Bridges and the State of the Nation

I mostly went looking for the text of Simon Bridges’ “state of the nation” speech yesterday to see if there were any signs, at all, that the Leader of the Opposition was going to confront New Zealand’s appalling productivity growth performance.   He had, after all, been Minister of Economic Development only 18 months ago.  There weren’t.

I’ll come back to economic performance and economic policy later, but the rest of the speech had some interesting snippets.

There was a long section on law and order.  There was plenty of rhetoric but one line in particular caught my eye

I am determined that under the next National Government, New Zealand will become the safest place to live in the world.

Wow, I thought, that sounds like a bold promise.  I don’t carry crime data around in my head, so I went looking.   Reporting and collection differences muddy cross-country comparisons of the incidence of crime, and for a full comparison you’d want to look at the full gamut of violent crime, theft and so on.   But the most comparable data across countries is that for the homicide rate.   Here are the homicide rates (per 100000 people) for advanced countries, using UN compilations of data.

homicides

Dreadful as any intentional homicide is, New Zealand doesn’t rank too badly, just a bit better than the median of this group of countries.  But Simon Bridges says that under the next National government, New Zealand will be the safest country in the world.   Say they come to office next year, and are in office for nine years.  That means he thinks that within ten years, they can take steps that will lower New Zealand’s intentional homicide rate by just over two-thirds, to match the record in places like Singapore, Japan and Luxembourg.

I ran this chart in a post late last year, using NZ Police data.

murders

Cutting our murder rate by more than two-thirds would involve getting, and keeping, it, down to the very lowest individual years managed in the last 100 years or so.   It would be laudable goal…….at least if Mr Bridges had any serious and plausible ideas about how to do it.  And the sort of change that really would support, over time, a much lower prison population.   Fifteen murders a year would still be fifteen too many, but even that seems like a tall order, even with an ageing population.  Mr Bridges promises that National will “continue to put forward the ideas” between now and the election to make his “safest place to live in the world” vision a reality.  Count me a bit sceptical, but I’ll watch with interest to see if there is some substance there.

The headline from the Bridges speech was around the promise to index the income thresholds in the tax system.  It would be a welcome, but well overdue, reform if someone finally does it.  But I wondered about some of the details.  This is how Bridges explained what they are proposing.

We will amend the Income Tax Act to make sure income taxes are adjusted every three years in line with the cost of living.

Within a year after every election, Treasury will advise the Government on how much the tax thresholds should be adjusted to account for inflation.

That means income tax thresholds will increase every three years to stay in line with the cost of living.

The first change will be in 2021 and relate to the tax years of 2018, 2019 and 2020.

We will include a veto clause so the Government of the day can withhold the threshold changes in the rare circumstances that there is good reason to do so.

But it will have to explain that decision to New Zealanders.

But why not

(a) adjust the thresholds every year, and

(b) adjust them automatically, with the formula written into the Income Tax Act?

After all, we manage to adjust (for example) NZ Superannuation rates automatically each year.

One of the arguments for indexing the thresholds is to reduce the ability of politicians to use occasional adjustments to present themselves as giving a tax cut.  The Bridges model –  adjustments only every three years, and only on the basis of the Minister of Finance responding to a Treasury recommendation – still seems to keep too much of that potential intact.  Adjusting for inflation will be in ministerial gift, not simply an automatic calculation routinely notified to taxpayers (according to legislative formula) by the Commissioner of Inland Revenue.

I’m also uneasy about this idea that the Minister could reject a specific  indexation recommendation.  First, if the adjustment were being done annually, the amounts involved are so small there could be no compelling reason not to proceed (with triennial adjustments the amounts get chunkier). And, second, we don’t apply this approach to (say) New Zealand Superannuation payments.  What the statutory formula says goes.

If a government thinks there is a persuasive case to raise tax rates –  and from time to time that may be necessary or appropriate –  they should be willing to come to Parliament and make the case in an open and transparent way.  That is, for example, what they have to do if they want to lower (real) NZS payments.    Inflation shouldn’t be able to be used to be used as a silent cover, enabling governments to grab more (real) revenue.

And then there was the economy.  Simon Bridges devoted a lot of space to it in his speech but there was very little serious content.  What it all boiled down to was:

(a) when we were in government our economy was a rockstar (he doesn’t use the word, just ‘one of the best performing in the developed world’)

(b) Labour is raising taxes

(c) Labour is doing wasteful spending (fee-free tertiary education and the the Provincial Growth Fund), and

(d) National would reverse the Auckland fuel levy, and any capital gains taxes, and not increase other taxes in a first term.

(It was notable that despite the talk of wasteful spending –  with which I agree with him on the specifics –  there were no promises to unwind those measures.)

And that’s it.  There was no suggestion of an economic reform strategy –  not even ideas to come –  or even a need for one.  Things would, it appears, be fine if only we had lower (Auckland) petrol taxes and no capital gains taxes.

So, as an aide memoire for Mr Bridges and his economic team, lets remind ourselves of some key New Zealand data.  I ran this table a couple of weeks ago

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

When Mr Bridges’ parents were young, New Zealand was still among the very richest and most productive countries on earth.    His children are born into a country where average productivity levels are barely 60 per cent of those in the top tier of the OECD.

And what happened under the government in which he was, by the end, a senior minister.

real GDP phw dec 18

Barely any productivity growth at all in the last five or six years (and allowing for the lags, and the fact that the current government has done little, the most recent year’s data reflects those some policy frameworks and choices).  We dropped further behind Australia over the last decade, and various eastern European countries –  never previously close to us in the last 150 years –  are either snapping at our heels or overtaking us.   Well done them.  Shame on us (and the succession of governments and oppositions).

Successful economies tend to trade a lot with the rest of the world.  Early in their last term, the National Party in government knew this –  reflected in the (slightly wrong-headed) targets for much higher exports as a share of GDP).   Here is the actual and forecast data (for exports –  the import chart isn’t that different) from the most recent Treasury HYEFU.

exports hyefu 18

Foreign trade as a share of GDP has been shrinking this century – under both National and Labour governments –  and nothing Treasury can see suggests that underperformance is about to be reversed.

But in two pages of speech text about the economy there was not a mention –  not even a hint – of any of this.  Of course, none of this is as immediately topical, or offering political mileage, as a possible capital gains tax.  But a serious leader might at least be able to point to the need to do so much better on the economic performance –  material standard of living – front.

It is only about 19 months until the next election.  Sadly, there is no sign from this speech that a future National goverment would be any more serious about reversing our relative economic decline than their predecessors –  of whatever stripe –  for the last 25 years.  Worse still, they seem to have given up believing there even is an issue.

School days and years

Sitting reading the Herald this morning as my oldest child headed out the door for his first day of the new school year –  two more still on holiday – I noticed that National MP Nicola Willis was making a bid for the state to do more child-minding for her and her husband   She has an op-ed trailing a private member’s bill she will seek to introduce to reduce the summer holidays for school children by a week or two.

That had me wondering how our school year compared to those in other advanced countries.  For some reason, the OECD doesn’t have data on New Zealand in their tables showing the number of hours per year of instruction at primary school.  But the Ministry of Education website says that our primary school have to be open for 390 half days a year (195 days).    The standard primary school day seems to be from 9am to 3pm, and if we subtract an hour for lunch and fifteen minutes for another break, that leaves 4.75 hours per day of instruction time, for a total of 926 hours per year.   Here is how that estimate compares with the other OECD countries for which there is data reported.

school hours per year

In other words, we already have one of the higher primary school hours requirements among the OECD countries.  (Accordingly to one website I looked at, Australia has slightly shorter school years, but slightly longer school days.)  And recall that these aren’t voluntary hours, but coerced ones.   Finland is sometimes touted as having an excellent education system, so I was particularly interested in the hours numbers reported there.  There are some odd looking numbers –  South Korea has a reputation for long hours and very intense schooling, which doesn’t seem to square with these numbers – but I can’t see any credible way in which New Zealand is not already in the upper half of the OECD for schooling requirements.    And everyone recognises that schooling has a considerable element of (compulsory) child-minding about it: home-schoolers rarely spend 900 hours a year on the equivalent learning.

Perhaps also not entirely irrelevant when an MP wants to reduce holidays for kids is to look at minimum annual leave requirements for adults.  It wasn’t until 1944 there were any.  When I was the age Nicola Willis’s kids are now –  and the school year seemed the same length as it is now – that minimum was two weeks.  In 1974, the minimum was increased to three weeks, and in 2007 it was further increased to four weeks.   These weren’t changes proposed by the National Party, but there is no sign Nicola Willis or her leader wants to undo them, so why does she think our kids should be conscripted to the state’s service for even more weeks of the year, even as (most) adults appreciate the greater leisure?

Willis claims a high-minded motive

Most importantly, Kiwi kids feel the impact. Research shows the “summer slide” in student achievement is real. Kids’ literacy abilities can decline over the six-week break, with one study showing students losing months of progress over summer. Much of term one can be spent getting kids back to where they left off the following year. This is a real barrier to achievement.

Count me a sceptic on that one.  “One study” can be found to support almost any argument.  But even if it were true (a) plenty of workers come back to their desks after the summer holiday at a bit of a loose end, less focused than they might be for a few weeks, (b) formal literacy abilities are not the only capability we want our kids to develop, and (c) it would surely depend a great deal on the specific child  (my wife and I both recall going to library almost every day in our school holidays, and one of mine tells me she has read 33 books this month so far).   And if New Zealand’s PISA scores have been dropping –  under Nicola Willis’s party’s term of government –  that isn’t because we shortened the school year.   And if the holidays sometimes drag a little (a) boredom is often good for children (as they find ways to amuse themselves), and (b) so do terms and school years. I presume I’m not the only parent to have noticed children getting tired towards the end of terms, especially towards the end of the year.  They are children, and primary schools ones in particular don’t have the stamina of heathy adults.

But National Party MP Nicola Willis –  a party that once claim to stand for freedom, family etc –  now wants to compel kids into state-run schooling for more weeks of the year.

And why?   That alleged summer time literacy drop isn’t the real reason –  despite that “most importantly” the argument is only introduced late in her article.  What she wants is the state to force kids into school –  away from beaches, climbing trees, picking blackberries, reading, trying out cooking, hanging out with friends, siblings, parents, or whatever –  for longer to make it easier for parents to work long hours (over the course of a year).    It is really as simple as that.

I do have some sympathy for some parents –  not high income ones like Nicola Willis and her husband, for whom these things are purely choices.  Thanks to successive National and Labour governments, good housing in our major urban areas has been rendered ridiculously and totally unnecessarily financially out of reach of many people.  I have no idea how young couples manage to buy a house in this neighbourhood (I bought my first house here at 26 for the equivalent of $300000 in today’s dollar –  the median price in the suburb is now $900000), but part of it is both parents working full-time, not really from “choice”, but from something closer to “necessity”.   But how then do you manage school holidays?

I’m fortunate. Not only did I get into the housing market before the absurdity took hold, but in the five years we both worked fulltime we had a nanny, and I (enjoyed) taking all January off to be around with the kids.  And now we are comfortably a one income family and I (most of the time) really enjoy the holidays and the time with the kids (grown up before you know it anyway).

Not everyone has those options –  although I’m sure Nicola Willis and her husband could, despite her claims of how tough it is for them –  but that doesn’t make the appropriate answer to have the state coerce your kids into school for even more weeks (at the hottest time of the year).  Before you know it, people like her will pop up wanting to have kids in school to (say) 5pm each day as well –  much more convenient for workers I’m sure.

For a National Party MP to fail to recognise that substantial distinction between compulsory attendance (school) and voluntary childcare arrangements tells you again how statist the National Party itself has become.  Perhaps there are regulatory barriers to more after-school or holiday programmes –  one imagines the National government’s OSH rules might be part of that –  and it might be sensible to identify any of those and advocate removing them.  It would certainly make sense to deregulate the land market and make decent housing affordable again, in ways that would give many more families options around part-time work, longer holidays, or one parent or other not engaging in market employment at all for a time.  It might even make sense to explicitly encourage strong two-parent families.   Those are the sort of measures a National Party might once have proposed.   But these days they seem to be mostly statist me-tooers, proposing to deal with one egregious state stuff-up (the housing market) with yet more state coercion.   And this from a party that barely even supports effective school choice, so that more coerced time in schools also typically means not forming our children in the academic heritage of our civilisation, but quite a bit more (mostly unthinking) indoctrination in the values and political beliefs of the teachers.

And now, when the wind drops a bit, I’m off to the beach with my daughter.

Electioneering 1954 style

A few weekends ago I was fossicking in a charity book sale when I stumbled on The National Government 1949-1954: FIve Years of Progress and Prosperity, published by the National Party.   It was, it appears, published as part of National’s 1954 election campaign: 150 pages of (often quite detailed) text and tables, complete with a detailed chronology of measures, and an index.

I’ve always been interested in that first National government.  Apart from anything else, the Prime Minister (and Minister of Finance) was my grandfather’s cousin –  they’d been close, and in our family Sid Holland was always “Uncle Sid”.  It was a government with a fairly mixed record.  Through my career at the Reserve Bank I was always quietly proud that a relative had legislated to establish the primacy of price stability in what we expected from monetary policy and to put monetary policymaking at a further remove from direct ministerial control (even if, in practice, it didn’t make much difference).

There was some genuine liberalisation –  including of those banes of New Zealand economic management for too many decades, import licensing and exchange control.  And there was the ANZUS Treaty –  which I hadn’t previously known came into effect on ANZAC Day, a nice touch –  and the interesting episode of New Zealand’s approach to the Suez crisis.  It was the time of the wildly popular first ever visit by a reigning sovereign.  And the sort of short-term austerity that led to the Auckland Harbour Bridge being built too narrow from the start, or central planning that meant that for years the Reserve Bank wasn’t allowed to start building its own building.

In the territory of serious black marks, it is hard to defend the way the 1951 waterfront strike was handled –  not so much the confrontation with the watersiders itself, but the brutal undermining of civil liberties and the freedom of the press during that period –  often using powers introduced by the previous Labour government.

Perhaps only in New Zealand  –  where good histories and biographies are few – could a government that was in power for eight years, with a leader who spent 17 years in the role, not have either a decent scholarly treatment of that government or a biography of its leader.

But what of the book?

It has a foreword by the Prime Minister which, I imagine, captures quite well the way National saw things in those years

It is a proud thing to belong to a Government which is able to say that the people have never been better off, that there is a new spirit of vigour and enterprise abroad in the land, that there was never a time when so much progress was being made in the development of the resources of the country.

Once again, New Zealanders feel that the future belongs to them…….

Freedom, which is at the heart of the National Government’s philosophy, is perhaps an intangible thing – until you have lost it.  But it yields tangible results. The Government’s recrod, which this book outlines, is the answer to those who stand to the creed of Socialism.

But having lauded freedom, the Prime Minister goes on to laud the apparently growing role of the state.

A vast programme of development works is in progress –  imaginative and progressive schemes like the new pulp and paper and timber industry in the Rotorua-Bay of Plenty area, the utilisation of geothermal steam, the huge hydro-electric project at Roxburgh.  More hospitals, more schools, more houses –  there is no neglect of everyday necessities because of the scale of the development programme.  The Government has liberalised and extended social services, more is provided for other social services, trade is booming, the needy are cared for, the workers are prosperous, savings are greater.  On all fronts New Zealand has gone ahead, as a young country should…..

I lived in Kawerau as a child, but it is only over the last decade as I’ve come to read a lot more New Zealand history that I’ve come to realise how big a deal –  in some way, the decade’s Think Big, complete with outside capital and protected markets –  the Kawera/Murupara development really was in the 1950s.  The state was at the leading edge of promoting economic development, as it saw it (in this book, the Kawerua scheme is described –  perhaps with a little exaggeration, depending on how one classifies Vogel’s interventions –  as “the greatest single enterprise ever attempted in New Zealand”.

On the one hand, in the early 1950s, New Zealand still had some of the very highest material living standards in the world.  On the other, only a few years later people started writing serious reports (eg the new Monetary and Economic Council and the new NZIER) observing that New Zealand’s productivity growth was lagging behind.  Sadly, it was to be the story every decade from then to now.

But this post isn’t really intended to be an abbreviated political or economic history of the decade.  It was more that I was fascinated by things the National Party chose to highlight, and the accounts of interventions I’d just never been aware of.

Take rest homes for example.  When I was young, almost all of them were run and provided by church groups. I had never given much thought to why –  caring for the vulnerable was one of those things the church had done since Roman times.   But this little book tells how the government skewed the playing field:

Soon after taking office the Government introduced a policy of helping charitable or religious organisation to establish homes for aged people. Generous subsidies, up to 50 per cent, are offered, together with loans finance on favourable terms in respect of housing schemes.

The next sub-section recounts the introduction of a similar subsidy for such groups to establish youth hostels.

There are reminder of times past: anti-tuberculosis campaigns get two-thirds of a page to themselves.

There were 506000 radio licences in New Zealand in 1954, and not a single television.

And in a country of two million people, there were still only 334580 telephone subscribers (and a little subsection on “Mobile telephone services” –  some 2000 people had telephones in vehicles, up from only 192 when the government had taken office five years earlier).

The forerunner to Air New Zealand –  Tasman Empire Airways Ltd –  flew 30888 people trans-Tasman in the entire year to March 1954: fewer than 100 a day.  Domestic air services, so the party (fairly) boasted, has increased substantially during its term in government, but total passenger numbers were still less than 1000 per day.

And if economists are (largely rightly) inclined to be censorious about the excess demand policies of the period (inflation nonethless kept in check) there is still something to hanker after in these numbers:

In spite of the large increases in the labour force, ample work is still available.  At 15/1053 the number of vacancies for men was 13500 and for women 6500. Unemployment in 1953 averaged only 85 persons throughout the year.

(These were people registered as unemployed.  Five-yearly census numbers were higher, but still very low by modern standards.)

These were the days when, in New Zealand almost uniquely, cars held their value, the numbers imported being rationed.  There was an exception for people with overseas funds themselves (the “no-remittance” scheme) –  which made an English OE additionally attractive.  My grandfather was not infrequently heard to jest that my father proposed to his daughter only because she had a car, (having done her OE).

What of monetary policy?

The declared policy of the Government is to divorce currency and credit from political control, to avoid the issue of credit unbalanced by goods and services, and to stabilise internal prices by establishing a proper balance between money and goods.

From an economist’s perspective, two out of three isn’t bad, but that middle phrase is disconcertingly reminiscent of the real bills doctrine.  In fairness, the same government liberalised what were then known as “capital issues controls” restricting the ability of firms to raise funds on market.

And if there were elements of liberalisation, (eg the “state monopoly of coal seams” was abolished  on 10 October 1950) there was also this

The Potato Board was established in 1950 to control the production and marketing of main crop potatoes.

Why, one has to wonder?

In the some things don’t seem to change category, there was the boast that

Maori land claims.  Removal of grievances over land claims is being vigorously pursued, Claims settled include: [and a list follows]

Perhaps in the same category, pages and pages are devoted to housing and housing finance, including this curious observation under the heading “Encouraging local authorities to buy land and develop it for housing”

A retarding influence in many cases has been the desire on the part of local bodies to avoid placing a further burden on ratepayers by raising loans for housing activities, but the loan procedure has been simplified to open the way for local authorities to engage in housing activities without recourse to long-term finance.  They can now finance these projects on bank overdraft.

I’m clearly missing something in understanding the greater appeal of a bank overdraft.

Meanwhile large scale immigration has restarted (I wrote about it here), including subsidised (“assisted”) migration.  Being a skilled building trade worker was enough to get assisted passage for married people (at the time, policy explicitly favoured single people because of the housing shortages).  But there is no hint of the politicians realising –  what economists knew even then –  that new arrivals added more to housing demand, and overall resource pressure, than any feasible increase in supply (even in the building sector specifically).

For an economic history junkie, it is a fascinating read.  There is the line from L P Hartley’s novel The Go-Between that “the past is another country, they do things differently there”, and it comes to mind strongly reading this book  And, it won’t surprise regular readers to know that the other thought that comes to mind is one along the lines of “if only” we’d done things differently then and since, and could still today boast of being one of the richest countries in the world.  How much more we could offer our people –  on market, and off.  Of course, in material terms, people are better off today than they were in 1954.  That is an important benchmark, too easily lost sight of –  only a few years prior to 1954 my mother had done her masters’ thesis on the incidence of basic home appliances in Dunedin (far from universal) –  and yet, and yet, the failures and lost opportunities since then, which mean we now languish so far down the international league tables, matter too.  Both National and Labour must take responsibility for that failure.  Not that one would know it from either party’s campaigns last year.

 

Sir William and the rockstar economy

I don’t really want to revisit the questions of whether retired politicians and senior public servants should be given honours largely for just turning up and doing a (fairly reasonably remunerated) job, or even whether there are really 15 people per annum in this country deserving of knighthoods.  I touched on those issues in a post in January.

But two awards in yesterday’s list caught my eye.  The first was the knighthood to former Prime Minister and Minister of Finance Bill English, and in particular the descriptions of Bill English’s contribution.

There was the official citation, the words put out under the name of the Governor-General, but presumably supplied by the current Prime Minister and her department

As Finance Minister from 2008 until 2016, Mr English oversaw one of the fastest-growing economies in the developed world, steering New Zealand through the Global Financial Crisis and the Christchurch earthquakes and ensuring the Crown accounts were in a strong financial position.

And, even more incredibly, a story by Stuff political reporter Stacey Kirk in which she noted that the official citation had been expressed “rather dryly”, as if it didn’t do full justice to the man’s contribution, and going on to observe, without a trace of critical scepticism or irony,

More colourful commentary at the time would globally brand him the man responsible for New Zealand’s “Rockstar Economy” – the envy of government’s worldwide and a textbook example of how to pull a country out of recession.

From a sudden jump yesterday in the number of readers for an old post of mine from 2015 on the emptiness –  or worse –  of the “rockstar economy” claims, it seemed that at least a few others might have been a bit sceptical of Kirk’s column.

I’m not going to quibble about everything.  The Crown accounts were in a strong position when National took office in 2008, and were in a fairly strong position when they left office.  Net debt was higher when they left office than when they took office, but the deficits which were emerging in 2008 as the recession took hold –  recall that only a few months earlier in the 2008 Budget, Treasury’s best estimate was that the budget was still in (modest) surplus – were gone and the budget was back in surplus when National left office.

The terms of trade make a big difference to the government’s finances.  Here is Treasury’s chart from this year’s Budget, illustrating how much help our unusually high terms of trade have been in recent years.

cab with tot adj

It is a real gain, but it is an exogenous windfall, not something any government or politician could simply conjure up.

What about the official claim that Bill English was responsible for “steering New Zealand through the Global Financial Crisis”.   It has become part of established rhetoric, but it has never been clear to me –  and I was working at The Treasury at the time –  that there was anything of substance to it.    As ever, the biggest single contributors to getting New Zealand through this particular recession were (a) time, and (b) monetary policy.    The crisis phase in other countries had been brought to an end by about March 2009 –  initially as a result of extensive interventions in those countries (bailouts, fiscal stimulus, lower interest rates, and so on).  That took the pressure off the rest of us.  And our own, operationally independent, central bank had cut the OCR by 575 basis points by April 2009 (having begun to cut well before National took office in mid-November 2008), and some mix of the sharply lower interest rates, global risk aversion, and lower commodity prices had also lowered the exchange rate a lot.  The Reserve Bank also put in place various liquidity assistance measures, at its own initiative.

What role then did New Zealand politicians play in “steering us through”?  The previous Minister of Finance had put in place the deposit guarantee scheme, designed to minimise any risk of panicky runs on New Zealand institutions. I happened to think (having been closely involved) that was a good and necessary intervention, even if on important details the Minister departed from official advice, in turn increasing the later fiscal cost.  On taking office, the new Minister of Finance, Bill English, made no material changes to the scheme, and took no material steps to rectify its weaknesses.   Mr English did approve the (better-designed) wholesale guarantee scheme, designed to assist banks tap international wholesale funding markets in a period when those markets had largely seized up.  It didn’t end up being extensively used, but was also the right thing to have done at the time.

What else was there?  In the 2009 Budget –  delivered after the crisis phase abroad had passed –  a couple of rounds of tax cuts, promised in the 2008 election campaign (itself occurring in the midst of the crisis) were cancelled.  That was prudent –  given other fiscal choices the government had made –  but there wasn’t anything extraordinary or particularly courageous about it.   There was no discretionary fiscal stimulus undertaken in response to the crisis by either government –  or nor was it needed, given the scope monetary policy here had.

The truth of the international financial crisis of 2008/09 is that the New Zealand was largely an innocent bystander, caught in the backwash.  There wasn’t much governments could, or did, do about it, and – to a first approximation –  what they (Labour and then National) could do, they did.   Both supported an operationally independent Reserve Bank and it, largely, also did what it could do (if, arguably, a bit slow to get off the mark).  And then the storm passed and we started to recover, in a pretty faltering sort of way.

What about the other bit of that official citation, the claim that “as Finance Minister from 2008 until 2016, Mr English oversaw one of the fastest-growing economies in the developed world”?    Why does the current Prime Minister continue to buy into this sort of nonsense –  the myth  (no, sheer falsehood) of the “rockstar economy”?    To the extent the claim has any meaning at all, it simply reflects the much faster rate of population growth New Zealand experienced, especially in the last five years or so.   Over that five year period (2012 to 2017), New Zealand’s real GDP per capita increased at almost exactly the rate of the median OECD country.   Which is okay, I suppose, but nothing to write home about, especially once one remembers that we are poorer than most of these countries, and are supposed to have been trying to catch-up again.

But, one more time, let’s dig a little deeper.

Productivity growth is the only sure foundation for sustained improvements in material living standards.  Over the full period 2007 (just prior to the recession) to 2016 (the last year for which there is data for all OECD countries), New Zealand experienced labour productivity growth basically equal to that of the median OECD country.  Again, perhaps not too bad, but no sign of any catching up.     What about the last four years, the period to which most of the “rockstar economy” claims related?

real gdp phw english

Spot New Zealand –  if you can –  down next to Greece.  And adding in 2017 –  for which we have data, but some other countries don’t yet –  would not improve the picture.  Our recent productivity record –   through the period presided over by Bill English (and John Key and Steven Joyce) –  has been really bad.

What that means is that, to the extent that real GDP per capita growth has been middling, it has all been achieved by more inputs (mostly –  since business investment is weak –  more hours worked), not smarter better ways of doing things, old and new.  Perhaps it really is a rockstar economy: a John Rowles or Cliff Richard one, belting out the same 1960s favourites over and over again?   Recall that, being a poor OECD country, New Zealanders work more hours per capita than most other advanced countries do.

And despite more hours worked, it isn’t even as if we were particularly good at keeping the economy fully-employed during the English tenure.  In this chart, I’ve standardised the unemployment rates of the G7 group of big advanced countries and of New Zealand so that both are equal to 100 in 2007q4, just prior to the recession.

U rates g7 and NZ

Our unemployment rate went up about as much as the G7 countries (as a group) did, but just haven’t come back down anywhere near as much.  For the G7 as a whole –  which includes such troubled places as Italy and France, and is mostly made of countries that exhausted conventional monetary policy capacity –  the unemployment rate is now lower than it was before the recession. But not in New Zealand.

Politicians don’t directly control the unemployment rate (or most of the other measures in this post), but it is pretty amenable to micro reforms, and (within limits) to monetary policy action.  Under Bill English’s oversight, minimum wages kept on being raised, and nothing was done about a Reserve Bank that consistently kept monetary policy too tight (evidenced by the persistent undershoot of the inflation target set by the same Minister of Finance).

And what about foreign trade as a share of GDP?  Successful economies tend, over time, to have a rising share of GDP accounted for by foreign trade (exports and imports).  Small countries that succeed tend to have much larger foreign trade shares (since abroad is where the potential markets –  and products –  mostly are).

Foreign trade as per cent of GDP
2007 2016
Exports New Zealand 29.3 25.8
OECD median 40.5 42.3
Imports New Zealand 29.1 25.5
OECD median 39.2 39

But from just prior to the recession to 2016 (again the last year for which there is a full set of comparable data), New Zealand’s foreign trade shares shrank, even as those of the median OECD country held steady (imports) or increased (exports).  Relative to our advanced country peers, our economy became more inward-focused.

And that is despite the fact that we’ve had the second-largest increase in our terms of trade of any OECD country –  very different from the other commodity exporters (Norway, Mexico, Chile, Canada, and even Australia).

OECD TOT

Fortune favoured us, and we –  our political leaders, the long serving Minister of Finance foremost among them –  accomplished little with that good fortune.

Of course, not everything has been in New Zealand’s favour.  We didn’t have a material domestic financial crisis, we weren’t locked into a dysfunctional single currency, we went into the lean years with a healthy fiscal position, we had more space to adjust conventional monetary policy than almost any other advanced country, and we’ve enjoyed a strong terms of trade.  For enthusiasts for immigration, we’ve continued to draw in large numbers of permanent migrants, and have accelerated the inflow of temporary migrants.

But there were the earthquakes.  I’m not about to deny that they have held back economic performance, compelling resources to shift into domestically-oriented sectors, rebuilding (and inevitably/rightly so) rather than doing other things.  But even the earthquakes need to be kept in perspective: they were seven years ago now, and in wealth terms were more than paid for by the combination of offshore reinsurance and the lift in the terms of trade. There is still no sign of things turning round now –  of higher business investment, or a greater export orientation, of a recovery in productivity growth.  It is just, at best, a mediocre story.

And did I mention house prices?

real house prices OECD

There are, of course, some other black marks against Bill English.  There were the questions of integrity around the Todd Barclay affair.  There was the willingness to lead his party into an election with a candidate who’d been part of the PRC military intelligence operation, and a member of the Chinese Communist Party, all things hidden from the electorate, and then to go on defending the indefensible as it became clear that important elements of this past had also been withheld from the immigration authorities.

But, even on his own ground – the economy –  the record just doesn’t add up to much at all.

Oh, and as for the other top award that caught my eye yesterday, that was this astonishing one.  I’ll probably write about that elsewhere. [UPDATE: Here for anyone interested in this non-economics issue.]

 

Amy Adams and the National economic model

National Party finance spokesperson Amy Adams was interviewed on TVNZ’s Q&A programme on Sunday.   Amid the to-ing and fro-ing on aspects of the government’s Budget, there was an odd exchange about the underpinnings of economic growth in New Zealand.

AMY Can I just finish, though? Can I just finish? Even Treasury is saying that the GDP growth that they’re forecasting is only held up because of strong and, in fact, growing immigration numbers — something that Grant Robertson went on about for nine years in opposition. So it’s been driven by immigration, industrial law changes, foreign direct investment, new taxes. Those things will slow the economy.

CORIN Are you seriously criticising this government for relying on immigration to grow its economy when your government relied on immigration and housing?

AMY Am I going to get a chance to answer? Okay, so what I’m going to say, Corin, is that for nine years in opposition, Grant Robertson made a big deal about the fact that immigration and the net flow of migrants into New Zealand was what was holding up the economy. What I’m pointing out is that Treasury, in its own estimates in the Budget, has said it is continuing strong immigration that is going to continue to see GDP held up. We’ve always argued that you need a good inflow of skilled workers. We’ve never made any bones about that, but this is a government, again, that talked one game in opposition and is entirely going the other way in government.

CORIN Fair enough — that’s a fair point, but it’s a bit rich to criticise them for relying on immigration.

AMY I’m not criticising them for doing it; I’m saying I’m criticising them for breaking their promises about what they said. They said in the campaign they would slash immigration, and now it’s strong immigration numbers that they’re looking at, or at least, Treasury are looking at to support those figures.

If I’m reading Adams correctly she appears to be

  • criticising the government for not carrying through on what she describes as their promises to “slash migration”,
  • arguing that, on Treasury’s account, continued migration-led population growth is a key element in the GDP growth forecast over the next few years (Treasury having revised up its medium-term immigration assumptions), and
  • acknowledging that in National’s term in government, the numbers relied very heavily on large immigration inflows.

I’m mostly interested in that final point.  On my analysis of Labour’s manifesto, there was never a promise to “slash” migration, or even to take steps that would cut the net inflow for more than a year.  And those were policies put in place when Andrew Little was still leader; from her silence on the issue once she became leader it was pretty clear Jacinda Ardern didn’t really believe in those policies.  There was no change promised in the centrepiece of our immigration policy: the residence approvals target number of 45000 non-citizens per annum.    (There hasn’t yet been any sign of the modest changes Labour did promise –  some sensible, some not – although we are told they are coming.)

But what of National’s approach to economic policy.   A couple of weeks ago, the National Party leader was touting his party’s economic credentials

When I was Economic Development Minister, our plan for the economy was set out in the Business Growth Agenda.

The BGA comprised over 500 different initiatives all designed to make it easier to do business by investing in infrastructure, removing red tape, and helping Kiwis develop the skills needed in a modern economy.

Some of those were big, some were small. I’ll admit some weren’t as exciting spending a billion dollars every year.

But together they were effective.

New Zealand has one of the best performing economies in the developed world.

But, in fact, what it came down to mostly was a lot more people, and the activity that a lot more people generate.  At least Amy Adams seems to recognise that.

In the five years to the end of 2012, New Zealand’s population is estimated to have increased by 4.3 per cent, and in the five years to the end of 2017 the increase is estimated to have been 9.3 per cent.    More than all that increase resulted from changes in net migration (the natural increase was smaller in the second period than in the first).  Coping with a lot more people – especially when the increase is unexpected – generates a lot of economic activity (people need houses, schools, shops, offices etc), but not necessarily a lot more long-term economic opportunities to support the increased number of people.

Note that I deliberately used the words “not necessarily”.  At some times, and in some circumstances, migrants can help create or tap whole new opportunities, helping to lift economywide productivity, increase the outward-orientation of the economy (and the associated investment), and so on.  But it is an empirical question, that has to be reviewed in the light of experience.  Sadly, there is little or no sign that we’ve seen those sorts of gains here.

I’ve pointed out previously (perhaps ad nauseum) that total labour productivity growth in New Zealand in the last five years was only about 1.5 per cent.  Over that period, too, trade with the rest of the world (exports and imports) have been shrinking.

trade shares may 18

When National first came to office 10 years ago they recognised that sustainably successful economies tend to be ones that find more and better products and firms that successfully take on the world (in turn, enabling us to import and consume more from the rest of the world).  Perhaps unsurprisingly, foreign trade rated no mention from Amy Adams.

So we’ve had

  • little or no productivity growth in the wake of the population surge,
  • a shrinkage in the proportion of our economy traded with the rest of the world, and
  • increasingly ruinous house prices in much of the country.

Twenty years ago when people first started to worry a bit that there wasn’t much sign of New Zealand catching up again with the rest of the advanced world, one hypothesis that did the rounds for a while was that of ‘the cheque is in the mail” –  just be patient, and the gains would materialise soon.   They didn’t then, but perhaps this time is different?

One place we might look for signs of that is business investment.  But, as even the Reserve Bank Governor has been pointing out, that has been pretty muted.   Here is business investment (total gross fixed capital formation less government and residential investment spending) as a share of GDP.

bus investment may 18

That mightn’t look too bad to you –  after all, the line has been edging up over the last few years.  But even now the share of the economy devoted to business investment is lower than in every quarter from 1993 to 2008, and we’ve had much larger and more sustained total population increases this time round than in the previous couple of cycles.  More people need more capital.  It doesn’t look as if business has been planning for even better times ahead, more or less just meeting the domestic demands of the rising population itself.  (And as I illustrated on Friday, Treasury doesn’t expect any recovery in the export/import shares of GDP in the next few years.)

Consistent with that, here is a chart I’ve shown previously, using SNZ’s annual capital stock data.

cap stock growth may 18Growth in the per capita “productive” capital stock –  public and private, but excluding houses –  has been low and has been trending downwards.  I’ve also shown (orange line) a proxy for natural resources per capita: since natural resources themselves are fixed, this is just the inverse of the rate of population growth.  Per capita natural resources are falling.  That mightn’t be a problem –  it is, after all, true of every country with a growing population – if other resources were taking the place of the natural ones.  But there has been no sign –  in business investment, productivity, or the foreign trade data –  of that here.

Productivity growth here (real GDP per hour worked) in the last five years was 1.5 per cent in total.  The best-performing eight OECD economies averaged 11.3 per cent over the most recent five years (some to 2016, some to 2017).  Most of those countries are still a bit poorer and/or less productive than New Zealand –  but not all (the list includes Turkey, Slovakia, and Korea). And those gaps are now a greater deal smaller than they were even five years ago.  New Zealand GDP per capita is currently around $60000.  If we’d managed 10 per cent productivity growth over the last five years –  instead of 1.5 per cent – the economy would be around $5000 bigger per man, woman, and child.  Just think of the possibilities that would have opened up, individually and collectively.

Instead, pretty much all we had was the activity generated by a lot more people, and more working hours for those already here.  Probably inadvertently, the National Party finance spokesperson has finally acknowledged it.

Of course, the outlook under the current government is more of the same, or even worse.  The immigration policies of the two main parties are all but identical in substance (although the cyclical dimension does appear to be turning), but the new government throws into the mix the ban on oil and gas exploration, a determination to do more on water standards, and to do much more around emissions.  Perhaps each of those policies is individually worthy, but they are all likely to come at an economic cost, a cost exacerbated if policy keeps on trying to drive up the population –  in a location that hasn’t shown the (beneficial) economic fruits of such a policy for a long time now.  And should the government somehow manage an acceleration of the rate of housebuilding, that too will only squeeze out –  through higher interest and real exchange rates – more of the business opportunities that might otherwise have supported a growth in material living standards.

More people, at least in New Zealand, isn’t a path to higher productivity, and higher productivity is what aspirations for higher material living standards rely on.  More people is just a path to more activity to accommodate more people –  skewing the economy inwards again, and undermining our prospects of ever getting back towards that upper tier of advanced economies.  On this score, Amy Adams (and her leader) appear quite as blind as Grant Robertson (and his). It is only two years until the next election campaign will be getting underway: the Adams interview doesn’t suggest any sign of a rethink of policy, or even a recognition that activity is no substitute for productivity.  And the latter is sorely lacking in New Zealand.