to propaganda than to good policy process.

Or here is another chart.  Bascand included in his speech a chart on New Zealand GDP since 1965.   Here are the unemployment rates for the two countries since 1966 –  the official Australia data starts then and our series was backdated (from when the HLFS started in 1986) by Simon Chapple.  Not 200 years of data, but more than 50.

U rates long-term

Do those look like two economies prone to materially differing degrees of macroeconomic volaility?  If anything, Australia might have been a bit more volatile (over this particular period).  Peak unemployment rates in Australia in the Great Depression also appear to have been higher than those in New Zealand.

But I don’t want to mount an argument that Australia is more exposed to macroeconomic volatility than New Zealand is.   If anything, rather the contrary.  Over long periods, New Zealand and Australia have been two of the more similar countries on earth.  The modern countries emerged at much the same time, for almost all their histories they’ve had much the same exchange rate regimes, they’ve had strongly overlapping banking systems, they’ve been heavily dependent on foreign capital (especially in the development phase), they liberalised again at much the same time, they both run public debt sky high at much the same times, they both turned fairly inwards for a time, they’ve had pretty similar migration policies, they’ve mostly had very similar terms of trade cycles, and they’ve both had the rule of law (and similar legal systems) and democratic government throughout their modern histories.  They’ve been tolerably well-governed, tolerably successful in economic terms (Australia more than us in recent decades), with a high degree of financial stability in both countries for now well over 100 years –  with the sole exception of the brief period of shared craziness immediately after the 1980s liberalisation when no one (regulators, lenders or borrowers) really knew quite what they were doing.

2025 TOT

So if Adrian Orr and Geoff Bascand really want to mount a case for putting much more onerous capital requirements on in New Zealand than in Australia, it is simply absurd and untenable to  mount it on the basis of some intrinsic greater level of economic risk in New Zealand than in Australia.  It hasn’t been so in history, and they’ve not even sought to advance an argument for why it might be so in future.

Perhaps the Australians really have it wrong and superior wisdom rests with Messrs Orr and Bascand.  But, frankly, it seems unlikely.  Not only are the key Australian officials much more experienced in these matters than ours, and they have the additional worry that there is no prospect of parental support for their banks, but it is the New Zealand proposals which appear to put us out of line with (above) international benchmarks, despite the impressive long-term track record of financial stability here, the floating exchange rate regime, and a now well-established history of keeping governments out of credit allocation.

More generally, in banking systems that have so much in common, in economies with so much in common, surely we should have looked to our authorities to have worked closely with the Australians to have developed as common a regime as possible, recognising (inter alia) that if and when anything really goes wrong with any of the big 4 the problems will be trans-Tasman in nature and are likely to be resolved –  and be best resolved –  at a trans-Tasman political level.    I’m not suggesting Australian officials and politicians have our best interests at heart.  Both sides need to look after their own national interests, but those interests can be protected –  probably better protected –  by working closely together, on as common a framework as possibly, consistent with maintaining/pursuing an unquestionably strong banking and financial system.

As for New Zealand citizens and voters, we really should be demanding much higher standards from our top central bankers, who seem unable or unwilling to answer simple questions and challenges about what the Governor is proposing, or to do so in ways that are straightforward and reasonably defensible  That really should worry Grant Robertson, who is responsible for these men and for the institution.

How unusual is Australia’s record without “recessions”?

Over the weekend a reader posted a link to a blog post by a couple of researchers at the St Louis Fed.  People often point out –  sometimes to boast (if you are an Australian politician), sometimes just out of curiosity –  that Australia has gone 28 years with “a recession”, where “recession” here is defined by that convenient (not overly helpful) benchmark of two successive quarterly falls in the level of real GDP,

As a definition of recession it seems to serve mostly because there is no better definition in general use. In the US, there is the NBER business cycle dating committee, which draws on a range of different indicators to reach a judgemental determination of the dates of recession, but those dates are typically only available with a lag, and there isn’t anything similar in most other countries (including New Zealand).

The rather obvious, but all too frequently forgotten, point that the St Louis Fed observers are making is that any sensible interpretation of GDP growth has to take account of the rate of population growth.  There are countries in eastern Europe where the fall in population has been large enough that one could see GDP falling every quarter and yet the average citizen would still their per capita GDP rising.  Even setting aside that extreme, there is a big difference between, say, Germany (with almost no population growth this century, Japan which has had a slight fall in its population in the last five years, and New Zealand with population growth in excess of 10 per cent over the same period.     Australia is another advanced country with rapid average population growth.

As the St Louis Fed researchers point out, once you focus on per capita real GDP the chart for Australia looks a bit different

st louis fed 1

On the “two consecutive negative quarter” rule, Australia would have had three (fairly mild) ‘recessions’ in the period since the end of the early 1990s recession.

In case you are wondering, New Zealand (using the average of our two GDP measures) would also have had three “recessions” (rather more severe) on this per capita metric: 1997/98, 2008/09, and 2010.

It is still fair to note that even on a per capita basis, Australia did not have a recession in real GDP in 2008/09.  As far as I can see that makes it the only OECD country to have avoided two consecutive quarterly falls in real per capita GDP over that period.

But (as the NBER business cycle dating methodology recognises) simply looking at GDP isn’t a particular sensible basis for assessing whether (more broadly) things are going backwards.  Personally, I find looking at the unemployment rate quite useful.   All else equal, if the unemployment rate rises the economy is generating fewer new jobs than the increase in the number of people ready and willing to work.  As with any measure there is some month to month and quarter to quarter “noise” (often just measurement challenges), but if the unemployment has been rising for a couple of quarters (especially in a climate where the long-term trend is downwards) that too is probably a suggestion of an economy going backwards where it counts.

Here is the quarterly series for Australia’s unemployment rate back to the early 1990s.

Aus U to sept 19

Over that period there were seven episodes where the unemployment rate rose for two or more consecutive quarters.  Most of the increases were small, but there were three episodes where the increase was 1 percentage point or more.

Over the same period, New Zealand had four episodes where the unemployment rate rose for two or more consecutive quarters, two of them by a percentage point or more.  The UK and the USA had three and two episodes respectively –  including the very sharp increase in the US unemployment rate at the time of the 2008/09 recession.

It isn’t even as if the extent of the rise in the unemployment rate in Australia over 2008/09/10 was unusually small.  Australia’s unemployment rose less than in the other Anglo countries, but on OECD numbers there were about 10 European countries where the unemployment rate rose by a similar amount (mostly) or even less than in Australia.

Another variable I find worth looking at for Australia is a measure of real income that takes account of terms of trade fluctuations (for commodity exporters much of any adverse shocks show up in price rather than volume, whereas for manufactures and services exporters the balance is the other way round).

This is a chart of real net national disposable income per capita series, produced by the ABS.

RNNDI to 19

It really quite a startling record of steady growth in this series from about 1993 to about 2008.  But the period since then has been quite different (a point that various of the more downbeat domestic Australian commentators often point out – real Australian incomes have not been doing well).  There have been seven periods since 2008 when RNNDI per capita has fallen for two or more consecutive quarters.    Somewhat to my surprise, when I looked at the closest New Zealand series there had only been two such falls since the early 1990s.   The fall in Australia’s per capita RNNDI over 2008/09 was a actually larger than the fall in New Zealand’s per capita real GDI measure.

The St Louis Fed researchers ended their post this way

So should we use Australia as a benchmark when thinking about possible duration of expansions? If so, we have to take it with a grain of salt because looking at just GDP growth doesn’t paint the whole picture. It is important to look at per capita GDP growth to have a broader view.

Their goal wasn’t to bag Australia but to put its experience in some perspective, specifically the importance of taking account of population growth trends when looking at GDP numbers and headline about presence or absence of GDP “recessions”.

This post is in much the same spirit.   I really like Australia and can’t stand the “chip on our shoulder” too many New Zealanders seem to have about the place.  It is different from most other OECD countries –  heavy resource dependence does that, as does rapid population growth – and that needs to be taken into account in comparing cyclical economic performance.      Through some mix of good luck and good management –  mostly the latter in my view (including choices around a floating exchange rate, low and stable public debt, and keeping the state out of the housing finance market) Australia has avoided anything like the worst downturns (whether per capita GDP or unemployment) seen in some other OECD countries (eg the US and –  even more savagely – a number of euro-area economies).  But it is a normal economy, it has upswings and downswings: if no one else the unemployed (and the underemployed) know it (relative to, say, the end of 2007, the median OECD economy now has an unemployment little changed from then, while Australia’s unemployment rate is almost 1 percentage point higher than it was then).

Incidentally, and while on the topic of per capita GDP growth, I had a look at the latest annual growth rates for New Zealand and the 30+ countries for which the OECD has data.  Despite all the talk  –  including from the PM –  about New Zealand doing better than its peers, our real per capita GDP growth in the year to the June quarter (or four quarters on four quarters) was just lower than the median country in the sample (and quite a bit below the unweighted averages of those countries).  Better than Australia over that year (see the first chart) but then –  as this post and the St Louis Fed one help illustrate –  Australia is no stellar performer.

 

Why does good government matter?

That was the title of a speech Jacinda Ardern gave in Melbourne a couple of weeks ago.   For the short trip to Melbourne, the Prime Minister had eschewed commercial flights and taken an RNZAF plane instead, only to have the plane break down.  It later emerged (page 11) that her office knew how badly this bit of New Zealand’s government was run

757.png

There must have been some wry chuckles in parts of the Australian government and public sector.

The “progressives” who turned out to hear Ardern (it was an ANZSOG event, so I presume lots were public servants and academics) appear to have loved her.  Stuff reported that

The event on Thursday night attracted more than 2000 people. Ardern appeared to rapturous applause, and was told that she had put fire in the belly and power in the hearts of Australians.

In The Guardian one particular left-wing Australian academic, a former adviser to Julia Gillard, lost all sense of reason and perspective, claiming Ardern as “one of the world’s great leaders”, and hankering for something different, for New Zealand type politics and reform.

In more recent times it seems that for every policy success achieved by New Zealand, Australia has suffered an equal and opposite failure.

Which is, no doubt, why so many hundreds of thousands of New Zealanders have migrated to Australia and so few Australians to New Zealand (even though we make it easier for them to come, than it is for us to settle in Australia) and why when our two countries were once more or less economically level-pegging, Australia is now so much richer and more productive than New Zealand is.  Don’t take it from me: as Australian Labor MP Andrew Leigh put it in his recent article, productivity makes a real difference, and creates real opportunities and choices.

For a time there was a strange phenomenon whereby people on the right in Australia tried to talk up John Key and Bill English as great leaders and economic managers (mostly, it seemed, in reaction to people they didn’t like in Australia –  whether Rudd, Gillard, Abbott or Turnbull).  Curiously, this particular left-wing academic manages to embrace that strange line as well –  Jacinda Ardern is great and so was John Key (“exceptional leadership”).  Going by results, could we perhaps trade these stellar figures for someone Australians think is less impressive, but who might actually address some of the serious New Zealand problems and failures?

But the real point of this post was about the Jacinda Ardern’s text.   When I first heard the title (“Why does good government matter?”) my immediate reaction was along the lines of “how would she know?”, but I guess it is possible to recognise what good government might be even if, as a serving Prime Minister, you aren’t presiding over such a beast.   A good start might be recognising that as Prime Minister you might perhaps be thought of as chief executive of the government but not –  contrary to the PM’s suggestion in her text –  of “the country”.

I’d have thought the question of why good government matters was pretty straightforward.  Governments exercise enormous power –  actual and potential (the latter especially in a country like New Zealand with few formal checks and balances) –  take an enormously large share of our incomes (equal to more than 30 per cent of GDP), and any agency that powerful needs to be kept in check, and we need assurances that those in charge of the goverment are operating efficiently, effectively, compassionately, honestly, openly, knowing their own limitations, and so on.    Good goverments can do some good.  Bad governments can be incredibly dangerous and damaging.  Look, after all, at the productivity or housing records in New Zealand –  or at the 10 per cent of working age adults living on welfare.

But there is little sense of any of this in Jacinda Ardern’s speech.  I guess she is a socialist –  former president of the International Union for Socialist Youth –  speaking to an audience of people with pretty similar beliefs about the desirability of a big and active government, with little emphasis on how –  time after time –  governments mess things up.

Ardern’s imperial mindset is on display early in the speech

Good government matters, because government affects everything.

Breathtaking.  The love of husband for a wife (and vice versa).  Of a parent for a child?  Our core beliefs –  those under the label of religion and others –  that shape what we value?   Friendships?  Whether or not the All Blacks win the World Cup?

I suppose you could mount a defence of the Prime Minister along the lines of bad governments can interfere even in these things, but there is not even a hint of that in her address – no sense at all of the appropriate limits of government or of the failures of even the most capable and well-intentioned governments.    In fact in the very next sentence she – I guess she is a Socialist –  goes on to suggest that this “government affects everything” line is something “we” (she and the smart active government types) “perhaps take for granted”.  She tells us, quite seriously, that she was “gutted” that an old school friend had no interest in politics: but then Ardern has never known anything but politics, and that simply isn’t (fortunately) the case for most people.   But she really wants to a better class of citizen to be worthy of people like her.

She goes on with unsupported stuff

Around the world, democratic values and institutions are under threat in a way that many of us never expected to see in our lifetimes.

It would perhaps be good if she were a bit more specific.   Perhaps she had the PRC in mind, and the way she and her colleagues repeatedly defer to PRC interests and pressures, allow PRC regime/Party-affiliated individuals to serve in our Parliament?  But I’m guessing not.

Perhaps she isn’t too keen to Vladimir Putin (neither am I) or Viktor Orban (not ideal either) but most adults are old enough (“our lifetimes”) to remember when these places were far far worse.   She surely can’t mean Brexit –  which was, after all, the choice of the British voters in a hotly-contested energised referendum?   And yet I fear she might, because in the next sentence we read

Nationalist sentiment that closes off the possibility of countries working together is surging.

Except that it doesn’t, does it.  Free and independent nations often choose to work together on specific items of mutual interest (eg no sign of the UK pulling out of NATO).  Aren’t Australia and New Zealand proudly independent countries –  doesn’t the PM tell us at every opportunity about her “independent” foreign policy? –  and yet we work closely together and are still able to disagree, and not subsume ourselves in one combined “New Australasia”.

Strangely, in her paean to good government, the Prime Minister talks of how

Norms that we in New Zealand and Australia take for granted – the rule of law, the peaceful transfer of power, freedom of expression – are being challenged in new and more explicit ways.

Must have been the PRC she was talking about again surely? But I guess not.

I’m old enough to remember when military coups in various African and Latin American countries were the regular fare on Morning Report, and when from the Fulda Gap eastwards few had the benefit of the rule of law, freedom of expression, and Party rule was something akin to the end of history.    Things are better now in so much of the world.  And 23 Democrats are lined up across the political spectrum to try to defeat Donald Trump in an open and contested election.

But she also mentioned “freedom of expression” –  the same Prime Minister whose government is beavering away on plans to restrict that freedom in New Zealand, whose government made mere possession of the manifesto of Brenton Tarrant an offence punishable by many years of imprisonment.

To this point she seemed to be merely warming up with some generic tropes for his left-wing audience.  And then it was into the red meat with a strong denunciation of the reforms of the 1980s and early 1990s –  all this from a Prime Minister of the same party that did many of the reforms.

In many countries, while the very wealthiest have grown consistently wealthier, the rest have seen little or no real rise in their incomes or their living standards – over decades.

Inequalities that deepened with the great deregulating reforms of the 1980s and 90s have become a permanent feature of these economies – not a brief moment of pain.

That is certainly the case in New Zealand.

Except that very little of that stacks up against the evidence.  In New Zealand wages have been rising faster than the capacity of the economy to pay (growth in nominal GDP per hour worked), income inequality hasn’t widened for decades, and to extent there have been issues in New Zealand they have to do largely with housing –  where successive governments have presided over grossly over-regulated urban land markets.

And look at her try to distance herself from and disown all sorts of reforms  (notice that “said to”)

Starting in 1984, through to the 1990s, we removed regulations that were said to hamper business, slashed subsidies, transformed the tax system, dramatically cut public spending and massively reduced welfare benefits paid to the sick, those caring for children and the unemployed.

Now we can argue whether those regulatory reforms were necessary, but regardless the numbers speak for themselves.

And yet she shows no sign of even understanding the numbers, repeating the same line she took into the 2017 election, claiming that in aggregate the economy did well, but the “right” distribution didn’t happen, as if oblivious –  or uninterested –  in the continued widening gap between the level of productivity in New Zealand and that in leading advanced OECD economies (and than in Australia).

She does go on to devote a paragraph to housing markets, but shows no sign of actually understanding the issues, suggesting that low interest rates are the cause of the problem.  Similarly she laments technological advance putting “people out of work” (it is called productivity –  doing more with less), seemingly oblivious to the incredibly high labour force participation (and employment) rates we actually have in New Zealand (higher, for example, than in Australia).

And in a line of (stunning) naivete, we read this

Stunningly, our most connected generation in New Zealand, has also been found to be our loneliest.

And in the next line (emphasis added),

what does good government look like, not for us but for the very people who are turning away from us?

The Prime Minister of the ANZSOG (public servant and academic) audiences, “people like us”.

And so she goes on

Domestically, some have chosen to reject the independent and expert public service and the possibility of a mutually respectful and diverse nation.

Could we perhaps have one of those “independent and expert public services”, instead of the degraded (for example) Treasury we currently have in New Zealand?

Abroad, they reject the international institutions that they paint as responsible for both economic and cultural problems when they aren’t necessarily at fault.

One of my old bosses used to jump up and down when we (unspecifically) tarred unnamed individuals.  She might be a fan of the EU, but there is no reason why the British public should be, or why them choosing the pull back from the push for a federal Europe should be any sort of marker of societal failure or decline.    And if the IMF, the World Bank, the UN etc do little harm, they don’t do much good either.  And if she wants to criticise the US over the WTO, perhaps she should say so directly –  or perhaps even live the view that free trade benefits most those who take off restrictions on their people, and take a lead and remove New Zealand’s remaining tariffs and import restrictions.

And then

So this is one answer that is available to people – and that some are signing up for. After all, fear and blame is an easy political out.

Except that some people –  parties and individuals, Labour included –  are to blame for our housing disaster, our dreadful productivity performance.  That blame should be sheeted home.

We get several mentions in the speech of high rates of GDP growth but (I think) not a mention of immigration –  which the PM and the ANZSOGers love –  and not a hint of per capita income growth, let alone the (lack of) productivity growth.  Productivity creates possibilities and options, eases hard choices etc.  But Ardern seems to prefer not to know.

And we get stories about “social and economic inequality” driving deprivation, poverty and crime, but nothing at all about cultural failures (a point Winston Peters was making this week), family breakdown, or choices and individual responsibility.   Free societies can’t flourish without strong and functioning families and cultures.

As she was talking to public servants, there is several pages of talk about public services reforms –  but nothing about transparency, nothing about accountability, nothing about excellence, nothing about (say) fixing a system in which the head of the State Services Commission largely exonerates his buddy the outgoing Secretary to the Treasury after a monumental stuff-up, revealing an inability to operate under pressure at the very top of our public sector.  Once upon a time Labour talked of being the “most open and transparent government ever”.  Now even people on the left just scoff and make fun of the claim.   And if the public service is in such good shape (as she claims) doesn’t it make it very clear that responsibility for the severe ongoing policy failures really lies with her (and her colleagues, and people elected before her from her party and others).

The speech ends with the claim that “Good government need not be an oxymoron”.  At one level that is obviously true, and yet at another it invites the reaction “and yet surely in New Zealand in recent decades it has proved to be so”.   And if it weren’t for the ideological blinkers of her audience (for whom her main appeal seems to be that she is the “not Scott Morrison” or the “not Donald Trump”, you’d have to marvel at the presumption of the Prime Minister offering lectures on good government to a country that is so much richer and materially more sucessful than New Zealand is, to which so many New Zealanders have moved in recent decades, and when her government has done so little.

For those –  as many do –  who praise Jacinda Ardern as a great communicator it was also striking to read the speech and not find a single fresh or interesting idea, not even a fresh or startling way of making an old point. It was as if some public servant or PMO staffer had simply turned the handle and churned out a set of cliched notes, empty of almost any substance, with nothing to leave people thinking.   Is there anything to this alleged communication skill, beyond the level of individual empathy –  not an un-useful quality in a Prime Minister, but hardly the foundation for any sort of transformative government.

In his Herald column last week, Matthew Hooton brought me up short with this summary

The Ardern Government is the emptiest and most incompetent in living memory,

But it is hard to disagree (despite some competition for the title) and the problem starts at the top.  So much of what the Prime Minister says is vacuous –  almost devoid of content –  and it has been matched by an absence of any serious steps to deal with pressing failures (or utter failure in, for example, an actual initiative: KiwiBuild), in turn presumably built on  no compelling narrative about what has been done wrong in the past, and what might make a material difference in the future.  Endless blather about wellbeing doesn’t change that failure.

For those who doubt the “vacuous” charge, consider finally this

Someone I debate these things with, perhaps inclined to making a few more allowances than I am, observed “even I have to agree that is pretty vacuous”.

We really need good  –  disciplined, rigorous, courageous, open, self-aware, limited – government.  We don’t have it.

 

Thoughtful analysis of productivity from the Opposition

The Opposition in the Australian Federal Parliament that is.

In my post yesterday, I noted  that Simon Bridges’s latest speech continued the pattern in which our Opposition pretends there is no real structural problem in the New Zealand economy: no decades of productivity underperformance, no near-complete absence of any productivity growth in the last several years (whether under National or Labour).

And so it was some mix of refreshing and depressing (would that it were so in our country) to yesterday read a new paper by the Australian Shadow Assistant Minister for Treaasury on “tackling Australia’s productivity crisis”.  No doubt it helps that the Shadow Assistant Minister was previously a professor of economics at the Australian National University (I wrote about a paper he gave in New Zealand last year here).   And perhaps the political context is different: it is now six years since the ALP was in (federal) office and it is three years until the next election.  And Leigh isn’t the highest profile ALP politician.  Nonetheless, a moderately senior figure in the main opposition party actually went to the effort of writing a serious paper on productivity failures in Australia (not even engaging mainly in gotcha politics –  all the fault of the other lot).   Would that it were so here.  If National doesn’t have any former professors of economics, I’m sure there must be some serious economists around who would be National supporters and might be happy to help, were the party to be seriously interested in addressing –  rather than avoiding –  the issue.

And I don’t say any of this because I agree with Andrew Leigh’s prescriptions.  Mostly I don’t –  in fact, to a first approximation I think he has the wrong mental model of the Australian economy –  but he is a politician showing every sign of trying to take the issue seriously.  Productivity growth is what underpins any long-term sustainable improvement in material living standards.  As he puts it (with his particular left-wing emphases)

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Here is how Leigh introduces his article

At the start of June, the Productivity Commission quietly dropped a bombshell. Australia’s productivity growth had basically stalled. Labour productivity — output per hour worked — was more or less flatlining. After a generation in which labour productivity had grown at almost 2 per cent a year, it had tumbled to just 0.2 per cent.

The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

Note that in the final paragraph of that extract is one difference between Australia and New Zealand.    In New Zealand wage growth has outstripped growth in nominal GDP per hour worked (ie the combination of terms of trade and productivity) for some time, but this is the Australian version of that chart

wages in aus

There is a variety of possible explanations, but the comparable New Zealand chart slopes upwards, not downwards.

But how does the aggregate productivity picture look for Australia?  This is quarterly ABS series of real GDP per hour worked.

aus prod.png

In the last two or three years, the picture is quite as bad (no growth at all) as in New Zealand –  bearing in mind that the average level of productivity in Australia is far higher than in New Zealand.

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century.  In doing so he relies on a recent speech from a senior Australian Treasury official on productivity (another contrast to New Zealand), reporting some research work Treasury had done.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

Go to Quinn’s speech and you find this chart (unfortunately a bit fuzzy)

quinn

The left hand panel is the point Leigh is making.  It doesn’t look very good.

On the other hand, the economywide cross-country comparisons really don’t look so bad at all (and being annual data you don’t see the recent flattening in the way the quarterly chart above shows).

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch (as I’ve used in previous charts and tables for NZ comparisons: US, France, Belgium, Netherlands, Germany, Austria, Denmark, Sweden).

AUs prod 2

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms.   Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work.   It isn’t a good performance at all –  the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process –  but it is a rather different emphasis than in the Federal Treasury chart Leigh draws on.

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years –  all those newly developed iron ore and LNG exports.  There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy).   I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance  (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which –  in this context –  I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders.  Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

aus norway

Australia –  still building up its fresh wave of resource exports –  has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years.  And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article.  There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia.  My own story of Australia’s underperformance is much like that for New Zealand.   Remoteness and distance are huge issues –  perhaps even increasingly important globally –  and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation).  It isn’t just a matter of simple division –  but it is close to it, bearing in mind what else we know about the Australian economy –  to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

There are lots of detailed points in Leigh’s article, some of which seem more compelling than others (I’m not persuaded that getting more people into tertiary education is likely to make much economywide difference, when the people not going now are likely to be those who would benefit least from doing so –  it hasn’t been worth their while to do so). And I’m not convinced he has the right model to think about Australia –  where the bigger issues seem more macro in nature – but it is just refreshing to see a moderately senior active politician actively engaging in thinking about, writing about, talking about, how productivity performance might be markedly improved.  Because, as he says, it really matters to all of us.

Contemplating trade restrictions and industry protection

I’m just back from a family holiday in sunny south-east Queensland.  Being a New Zealander, I have a visceral fear of snakes, but as we saw them only in the zoo, one could concentrate on the upsides of Australia.   Seriously good newspapers for example.  Daily surf swims in the middle of July.  Plastic bags in plenty of shops (Queensland seems to have outlawed – the very useful –  thin supermarket bags but not others).   And, of course, one could look around, and read the papers, and contemplate what productivity and higher material living standards really mean.  It was a while since I’d been in Brisbane, and the central city certainly had a look and feel more prosperous than what one finds in Auckland (or Wellington).

At the turn of the century, GDP per hour worked (PPP terms) was about 31 per cent higher in Australia than in New Zealand, and on the latest OECD estimates than gap is now 41 per cent.    And it isn’t as if Australia itself is some stellar productivity performer.  (Those with longish memories may recall a time barely 10 years ago when there was serious political talk of closing the economic gaps with Australia, but –  as a result of policy choices of both National and Labour governments –  the gaps have just widened.)

I couldn’t see state-level GDP per hour worked data for Australia,  but there is GDP per capita data.  The gaps between New Zealand and Australia aren’t as large for per capita income as for labour productivity, simply reflecting the longer hours the typical New Zealanders engages in paid work over their lifetime.  For Australia as a whole, GDP per capita (PPP) terms is “only” 34 per cent higher than in New Zealand.  In Queensland –  with below average state GDP per capita –  that gap is “only” about 25 per cent.   Even a 25 per cent difference purchases a lot of (say) cancer drugs, new cars of whatever other public or private goods and services people aspire to.  I’m sure the Australian health system has its problems, but I was struck reading three papers a day over 10 days not to see stories about health underfunding.    And yet the (various levels of ) Australian governments spend a smaller share of GDP (35 per cent) than New Zealand governments do (38 per cent).

So there was sun, surf, papers, productivity in Queensland.  And there was another thing I always look out for abroad.

trout 2

I prefer fresh but the little supermarket near where we were staying “only” had smoked.  Not, in this case, the Australian product but (so I was surprised to notice when opening the packet) Norwegian.

trout 3.jpeg

The wonders of a global market and all that.   But just not in New Zealand.

There are, of course, plenty of trout in New Zealand –  all descendants of trout introduced in the 19th century (it isn’t exactly a native species).  In fact, some of the trout species in Australia was introduced from New Zealand.

But if there are lots of trout in New Zealand, the only way you can consume any is to go and catch one yourself, or make friends with someone who fishes for them and who will gift a trout to you.   It is as if I could only consume milk if I owned a cow or had someone close by who would give me milk.  Perhaps the first half of that sentence did describe much of the world prior to the 20th century, but even then the sale of milk wasn’t banned.  But the New Zealand government has for decades now banned the sale of wild trout.

When I went looking, I discovered that the sale of other trout isn’t outlawed in New Zealand, but as a recent regulatory impact statement prepared by the Department of Conservation put it.

The sale of trout (except for wild trout) is allowed in New Zealand. The reason it is not available for sale is because there is no way to obtain trout to sell – trout farming, selling wild trout, and importing trout are all prevented by legislation or the CIPO.

(that’s a customs import prohibition order).  The prohibition extends to smoked trout.  Here is the latest version of the restriction, just renewed a few months ago.

Read literally, clause 4(1)(b) appears to suggest that the imports for sale are only prohibited if they are for amounts of less than 10 kgs.

trout 4.png

That can’t have been what was intended, but it appears to be what the law says. [UPDATE: I misread it.]

There was a policy process undertaken last year that led up to the government’s decision to renew the import ban.  It was weird policy process, described thus

There has been no public consultation on the options covered by this paper. The views of the various interest groups are well known to officials, but there may be Treaty implications if a firm decision was taken without formal consultation with iwi. The nature of the issues mean that a decision has to be made as to which set of interests should be given precedence.

Officials –  of course –  consider they know all that needs to be known.  And quite Treaty issues arise in respect of foreign trade in a species itself introduced to New Zealand is beyond me –  but fortunately I’m no longer a public servant.

Of the official agencies that were consulted, MFAT actually favoured allowing the import restriction to lapse. I’m not usually a fan of MFAT –  and had Beijing objected for some reason, no doubt they’d have taken the other side –  but well done them on this one.  It isn’t a good look when New Zealand prattles on about open trade, rules-based orders, when it maintains in place a near-absolute prohibition of the importation of an innocuous, but tasty, food product.

I guess no one looks to the Department of Conservation for high quality and rigorous policy analysis, especially on economic issues.  Their RIS on the trout CIPO did nothing but reinforce those doubts.

The entire official case for the prohibition of imports of trout (and, by implication, for continuing restrictions on domestic trout farming –  although that isn’t the focus of this particular policy process) appears to rest on supporting the recreational trout fishing industry.

22. The import prohibition and the prohibition on the farming of trout are aimed at protecting the New Zealand wild trout fishery.

Like, for example, banning deer farming to protect hunting of deer in the bush?  Or pig farming?  Or salmon farming?

The officials even acknowledge that (for example) allowing the sale of salmon has not led to widespread salmon poaching, and that other countries successfully manage to have wild trout fishing and trout sales.  But, they plaintively suggest, New Zealand is somehow different.   For example

If imported trout could be sold, the illegal sale of wild trout would be much more difficult and costly to detect.

Which is, of course, not an argument for maintaining the existing restrictions but for removing both import and domestic sales (and farming) restrictions, not continuing to run industry assistance to a small tourism sector –  somewhat akin to the protection that used to be offered to the New Zealand car assembly industry or the New Zealand television assembly industry.  You get the impression reading the document that the DOC officials have simply got all too close to their mates in Taupo, and are subject to regulatory capture.

The documents contains this paragraph

42. The Government’s objectives in regard to the issues examined in this paper can be summarised as follows:
• Maximise recreational and tourism values of wild trout fishery
• Maximise employment and economic values of wild trout fishery
• Maximise economic growth and employment opportunities in the wider economy
• Provide for maximum consumer choice in purchasing decisions
• Minimise risk of friction in negotiations with trading partners.

These objectives are not referenced to any fuller document in which “the government” makes its case, and they have the feel of being made up on the fly with little or no supporting analysis.   They go on to state

43. The interactions between these issues mean that it is not always possible to progress all of these objectives simultaneously. Actions that could advance some of the objectives may restrict progress on other objectives. Decisions on which objectives should be given precedence therefore need to be made by elected Ministers.

In a way, of course, that is true.   If your goal is to maximise the size of the protected sub-industry, whether buttressed by direct subsidies (think film), import bans (trout), domestic production of a related product (trout farming ban) it will conflict with overarching goals about consumer choices and economic efficiency (as well as that lesser goal about living the words about a free and open economy with respect to trading partners).  But, as in so many industries in the past,  that tension should be resolved in favour of the consumer and of economic efficiency.  In this case, it isn’t even clear that there really is much of a tension.  DOC’s RIS offers not the slightest evidence that allowing imports of trout meat (smoked or otherwise), or even allowing domestic farming of trout, would make any difference whatever to the number of North American anglers who come to Taupo.  Perhaps on the domestic side there might be a smaller number of trout fisherman…….in the same way that a much smaller proportion of us milk house cows, collect our own eggs, or whatever than we once used to.   The only “value” really being protected here is that people who don’t go fishing shouldn’t be able to eat trout in New Zealand.  If that is a values-based policy framework, it is a pretty weird one.  Logically, one might apply the same daft policy to native fish too.

It is really quite shoddy advice, in support of shoddy policy.   As one gets to the end of the RIS one gets the impression a reasonable number of government departments are beginning to conclude that the policy around trout is a nonsense and should eventually be revisited.   But it isn’t clear that DoC is among them –  then again, they are probably brought up to dislike all introduced species (may not even be too keen on people, disturbing that natural environment), and they simply aren’t the agency that should be responsible for an issue of industry protection policy and interfering with the ability of New Zealanders to easily consume a safe and lawful product.

There was petition last year seeking to introduce trout farming in New Zealand.  Whether it gets anywhere, only time will tell, but it is hard to be optimistic when the current government extended the existing import ban again only last year.   Perhaps New Zealand consumers will have to hope that foreign governments will take up the issue more seriously, and put more sustained pressure on the New Zealand government to remove the barriers between consumers and trout (more cheaply and efficiently than holidaying abroad).