Emissions policy and immigration policy

A month or so ago I ran a couple of posts on New Zealand’s greenhouse gas emissions in international context.  Readers may recall that New Zealand now has the second highest emissions per unit of GDP of any OECD country, having moved up from sixth in 1990.

emissions per GDP

As part of the Paris climate change accord process, New Zealand has made ambitious promises to reduce its total emissions substantially.   This was the wording from the terms of reference for the new Productivity Commission inquiry into how best the economy might adjust given the climate targets

New Zealand has recently formalised its first Nationally Determined Contribution under the Paris Agreement to reduce its emissions by 30 percent below 2005 levels by 2030. The Paris Agreement envisages all countries taking progressively ambitious emissions reduction targets beyond 2030. Countries are invited to formulate and communicate long-term low emission development strategies before 2020. The Government has previously notified a target for a 50 per cent reduction in New Zealand greenhouse gas emissions from 1990 levels by 2050.

At present, total emissions are still above 1990 levels, not a common outcome for OECD countries.

One of the reasons for that is that we have had much faster population growth than most advanced countries.    Indeed, in their recent report on emissions etc, the Ministry for the Environment even listed population growth as first among the various constraints or challenges New Zealand faces.

Some of the challenges New Zealand faces when reducing emissions include:

  • a growing population
  • almost half our emissions are from agriculture where there are fewer economically viable options currently available to reduce emissions
  • an electricity sector that is already 80.8 per cent renewable (meaning that we have fewer ‘easy wins’ available to us compared to other countries who can more easily make significant emissions reductions  by switching to renewable sources of electricity).

As I noted in my earlier post, I was pleasantly surprised to find the population issue listed so prominently.

It is hard to disagree with them  But it does leave one wondering what advice or research/analysis they have done, and provided to Ministers –  including when the target was being adopted –  about the implications of New Zealand’s immigration policy.  Our non-citizen immigration policy pushes up the population by almost 1 per cent per annum (against an, admittedly unrealistic, benchmark of zero inward migration of non-citizens).  Have they analysed the potential costs and benefits from lowering the non-citizen immigration target relative to other possible abatement (or compensation) mechanisms?  Perhaps there is credible modelling that suggests the overall abatement costs to New Zealanders would be lower through other plausible mechanisms.  But given that population increases appear first, and without further commentary, on their lists of “challenges” it would be good to know if they have done the work.

On reflection, I think I will lodge an Official Information Act request to find out.

And so I did, writing thus to the Ministry for the Environment

I was interested to read in the snapshot emissions document released this morning that the Ministry regards increasing population as one of the top challenges New Zealand faces in meeting its emissions reductions target.

Accordingly, I request copies of all advice to the Minister for the Environment or ministers responsible for climate change policy, any and all internal research or analysis documents, and any advice to MBIE or the Mnister of Immigration, on the implications of New Zealand’s immigration policy for (a) the setting of, or (b) the successful pursuit of, or (c) costs of pursuing New Zealand’s emissions reduction target.   Among my interests is in any material on the relative costs of various options for achieving the target, including whether any research and modelling has been done on the costs of cutting the immigration targets relative to other abatement methods/policies.

This request covers all material since the start of 2014.

I deliberately went back to the start of 2014 to encompass both the period leading up to the adoption of New Zealand’s emissions reductions commitments, and the period since then, when presumably officials had to think hard about how policy might assist in minimising the costs to the economy of meeting the target the government had committed us to.

A short time ago, I received a full and comprehensive reply from the Ministry for the Environment, the ministry which has the lead responsibility for official advice on climate change and emissions related issues.

After quoting my request back to me, Roger Lincoln, Director Climate Change, replied

“No documents were found within the scope of your request. For this reason, your request is being refused under the grounds of 18(e) – the document that contains the information requested does not exist or can’t be found.”

I wasn’t really expecting there would be much.  But nothing at all, not a shred, whether before the government entered into these commitments, or subsequently, or even just before they openly listed the growing population first in the list of challenges New Zealand faces in reducing emissions?   That did take me by surprise.   So complete is the absence of material, that it is almost as if they were determined not to consider the issue, or (say) point it out to MBIE, the government’s leading immigration policy advisors.  Whether that was because senior officials internally discouraged them looking at the issue, or whether one or other of their ministers issued such guidance, we don’t know.

But MfE is clearly aware enough of the issue to put it top of their recently-published list of challenges.  And yet has done no research, no analysis, and provided no advice on the interaction between immigration policy and the costs of meeting our climate change commitments.

Not long enough, Stephen Toplis incurred the wrath of a senior public official for suggesting that, in his view, if the Reserve Bank did not adopt a particular line, it could be considered “negligent” –  ie not doing its job properly.   And that was just a conditional statement about something that hadn’t happened yet.      When the Ministry for the Enviroment has done nothing at all on immigration policy and the additional costs it appears to impose to meet the emissions targets –  not even simply pointing out the possible connection to MBIE –  whether in providing advice on formulating commitments, or on how the country might best meet those government commitments – that looks quite a lot like actual negligence, with the potential for real economic costs to New Zealanders.

I do hope that when their Issues Paper for the emissions reduction inquiry emerges, the Productivity Commission will prove to have taken the issue rather more seriously.

A true believer from the OECD

The OECD released today its biennial Economic Survey of New Zealand.  I will write about it in due course, but there are 170 pages to read.

Usually these reports are just released on the website from Paris.  But today the OECD’s Chief Economist, Catherine Mann was in town, to help promote the OECD’s view of the world.  There was a press do this morning apparently, and then a Treasury guest lecture presentation, attended by all manner of past and present bureaucrats, and some others with an interest in what Catherine Mann had to say.

She gave us some brief observations on the state of the world economy, before turning to present the New Zealand survey –  the OECD’s story about what is going on here, and what should be done to make things better.  To their credit, the OECD is quite open about the ongoing severe underperformance of the New Zealand economy –  as they note, the productivity gaps to the richer OECD countries are large and, if anything, are getting larger.  Here was my variant (from a post last week) of the sort of chart she showed.

douglas 3

But the point of this post is about the bit where she took my breath away.  I couldn’t quite believe what I was hearing.  I don’t think even the Minister of Finance or the Prime Minister would have made such bold –  but unsupportable –  claims.

She presented a chart showing growth in real GDP per capita in the OECD as a whole in the US, the euro area, and in New Zealand.  As she noted, growth in all regions is still lower than it was in the 20 years or so prior to the 2008/09 recession.     In the other three regions, the OECD is picking that per capita GDP growth will pick up in 2017 and 2018, but in New Zealand they are picking it to slow a bit.  I looked at the chart and didn’t make much of it –  there is plenty of year-to-year volality, and I wouldn’t put much weight on just two years’ data.

But Mann couldn’t help herself.  She was here to tell a good news story, and proceeded to try to do so.     You might, she said, look at that chart and think it wasn’t a very good story for New Zealand –  real per capita growth was picked to slow after all –  but, no, in fact it was really a good thing.  Perhaps, I thought, she was going to say that the economy was overheating and needed to level out.    But it was a bigger bolder claim even than that.

Her argument was that per capita growth was just slowing “mechanically” because we’d acquired so many more people, and were forecast to keep on doing so.  Of course, she said –  advancing no story for why – this would weaken per capita GDP “arithmetically” in the short-term.  But –  and here I scurried to write down as much as possible her actual words –  because we were taking in so many more people to work and study, who would add value, bring fresh ideas, and create new businesses we were creating the underpinnings of a longer-term stronger economy.

Apparently, high levels of immigration were now bad for per capita income in the short-term, but would be good in the long run.  It was pretty much the opposite of the conventional New Zealand evidence –  that demand effects exceed supply effects in the short-term.  But set even that to one side for the moment.

[UPDATE:  On reflection, perhaps she had in mind some of the European countries with waves of refugees crossing borders, adding to population and probably not doing much for economic activity in the very short run.  But that is nothing like New Zealand’s immigration system –  most people arriving either have a job to go to, or are paying for a course of study about to begin.]

Because, in fact, she reckoned she had evidence that we were already seeing significant benefits.  And what form did these benefits take, in the assessment of the chief economist of one of the world’s premier international economic agencies?   Why, it was wage increases.

She had another chart, showing real wage growth for the US, the euro area, and New Zealand.   On this measure, real wages had been rising strongly in New Zealand in the last two years –  more strongly than the average for the 20 years prior to the recession.  (And over the same earlier 20 years New Zealand had had the lowest average real wage increases of any of the regions she showed).  And what was her story to explain this?  Why, it was the immigrants.  We were bringing in highly skilled immigrants, who will be earning higher wages, and –  look at the chart –  we see it in the data already.

Many of you will no doubt be wondering about this alternative universe.  But it is real data.    And, in fairness, comparing wage increases across countries is quite difficult, because countries measure things different ways.  In this case, she used a measure of “labour compensation per employee, adjusted for the GDP deflator”.   Ideally, one would want to use wages per hour worked, rather than per employee, but set that to one side for now.   More importantly,  in commodity exporting countries –  where the GDP deflator (value of the stuff produced here) inflation rate goes all over the place, no one but no one thinks that the GDP deflator is a meaningful statistic to use to deflate anything year to year.    When dairy prices plummet, on that measure real wage inflation rises, and vice versa.  From year to year, it tells one nothing meaningful.  And this, recall, was a presentation specifically focused on New Zealand.

Here’s an alternative –  much better –  measure of real wage inflation for New Zealand.  It uses the private sector LCI (analytical unadjusted measure) adjusted for the Reserve Bank’s preferred measure of core inflation, the sectoral factor model.  There is some short-term variability, so I’ve used annual average increases.

wages OECD

Not much sign of the recent high rates of wage inflation the OECD’s chief economist was touting.   The QES –  an actual compensation measure – is even weaker.

Of course, there isn’t much sign of the really highly-skilled migrants either.  Mann seemed to have forgotten that the OECD skills data –  which they use quite a bit in this report –  shows that while New Zealand’s immigrants are relatively highly-skilled compared to migrants to other countries, they  are on average less highly-skilled than the natives.  There hasn’t been a sudden change in immigration policy in the last couple of years that has generated some step-change increase in the skill level of migrants.

A sceptic sitting near me whispered, “just drink the Kool-Aid Mike”……

I was puzzled by all this, and waited for the question time at the end of her presentation.  I asked Mann quite what her optimistic take was based on  –  that while immigration would apparently be denting per capita GDP now, it would soon lead to an acceleration.  After all, I noted, we’d had large immigration inflows for decades, and on the numbers she had presented we’d had the lowest productivity growth and lowest real per capita GDP of the countries she had shown.    I wondered if she could explain her optimism in terms that took account of New Zealand’s experience over the previous 30 years or so  (not my chosen period, but the one she was using in her own presentation).

It was a pretty astonishing response.   She argued that this was an “immigration-driven economy”, and asserted that the skill characteristics of the immigrants were high, repeating that the evidence for this was the high real wage increases we’d seen in the last couple of years.  Moreover, she asserted, the pre-recession period wasn’t that relevant because we had so many more immigrants now (and presumably could therefore expect much larger future real economic gains).  She seemed not to be aware at all that the largest single component of the increase in the net PLT inflow had been the reduction in the number of New Zealanders leaving.  Or that the new analytical immigration data suggested there wasn’t anything very exceptional about the inflows of non-citizens we are seeing now (there was something similar 15 years ago).   Was she aware that there had been no increase in the residence approvals targets –  indeed a cut more recently  –  and that a significant chunk of the rest of the increase in the net inflow wasn’t more people chosen for their high skills, but (eg ) working holidaymakers and students mostly studying in relatively low-level courses.   It was a quite extraordinary degree of ignorance in someone holding forth so confidently on the undoubted gains New Zealand would see from the large immigration flows.   I don’t expect the chief economist of the OECD to be across all the details of New Zealand (a rather small and minor member of the OECD), but if she isn’t, she shouldn’t be holding forth with such breezy confidence on such a major issue of New Zealand economic policy and economic performance.  Instead, she seemed to have a doctrine, and patched together something that superficially appeared to make the data fit the doctrine.

It went on, because she attempted to explain away why our real wage inflation had been less than that of the US or the euro-area in the couple of decades prior to the recession.  It was, she claimed, because the historical US numbers were (somehow –  it wasn’t made clear how) biased upwards, and the New Zealand numbers were biased downwards.  Perhaps, but it was a new claim on me, and not one for which there was a shred of evidence produced.

It was an astonishing performance.  She then invited the OECD’s desk officer for New Zealand to add any comments.  I felt a little sorry for him – especially as he was an old friend of mine.    He noted that the actual slowdown in real per capita GDP growth the OECD was picking  for this year and next was mostly to do with them using the expenditure measure of GDP, and the gap that had opened up between the expenditure and production measures (ie just technical stuff).  He certainly wasn’t running an immigration story for that, as Mann had attempted to do.

He (who knows my story reasonably well) went bravely on attempting to address my question about how this optimism about the economic effects of immigration fitted against the backdrop of the last 30 years.  But it was clear that neither he, nor the institution, had any sort of narrative explanation that would even begin to fit the bill.  He seemed reduced to quoting the recent IMF cross-country empirical piece on immigration.  As he noted, in that sample (which included New Zealand as one of 14 countries), immigration did appear to have boosted per capita GDP.   But, as I pointed out in a post when the work was published even if that result was true on average for all the countries in the sample, there was no reason to be confident it had been so over this period for New Zealand (since these are average results).  More importantly, perhaps, the same study actually found negative effects (although not statistically significant) of immigration on both labour productivity and total factor productivity –  again, on average across this sample of countries.

I’ve seen quite a few leading international economic agency senior officials in my time.  This was one of the worst performances from such a senior person I’ve ever seen.   She may well have been quite good in her own area –  international economics –  and in fact I went along mostly because she had a very good academic reputation, and had performed well when I’d seen her previously.  But when she lapsed into advocacy and cheerleading for New Zealand’s immigration policy, without getting fully familiar with a credible story that fits the New Zealand data and experience, she probably did herself, and the cause, more harm than good.

[UPDATE: For anyone interested, her presentation slides –  including the charts I tried above to describe – are here. ]

 

Two sides of the same coin

When, a couple of months ago, the current National-led government announced plans to tighten immigration policy in several areas, I summed up the changes as “a modest step that ignores the big picture“.

Yesterday, the Labour Party announced the immigration policy it will campaign on.  I’d use exactly the same words to describe their proposals.  Some of the changes –  the largest ones –  seem broadly sensible, but they won’t come close to tackling the real problems with New Zealand’s immigration policy.

In some ways the biggest difference between the two parties’ approaches is that National provided us with no estimates about what impact their changes would have on numbers (and the Prime Minister apparently claimed yesterday they would,  in fact, have no impact on numbers), while Labour is touting large numerical impacts but not acknowledging that they will actually have little or no medium to long-term effect on the net inflows of non-New Zealand citizens.

In many ways, none of this should be a surprise.  The “big New Zealand” strategy, revitalised over the last 25 years, has been a bipartisan project.   On either party’s policy, it remains one.   There is really no material difference between them –  just details which, while not unimportant, don’t affect the underlying strategy.  A strategy which, to the extent it had an economic performance objective behind it (recall how MBIE used to call our immigration policy, “a critical economic enabler”), has simply failed.  There is no reason to expect anything much better if future if we keep on with the same policies.

What determines the medium-term contribution of immigration policy to population growth is the residence programme, which aims to give out around 45000 residence approvals each year.  The government cut that target a little last year.  Labour’s policy doesn’t even mention it.   At 45000 approvals, the programme is roughly three times the size, in per capita terms, of the equivalent programme is the United States (where about one million green cards are issued each year).

But what of the proposals Labour did put forward.  Their policy document is here.   It is misconceived from the first sentences where they state

Migrants bring to New Zealand the skills we need to grow our economy

Have they not seen the OECD data showing that New Zealanders are among the most highly-skilled people in the advanced world, and that –  on average –  immigrants are a bit less skilled than natives?    On the scale the New Zealand immigration programme attempts to operate at, the typical new additions to the labour force from non-citizen migration are not as highly skilled as the people who are already here, and our own young people who enter, and move up in, the workforce each year.   There are, of course, no doubt some exceptionally talented people.   But most are people from poorer countries looking for better opportunities here for themselves and their families –  typically, too, people who couldn’t get into the richer and more successful Anglo countries.  (None of this is a criticism of the migrants –  pursing the best for themselves and their families is probably what all of us seek to do too – but it is a criticism of the policy framework that enables such large inflows of not overly-skilled people.)

Mostly Labour’s policy seems to be about fixing some pretty dubious changes made to the student visa system over recent years.   In fact, three-quarters of the total numerical impact of their policy comes (on their own numbers) from student visa changes.

Labour will stop issuing student visas for courses below a bachelor’s degree which are not independently assessed by the TEC and NZQA to be of high quality.

Labour will also limit the ability to work while studying to international students studying at Bachelor-level or higher. For those below that level, their course will have to have the ability to work approved as part of the course.

Labour will limit the “Post Study Work Visa – Open” after graduating from a course of study in New Zealand to those who have studied at Bachelor-level or higher.

Mostly, those seem like a broadly sensible direction of change.   That said, I’m slightly uneasy about relying on bureaucratic agencies to decide whether courses are “high quality” –  in principle, surely the market can take care of reputational and branding issues?

And while it might look good on paper, I’m a little uneasy about the line drawn between bachelor’s degree and other lines of study.  It seems to prioritise more academic courses of study over more vocational ones, and while the former will often require a higher level of skill, the potential for the system to be gamed, and for smart tertiary operators to further degrade some of the quality of their (very numerous) bachelor’s degree offerings can’t be ignored.  In the student visa data we already see some slightly suspicious signs (bottom right chart) of switching from PTEs to universities  I’d probably have been happier if the right to work while studying had been withdrawn, or more tightly limited, for all courses.   And if open post-study work visas had been restricted to those completing post-graduate qualifications.

Selling education to foreign students is an export industry, and tighter rules will (on Labour’s own numbers) mean a reduction in the total sales of that industry.   Does that bother me?  No, not really.  When you subsidise an activity you tend to get more of it.  We saw that with subsidies to manufacturing exporters in the 1970s and 80s, and with subsidies to farmers at around the same time.  We see it with film subsidies today.  Export incentives simply distort the economy, and leave us with lower levels of productivity, and wealth/income, than we would otherwise have.   In export education, we haven’t been giving out government cash with the export sales, but the work rights (during study and post-study) and the preferential access to points in applying for residence are subsidies nonetheless.  If the industry can stand on its own feet, with good quality educational offerings pitched at a price the market can stand, then good luck to it.  If not, we shouldn’t be wanting it here any more than we want car assembly plants or TV manufacturing operations here.

Labour estimates that their changes to student visas and post-work study visas will reduce numbers by around 17000, roughly evenly split between the two classes of changes.  But what they don’t tell you is that these will be one-off reductions in the total number of people here on those visas.    Since the number of people who settle here permanently is determined by the residence approvals programme, and that hasn’t changed, the changes Labour is promising around student visas –  while broadly sensible –  while make a difference to the net migration flow in the first year they are implemented (the transition to the lower stock level) and none at all thereafter.   They might change, a little, who ends up with a residence visa, but not how many are issued.  If you favour high levels of non-citizen immigration but just want the “rorts” tidied up, it makes quite a lot of sense.

The changes Labour proposes to work visas are also something of a mixed bag.  They are promising (but with few/no specifics) to make it harder for people to get work visas

Since 2011/12, the number of low-skill (ANZSCO 4 and 5) work visas issued has surged from 14,000 to 22,000. For example, the number of “retail supervisor” work visas has increased from 700 to 1,700. Labour will work with firms to train New Zealanders to fill skills gaps so we don’t have to permanently rely on immigration. A developed nation should be able to train enough retail staff to meet its own needs. Immigration should be a stop-gap to meet skills shortages, not a permanent crutch.

Labour will make changes that preserve and enhance the ability of businesses to get skilled workers to fill real skills gaps but which prevent the abuses of the system that currently happen.

The broad direction seems sensible enough –  after all, the official rhetoric about the gains from immigration relate to really highly-skilled people, but what does it mean specifically?

And I get much more wary about proposals to move to a more regional approach (on top of the additional points for regional jobs the government introduced last year, thus further reducing the skill level of the average migrant).  This is what they say:

Currently, few skill shortages are regionalised. This makes it hard for a region with a skills shortage in a specific occupation to get on the list if the shortage is not nationwide. Importantly it means that work visas are issued for jobs in regions where there is not actually a shortage which puts unnecessary pressures on housing and transport infrastructure there.

Labour’s regionalised system will work with local councils, unions and business to determine where shortages exist and will require that skilled immigrants work in the region that their visa is issued for. This will prevent skills shortages in one region being used to justify work visas in another, while also making it easier for regions with specific needs to have those skills shortages met.

Where skills shortages are identified, Labour will develop training plans with Industry Training Organisations so that the need for skilled workers is met domestically in the long-term. We will invest in training through Dole for Apprenticeships and Three Years Fees Free policies.

Frankly, it seems like a bureaucrat’s paradise, and just the thing for influential business groups that get the ear of some local council or other.  It is hard enough to ensure that local authorities operate in the interests of their people, without setting up more incentives that will allow local authorities to be used to pursue the interests of one particular class of voters.

More generally, it is an approach that suggests no confidence at all in market mechanisms to deal with incipient labour market pressures.  There is no suggestion in the document, at all, that higher wages might be a natural adjustment mechanism, whether to deal with increased demand in a particular region or for a particular set of skills.  Even the Prime Minister was running that line recently  –  and he isn’t from the party supported by the union movement.

Again, changes to reduce the number of work visas granted to people for fairly low-skilled occupations aren’t a bad thing, but they won’t make any difference to the average net inflow of non New Zealanders beyond the initial (quite small) one-off level adjustment.     And there is no willingness to rely on market mechanisms –  eg set a (say) $15000 per annum fee, and allow limited work visas for jobs where the employer is willing to pay the taxpayer that additional price.

There were two other initiatives in the package.  The first was the proposed new Exceptional Skills visa.

Labour will introduce an Exceptional Skills Visa. This visa will enable people with exceptional skills and talents that will enrich New Zealand society — not just its economy — to gain residency here. 

It will be available to people who can show they are in an occupation on the long-terms skills list and have significant experience or qualifications beyond that required (for example, experienced paediatric oncologist) or are internationally renowned for their skills or talents. Successful applicants will avoid the usual points system requirements for a Skilled Migrant Category visa and would be able to bring their partner and children within the visa. This visa will help grow high-tech new industries, meet the increasingly complex needs of the 21st Century and enrich our society. Exceptional Skills Visas for up to 1,000 people, including partners and children, will be offered every year

When I first saw reference to this I was quite encouraged.  And if it makes a little easier for people who are genuinely highly-skilled to get first claim on those 45000 residence approvals each year, then I don’t have any problem with it.   But it isn’t exactly the American exceptional ability visa, and we need to be realistic about New Zealand’s relative attractiveness (or lack of it) to people with really exceptional talents.   The suggestion that the programme will “help growth high-tech new industries, meet the increasinbgly complex needs of the 21st century” is probably little more than late 20th century vapourware.

As for the proposed KiwiBuild visas, I suppose they were politically necessary. You leave yourself open if you campaign on both big reductions in migrant numbers, and massive increases in house-building, if you don’t prioritise construction workers.  In fact, of course, this programme makes a one-off reduction in the number of people here –  reductions concentrated in the population group that probably has the least housing needs..  None of the medium-term pressures will have been eased at all, even if some dodgy rules around students do end tightened.

In passing, I was also interested in this comment

We will investigate ways to ensure that the Pacific Access Quota and Samoan Quota which are currently underutilised are fully met.

I guess there are really large numbers of Pacific voters in Labour’s South Auckland heartland.    These Pacific quotas, again, lower the average skill level of those we given residence approval too (since people only come in on those quotas if they can’t qualify otherwise, all within the 45000 approvals per annum total).  I imagine, too, that the Australian High Commission will have taken note of that line.

Overall, some interesting steps, some of which are genuinely in the right direction.  But, like the government, Labour is still in the thrall of the “big New Zealand” mentality, and its immigration policy –  like the government’s – remain this generation’s version of Think Big.  And it is just as damaging.    The policy doesn’t face up to the symptoms of our longer-term economic underperformance –  the feeble productivity growth, the persistently high real interest and exchange rates, the failure to see market-led exports growing as a share of GDP, and the constraints of extreme distance.  None of those suggest it makes any sense to keep running one here of the large non-citizen immigration programmes anywhere in the world, pulling in lots of new people year after year, even as decade after decade we drift slowly further behind other advanced countries, and se the opportunities for our own very able people deteriorate.

But that is Labour’s policy.  And that is National’s policy.

For anyone interested, the Law and Economics Association is hosting a seminar on immigration policy and economic performance on Monday evening 26 June.   Eric Crampton of the New Zealand Initiative and I will be speaking.  Details are here.

UPDATE: Here is what I said to Radio New Zealand yesterday afternoon on immigration, in a reasonably extended interview, partly on Labour’s announcement, but mostly on the more general issues.

The little engine that could…and other fairy tales

“I think I can.  I …..think ….I…. can, I………… think……… I…………… can” said the little blue engine”

It was almost to the top.

“I——-think”

It was at the top.

“I ———can.”

It passed over the top of the hill and began crawling down the opposite slope.

‘I ——think——- I—— can——I—– thought——I——-could I—– thought—– I—– could. I thought I could. I thought I could.¨ I thought I could.”

And singing its triumph, it rushed on down toward the valley.

“The Little Engine That Could” is a heartwarming childhood tale, about hard work and a willingness to give anything a go.    Perhaps the Prime Minister once read the story to his kids.  But…….it is a story.   Technical capacity, not willpower, determines whether engines can pull loads, get over hills etc.   However, the Prime Minister now appears to have adopted the storybook as the basis for his latest, rather desperate, defence of his government’s immigration policy.

At his post-Cabinet press conference on Monday, the Prime Minister appeared to be –  as NBR put it –  practising his election lines.

Answering questions about New Zealand’s capacity to handle current levels of population growth caused, in part, by very high net migration, English appeared to practice attack lines for the forthcoming election campaign, saying he believed the ability to cope with these challenges was “going to be a key issue in the campaign”.

“We believe New Zealand can adjust to be a growing economy with a growing population,” he said. “Our political opponents think New Zealand isn’t up to it, it’s too hard and the solution is to shut down the growth by closing off international investment, getting out of international trade, closing down migration and settling for a kind of grey, low-growth mediocrity where the best thinking of the early (19)80s sets our political direction.”

and, from another account (which I will draw on but can’t link to)

English said that National unashamedly believes in New Zealand’s capacity to be a growing economy and that its political opponents unashamedly think New Zealand is not up to it.

Belief is one thing.  Evidence is (much) better.    Winning elections might be a different matter, but whether, and to what extent, large-scale immigration is providing long-term economic benefits to New Zealanders isn’t something to be determined by whose swagger is most convincing; who can put on the most macho stance, or who is most ready to kick sand in the face of the weedy doubters.  Wishing for benefits won’t make them happen.   Instead, it is a matter of calm balanced analysis and an assessment of the evidence of New Zealand’s experience.  We’ve had plenty of experience.   And that must be a point of some difficulty for defenders of the current large-scale non-citizen immigration policy, presumably including the Prime Minister.

After all, 100 years ago, on the best available measures, New Zealand had among the very highest material living standards anywhere.   Some combination of abundant land, a temperate climate, dramatic reductions in transport costs, and refrigerated shipping had required more people to take advantage of the new opportunities, and enabled just over 1 million people to flourish in what was, by international standards, a highly-productive economy.  There were new opportunities here, and it took new people to take earliest and greatest advantage of them.

On some measures, even as late as around 1950 we still had some of the highest material living standards around.  There hadn’t been many more new opportunities specific to New Zealand in the previous few decades.  But, on the other hand, we’d avoided wars and revolutions at home.  It wasn’t much of a surprise that we were still wealthier than almost anywhere in continental Europe.

But mostly since then we’ve been slipping down the rankings, whether measured by productivity (the better measures) or average per capita income (which can always be boosted by working ever more hours).   After World War Two, large scale immigration, actively promoted by successive governments resumed.  Even then, leading New Zealand economists were sceptical.   All manner of arguments were run for actively pursuing increased population.  There were defence arguments, there were arguments about redistributing Britain’s excess population to the land-rich Dominions, there was the apparently-reasonable argument that opportunities and incomes were just better here.

But whatever the arguments, any economic gains just seemed to keep failing to show up.  Of course, we did lots of daft things during the post-war decades.  Trade protection meant that, for example, in the early 1960s we had twenty television factories in New Zealand, and we made or assembled here all sorts of stuff that would never have passed a market test.  In the late 70s and early 80s we poured money down the drain in the absurdly expensive energy Think Big projects (while being spared Roger Douglas’s ambition for 16 state-promoted carpet factories).   But strip all that stuff away –  as we did –  and we’ve still done badly.

Productivity growth lagged that in other advanced economies in the 1950s and 60s.  Since 1970, data suggest that among advanced economies only Switzerland and, perhaps Mexico, have done worse than us.  And even since all the reforms of the late 80s and early 90s, we’ve still brought up the rear when it comes to productivity growth.  On average, we just keep slipping further behind those other advanced countries we were once so much better off than.

My friends on the right will emphasise how high taxes are, how much wasteful government spending there is, and how pervasive poor-quality regulation is.  And I have a great deal of sympathy with many of their individual points.   But the median OECD country isn’t really any better or worse than us on those scores (on some we do rather better than the median, on others quite a lot worse).   We could all do better, but the explanation for New Zealand’s continuing disappointing performance simply can’t rest in those traditional pro-market verities.

A much more plausible story is one that recognises that New Zealand’s wealth was largely built on able people, and good institutions, making the most of our natural resources.    It shouldn’t really be controversial; you can see it in our trade data.    As it always was, so it is today – the overwhelming bulk of our exports are the fruits of the land or sea (and I’ll count tourism in those numbers, since that it mostly what tourists come for).   Of course, there is small number of successful outward-oriented firms in quite different industries, but strip away the subsidised ones (export education and the film industry) and the numbers are really pretty small.

And not only are no new natural resources being made, but in New Zealand for many decades there hasn’t even been any really large new discoveries of usable natural resources that were hitherto unrecognised (or idiosyncratic shocks that strongly favoured New Zealand production from natural resources).  It is, surely, the big difference between the post World War Two experiences of New Zealand on the one hand, and Australia and Norway on the other.  The prosperity of all three countries rests largely on the natural resource products their able people, with good institutions, can sell to the rest of the world.  Norway and Australia were able to bring to market whole new resources that, while always there, were previously unknown or uneconomic to tap.  New Zealand has had nothing similar.  No new land, no new sea and –  so far –  oil/gas and mining activities that are of fairly peripheral scale.    If we’d known that difference 50 or 60 years ago, few people (if anyone) would have thought it would make a lot of sense to import lots more people to New Zealand.   Combining many more people with a key fixed factor (“land”) is simply a recipe for making it much more difficult than necessary to support top-notch living standards for the people who were already there.    And that is so even if one can get lots of productivity growth in the land-based sectors.

Of course, the standard pushback is along the lines of “but that is all old economy stuff; ideas and new technologies are the way of the future, and one can develop those industries anywhere –  all that matters is the people, the people, the people”.  Which would be fine, but the evidence seems to be against it.  When it comes making physical stuff, global value chains have become ever more important, and it is really hard for many firms located at the end of the earth to be part of such value-chains (whereas it is quite easy if you are in Slovakia or Korea).  And when it comes to ideas-based industries, counter-intuitive as it might seem, personal connections and proximity (to suppliers, markets, specialist resources, clusters of knowledge) seems to have become more important than ever.    All sorts of firms can be set up by people in New Zealand –  or in Patagonia, Port Stanley, or Windhoek.  But those firms, and those people, will usually command more value relocated nearer those global centres –  be they in Europe, North America or East Asia.   Wishing it was otherwise –  like believing I can fly –  simply doesn’t make it so.

New Zealand’s strength is its people, among the most skilled in the world, its institutions (absence of much corruption, rule of law etc) and its natural resources.    The latter are crucial –  that isn’t something of ideology, or old-school thinking, but of hard numbers –  and are, for practical purposes largely fixed.  (Add in our (self-chosen) climate change objectives and those natural resource opportunities could almost be argued to be shrinking.) But our disadvantage, and it is a severe one, is distance/location, and at least before teleportation is mastered, that disadvantage isn’t changing –  it is a land so remote that until perhaps 200 years ago, there simply was no foreign trade.

Against that backdrop, it is simply crazy to keep letting the central planners (politicians and bureaucrats) try to drive up the population.   New Zealanders know it in their own choices.   There is nothing shameful about a fairly flat population, whether in a country – plenty of rich European countries have had them for decades –  or a city.  But it seems almost heretical in New Zealand.  It makes sense that cities, or countries, grow when new opportunities abound.  The evidence to date strongly suggests they aren’t abundant here.   Some might think that a shame –  in some ways I do too –  but believing otherwise doesn’t make it happen.

Is there 100 per cent conclusive evidence?  No, in this life there hardly ever is.  But lets look at some of the straws in the wind:

  • among the very worst productivity growth in the OECD throughout the post World War Two period,
  • an export share of GDP that has stagnated and even gone backwards (in a country that once had among the very largest per capita exports anywhere),
  • a major city that has incredibly rapid population growth over decades, and yet of which even Treasury now observes “we are not seeing the agglomeration effects we would expect from Auckland’s size and scale.”

I’m for evidence-based policy.  If we’d seen more and more New Zealand firms successfully establishing themselves in international markets, and the export share of New Zealand’s GDP rising (as it typically does in successful catch-up economies), if we’d seen a decade of productivity growth materially outstripping that of the other OECD countries so that we were finally catching up, if we are seeing evidence that GDP per growth in Auckland was consistently far-outstripping that in the rest of the country (as we find in many other countries centred on knowledge-based industries) then (a) we could all celebrate, and (b) it might make sense to think about whether we should open our doors to lots of migrants.   As it is, we see none of those things.  And that with one of the largest (per capita) legal immigration programmes anywhere in the world.   It is madness; ideology (“big New Zealand” more than theoretical arguments typically) over experience.

But the Prime Minister and the National Party still “believe” apparently.  Perhaps they could show us their evidence?

I don’t like to make too much of the last few years’ experience.  Apart from anything else, data revisions could mean that stories that look good today eventually disappear like the morning mist.     But, for what it is worth, the last few years don’t do much to instill confidence.

There is the dysfunctional housing and land supply market for example.  Sure, you can argue that it really has nothing to do with immigration policy, but if you can’t or won’t fix up the land supply market –  and neither this government nor its predecessors have –  don’t give us the nonsense that New Zealand can cope with his immigration policy.   Even if there aren’t large productivity costs from those land-use restrictions (I’m open-minded on that in New Zealand) the distortion to real house prices, that makes purchasing a home more and more difficult in our cities is a standing reproach to our leaders.

And then there is productivity.  I’ve repeatedly showed charts of real GDP per hour worked in New Zealand, where the data suggest we’ve had no growth at all in the last five years (even though the dogma suggests large immigration should be generating positive productivity spillovers).  It is often hard to get timely cross-country comparisons, but earlier this month the Conference Board released their latest annual estimates of real GDP per hour worked.    Here is how New Zealand has compared over the last five years (2011 to 2016) with a sample of 40 or so other advanced countries (the group I often use –  EU members, OECD members, plus Singapore and Taiwan).

2011 to 2016 growth in real gdp phw

And it isn’t just because those other countries were recovering from deeper recessions.  Our labour productivity growth also lags behind the median of these countries for the whole period since 2007 (just before the recession).  It is just the same old story of underperformance.   Are there mitigating factors?  Probably always to some extent.   The Canterbury rebuild inevitably dragged resources away from other uses.  On the other hand, relative to our worst decade of economic underperformance –  the 1970s –  the terms of trade have mostly been pretty good this decade.

With the export share of GDP drifting further backwards, it looks more and more like an economy that exists on building for each other.  Nothing wrong with that in one sense –  people need houses, offices, roads etc –  but it isn’t how economies successfully catch-up with those richer and more productive than them.  That typically involves finding more and better things to successfully take to world markets.

In his post-Cabinet news conference, the Prime Minister was also making much of the contribution to the net migration numbers of the decline in the outflow of New Zealanders to Australia.    That, he claimed. “was a vote of confidence in New Zealand”.   Perhaps it sounds good politically to say it, but lets face reality.  New Zealanders have gone to Australia is fewer numbers mostly because the Australian labour market is tough – the unemployment rate and underemployment rates linger high, and there is increasing awareness of how much on their own New Zealanders are in Australia if things don’t work out well.     And even though the labour market is tough, look at Australia’s productivity growth (from a much higher starting point) relative to ours in the previous chart.  It isn’t so much a vote of confidence, as an unexpected loss of an escape valve.   That makes things even tougher for New Zealand, especially when the government keeps on bringing in much the same number of non-New Zealanders as ever.   In the short-term it gives the economy a boost –  demand effects exceed supply effects in the short-term –  but in the longer-term it just keeps worsening New Zealand’s relative performance on the sorts of economic measures that matter.

The Prime Minister was also at pains to stress that he believed New Zealand –  government and private sector – could and would invest enough to handle the rapid growth in the population.  The evidence has long been against him on that one.  Despite having had one of the faster population growth rates in the OECD, we’ve long had one of the lower rates of business investment among OECD countries.   In a well-functioning economy with high productivity growth etc you’d expect it to be the other way round –  more people should need more investment, of all sorts.

My arguments are generally specifically focused on New Zealand –  opportunities in Ireland or Belgium may well be different than in, say, New Zealand, Tasmania or Nebraska.   But for what it is worth, here is a scatter plot, using IMF data, of population growth rates and investment as a share of GDP for the countries the IMF classifies as advanced.  I’ve used data since 1995, simply because that is the period for which the IMF has data for all countries.   Recall that one really should expect investment as a share of GDP to be higher in countries with faster population growth than in those with lower population growth, all else equal.

But

IMF scatter plot

There is almost no relationship at all – and certainly not the expected upward-sloping line.  If anything, the relationship is slightly negative.  And New Zealand –  the red dot above 30 on the horizontal axis –  doesn’t stand out from the pack.  Since people do have to live somewhere, it looks a lot like rapid increases in population tend to crowd out (rather more price sensitive) business investment.    Perhaps it isn’t surprising then that many of the advanced countries with the strongest growth rates in productivity also have flat, or even falling, populations?  But, whatever the wider story, there isn’t much reason in the international data to believe the Prime Minister’s wishful thinking that enough will be invested and all will be fine.  And when your country already has some of highest real interest rates, and a persistently overvalued exchange rate, it is probably safer to believe that all won’t be just fine.

I could go one, but I just wanted to make two final brief points:

  • in his comments quoted earlier the Prime Minister suggested that somehow the alternative to continuing very high immigration targets involved “settling for a kind of grey, low-growth mediocrity where the best thinking of the early (19)80s sets our political direction”.   Personally, I’d say the very best thinking from the early 80s –  that of reformers at Treasury and Reserve Bank for example –  was very much to the point.  But even setting that to one side, the Prime Minister’s attempted slur might well rebound.  I checked out productivity growth for the nine years to 2016, compared to the nine years to 1984.  In those 9 years of Sir Robert Muldoon’s stewardship, growth in real GDP per hour worked was (according to the OECD) 9.0 per cent.   Not great.  But on the Treasury’s preferred measure of real GDP per hour worked (and even correcting for the break in the series last year), productivity growth from 2007 to 2016, totalled about 5.5 per cent.    The Prime Minister was Minister of Finance for most of that period.   (Yes, sure there were plenty of other imbalances, bad choices etc then, as well as terrible terms of trade….but they still achieved faster productivity growth).
  • I could commend to the Prime Minister a column in The Australian yesterday from Australian labour economist Judith Sloan (there are extracts and commentary on it here).   Notwithstanding Australia’s stronger productivity growth, and overall higher incomes, she slams the Australian government’s substantial immigration target (just slightly smaller, in per capita terms, than New Zealand’s), noting in particular the ‘cynical charade’ in professing concern about house prices while doing nothing about immigration (land supply –  a major problem in Australia too –  isn’t under federal government law).  Sloan isn’t just any economist.  She led the Australian Productivity Commission 2006 inquiry into Australian immigration.  And in many respects, she is about as “right-wing” as they come (to the extent such slogans have meaning), so much so that she was nominated by ACT and the Business Roundtable, and then appointed by the government, to serve on our own 2025 Taskforce a few years ago, where she was instrumental in ensuring that that Taskforce did not champion New Zealand’s immigration policy.   She doesn’t write about New Zealand these days, but it would be surprising if her conclusions about our policy were les stridently expressed than those about Australia’s

The Prime Minister can “believe” all he wants. He can attack Opposition parties all he wants (and we have yet to see specifics of what either Labour or NZ First propose), he can diss a former leading figure of the business and economic establishment, Kerry McDonald, he can ignore the counsel of someone as able in this area as Judith Sloan.  But what he seems unable to do is offer any evidence that his immigration is, or ever will, work for the benefit of New Zealanders.

Treasury on immigration, productivity and real wages

I’m still under the weather with the after effects of a bad cold, so this won’t be a long post.

Treausry has long been a champion of New Zealand’s large scale non-citizen immigration programme, going all the way back to when the system was opened up in the earlier 1990s.   But more recently, there have signs of some differences of view even within the organisation.  in 2014, they published (consultant) Julie Fry’s working paper on migration and macroeconomic performance in New Zealand, which was a pretty sceptical, but careful, assessment of whether there had been any material gains to New Zealanders.  Fry’s conclusion was that any gains had been “modest”.     There was, I gather, quite a difference of view within the organisation as to whether the paper should even be published.

Treasury has also been on record as having some concerns about possible adverse labour market outcomes for lower-skilled New Zealanders from, for example, the big increase in the number of working holiday schemes New Zealand has signed up to.  They noted, in a presentation released last year,

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

But they have remain upbeat about the potential contribution from genuinely highly-skilled immigrants.

And at the top of the organisation, the public view on New Zealand’s immigration from the Secretary to the Treasury, in a succession of speeches and interviews, has been relentlessly positive –  and equally relentlessly devoid of evidence.

In the Treasury’s Long-Term Fiscal Statement released late last year they were apparently torn between creedal statements, and a grudging engagement with the evidence, notably a recognition that “we are not seeing the agglomeration effects we would expect from Auckland’s size and scale”.

So I was interested to see that in the Budget Economic and Fiscal Update last week, Treasury looked at a scenario in which the overall net migration inflows stay even larger for longer than Treasury’s central projection.   As it is, their central projection numbers are already high: after growth in working age population of 2.4 per cent in the year to June 2016, they expect to have seen growth of 2.7 per cent in the year to this June, and 2.4 and 2.1 per cent increases for the next two years.

The scenario is as follows

This scenario illustrates the impact of higher migration on the economic and fiscal outlook when capacity constraints arise. In this scenario, net migration is assumed to remain around its current level of 70,000 per annum through to the end of the forecast period.

The results include

In this scenario, stronger population growth drives faster growth in household consumption, residential investment and business investment. Stronger domestic demand is reflected in faster employment growth. However, in the construction sector, it becomes increasingly difficult to access labour and materials. As a consequence, there is additional upward price pressure on construction costs, which leads to higher headline inflation. The policy interest rate rises earlier and the exchange rate is higher as monetary policy seeks to stabilise inflation.

So far, so conventional in many ways.  This is the standard experience in New Zealand when there are large migration inflows.  There is nothing here of the lines the Reserve Bank has been running for the last year or so, in which increased net migration somehow eases overall inflation pressures.

But what really caught my eye was the next sentence

Reflecting these conditions, growth in labour productivity, real wages and real GDP per capita is more moderate than in the main forecast.

They didn’t need to include that observation at all.  The scenario would have made perfect sense without it.  But here is the government’s premier economic advisory telling them –  and us –  that if net migration remains at current levels it would be expected to have detrimental effects on productivity (and wages).      I wonder what the Secretary to the Treasury makes of that?

After all, it is not as if there has been much productivity growth for the last few years.  Treasury uses a measure of GDP per hour worked that simply uses production GDP (I usually use an average of the two GDP measures in charts here).  Here is what their measure looks like.

tsy productivity measure

No growth in labour productivity at all for the last five years (the last year’s drop is largely just a series break in the HLFS hours worked, consequent on survey question changes).

Perhaps coincidentally, that happens to have been the period over which we’ve had big increases in, and persistent very high levels of, net PLT migration (much of it a reduction in the annual outflow of New Zealanders).    And, as I noted, the other day, on Treasury’s own estimates, there have been no economywide capacity constraints at play in that period –  the output gap is estimated to have been (and still to be) negative.  For enthusiasts for large scale migration, it should have been a good time for seeing lots of productivity growth.

For some reason, in their central forecasts Treasury expects quite an increase in productivity growth from about now.  They never explain what (about the economy or policy) is changing that will end now the run of five years of zero productivity growth.  These are their central forecasts (on page 6 here) for labour productivity growth.

Forecast annual growth in labour productivity,

June years

2018 1.3
2019 1.9
2020 1.1
2021 1.1

Perhaps as puzzling, are their real wage forecasts.  Even though Treasury expects the unemployment rate to fall, and the rate of productivity growth to accelerate, these are the real wage growth forecasts.

Forecast annual growth in real wages, June years
2017 (est) 0.0
2018 0.7
2019 0.6
2020 0.0
2021 0.0

Five years and a forecast growth in total real wages of  only 1.3 per cent.  It is enough to make one glad not to be in the paid workforce.   Workers will surely be hoping that Treasury’s alternative immigration scenario –  with those adverse productivity and real wage effects they talked about –  don’t come to pass.    (And I am a little surprised that no Opposition party seems to have pointed out how bleak the outlook for workers’ incomes is under the central Treasury forecasts.)

It would be interesting to have an updated honest and considered assessment from Treasury as to what our immigration policy is doing for New Zealanders.  I suspect there is still a tension between the textbooks and the “ideology”, and the growing accumulation of reasons to doubt that, in these remote islands, in an age when personal connections matter more than ever, simply piling up more people here –  many of the newcomers not even being that highly-skilled –  is making us better off, not worse off.   It is a strategy that is great for owners of business in the non-tradables sectors –  more people means more demand –  but not for the economy as a whole.  Our living standards depend heavily on the ability of firms here to find ever more ways of successfully selling stuff to the rest of the world.  That simply hasn’t been happening on anything like the necessary scale, and the absence of aggregate productivity growth is just one reflection of that.