Productivity, Productivity Commission, and all that

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa.  This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone.  However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges.  I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)

Could do better?

Minus the question mark, that is the title of a new and fairly short report undertaken for the Productivity Commission by economists Julie Fry and Peter Wilson on “Migration and New Zealand’s frontier firms”. The Commission itself has been charged by the Minister of Finance with reporting on what could be done about so-called “frontier firms”, and has been casting about for various possible angles (apparently their draft report is due later this week). There is a Stuff article on the Fry and Wilson paper here, which begins this way

Despite its best efforts to become the next Silicon Valley, New Zealand has instead attracted a lot of nice people but very few trailblazers.

There probably have been – and still are – a few with that “next Silicon Valley” type of aspiration, but the key point is more like “lots of individually nice people, but probably not much economic gain to New Zealanders as a whole”.

Fry and Wilson’s own summary runs this way

Fry and Wilson key points

Fry and Wilson themselves seem a bit more sceptical on the economic value (to New Zealanders) of New Zealand’s large-scale immigration programme than they were in their short 2018 book that I wrote about here.

I’m a bit ambivalent about the report, even though – considered broadly – it goes in somewhat the same policy direction as the approach I’ve been championing for much of the last decade. Perhaps that is mostly because the Productivity Commission didn’t offer to pay very much for a report, and so the authors didn’t have the time or resource to consider the issues around the economics of New Zealand immigration in any great depth. A serious look at New Zealand’s immigration policy and the connection to New Zealand’s underwhelming economic performance would require, for example, a full Productivity Commission inquiry devoted just to that issue, but the government determines inquiry topics and I gather they’ve refused to have an immigration policy one done, even though immigration policy is one of the larger discretionary government structural policy interventions in the economy. But I can’t blame Fry and Wilson for that.

But unfortunately the (presumed resource) constraint means that the report really isn’t much more than an initial view that large scale immigration over the last 30 years probably hasn’t done much good for New Zealanders, and that hence somewhat less in future would more likely be beneficial. I don’t disagree – and, of course, have gone further than the authors in my hypothesis about the damage large scale immigration may have done (a story they describe as “plausible but untested”) – but who is the report going to persuade? The report doesn’t seek to engage with a broader academic literature that tends to be quite positive about economic gains from immigration, at least in the advanced world as a whole, or with the advocacy for it – including in a New Zealand context – by outfits like the IMF or the OECD. They might – as I do – think many of these results don’t stand up to close scrutiny (eg on the IMF here, or the OECD here), or may not have much application to a single extraordinarily-remote location, but they neither engage with the papers, not articulate their critiques. There isn’t much New Zealand specific formal research, but somewhat to my surprise, there wasn’t even a reference to the big advocacy piece the New Zealand Initiative did in 2017 (reviewed and critiqued at length here).

But in the rest of this post I wanted to comment mostly on two areas where I wasn’t particularly convinced, even as someone generally somewhat sympathetic to the thrust of the report. The first is the claim – also in those Key Points above – that New Zealand’s policy for attracting skilled migrants is “close to international best practice already”. The authors seem to offer little or no support for this proposition, but even if it were true it would not be particularly reassuring given that (a) we take a lot of migrants, as a percentage of New Zealand’s population, and (b) the evidence suggests that on average migrants are no more skilled than comparable New Zealand cohorts. The large numbers of people who have managed skilled migrant entry as low-level retail or cafe managers, for example, suggests that if this is world best practice, world practice is pretty poor (which in many cases is true no doubt, but that is their problem not ours). But more specifically, we also know that the New Zealand system for granting residency to “skilled migrants” is now strongly skewed in favour of people who are already in New Zealand – explicitly favouring people from abroad with New Zealand qualifications and New Zealand work experience (with bonus points for living in remote corners of this remote country). That favours absorption and integration, but generally not outstanding excellence: our universities generally not being top-tier, and our economy not being some global centre of excellence. It simply isn’t that easy for, say, a young family – parents perhaps good graduates of top 20 overseas universities – to just get residency in New Zealand, not without first relocating temporarily to the ends of the earth on a short-term visa in the hope residency eventually works out. To the extent there is benefit for New Zealand putative “frontier firms” in migration, it some of those sorts of people – with some proven work experience globally – who are likely to be more valuable than some 21 year old student studying at Massey who couldn’t get into Stanford or Cambridge.

Of course – and here I think Fry and Wilson probably agree – not that many top tier foreign people are likely to want to live and work here (as distinct from the boltholers), but lets not get complacent that our current skilled migration system is really fit for purpose, whether as to target number or conditions of entry (and although it isn’t dealt with in this report, a lot of our residency grantees don’t even come in via the skilled migrant pathway).

(On that “not that many top tier foreign people are likely to want to live and work here”, see my doubts expressed a few years ago about the the-new Global Impact Visas. Rereading that old post yesterday, nothing in what we have seen and heard of the scheme’s operation so far would lead me to materially alter my view of the prospects.)

The Productivity Commission over the last couple of years has emphasised quite a bit a desire to see New Zealand-based firms investing more beavily in technology. I’ve been uneasy about this line of argument because at times the Commission has seemed to put the cart before the horse, not digging deeply enough to understand why the New Zealand economy is underperforming and more profitable business opportunities aren’t apparent. This emphasis seems to carry over to the Fry and Wilson report – no doubt delivering something consistent with what the client was looking for. There are several pages (in what is really only a 30 page report) on opportunities (“very significant upside productivity potential”) if only we made it materially harder for firms to hire foreigners.

The predominant mechanism they seem to have in mind – whether in relation to students, working holidaymakers, or RSE workers (there is a whole section on the fruit industry) – is that if labour is harder and more expensive to get, firms will invest in technology. On the one hand, they seem to be buying into a model in which immigration has driven down wage rates (for which the evidence, considered broadly – as opposed to a few concentrated subsectors – is quite thin; in New Zealand wages have risen faster than GDP per hour worked over the last few decades). But there are also disconcerting parallels with a couple of very shaky arguments. Back in the disinflationary 1980s there was sometimes an argument used (in the UK and here) that a high real exchange rate – pretty much an inevitable part of a transition towards low inflation – was really quite good because it would encourage strong firms to invest more heavily in advanced technology etc to retain competitiveness. There was never much sign of that in the aggregate. And more recently we here claims that materially increasing minimum wages, from already quite high (relative to median wages) levels, will itself boost productivity and stimulate investment in technology. There might be some of that – firms will look for ways to mitigate the forced increase in labour costs – but there is no evidence in support of it as some sort of economywide pro-productivity strategy. And so I’m also uneasy when this argument is applied so simply to immigration. Perhaps there is something to it at an individual firm level, but it is unlikely to hold much at an economywide level. (Relatedly, much of the discussion in the paper seems to be about average labour productivity, and very little about the – conceptually more important – total factor productivity. One can raise labour productivity in ways that still leave the overall economy worse off – Think Big in the 1980s was probably such an example.)

The authors seem to favour a much lower level of non-citizen immigration to New Zealand (on average over time), not just nipping and tucking in a few individual migration approval streams. But if so, then their paper seems to neglect a rather important adjustment channel. As they note, historically New Zealand economists tended to emphasise the significance of the short-run demand effects of migration (and the well-established point that the short-run demand effects tend to outweigh near-term supply effects plays an important part in my own story). But if immigration by non-citizens is cut back markedly and for a prolonged period we would expect to see a reduction (perhaps a quite significant one) in the real exchange rate. And – to take the fruit industry as an example – a lower exchange rate might well more than outweigh any sector-specific wage effects from reduced access to migrant workers, leaving no particular incentive for the industry to invest more aggressively in technology to replace labour (for the existing tradables sector this is my story of how adjustment works once reform is done not just to an indvidual firm – deprived of access to labour – but at an economywide level). It isn’t that I really disagree with the Fry and Wilson direction of policy, but their analysis seems a bit too simple, and also inclined to treat the existing structure of the economy as a given (whereas on my argument I think we would, over time, see quite a different mix of sectors).

Fry and Wilson end their paper with some specific post-Covid suggestions for the government

fry and wilson 2

I’m sceptical that the 4th bullet has any content to it, although the broad direction of their recommendations isn’t one I’m uncomfortable with. My own suggestions (from a speech a few years ago) are along somewhat similar lines.

reddell immigration specifics

Finally, in their paper Fry and Wilson note of my views

While plausible, Reddell’s hypothesis has not been tested empirically. However, it is
possible that the natural experiment provided by the Covid-19-induced border closure will
enable more solid conclusions to be drawn.

I don’t think that is so. Most importantly, for a natural experiment you really want New Zealand immigration policy changed with all else unchanged, but this year too much has changed all at once for any sort of read, let alone a clean one. Among those changes, the differential ways different countries have handled Covid, massive fiscal stimulus (which, all else equal, tends to put upward pressure on the real exchange rate), most other countries also closing their borders to a greater or lesser extent, and a big disruption to key elements of our tradables sector. Oh, and all parties expect – political parties seem to champion – a return to the immigration status quo ante just as soon as possible.

For anyone wanting to read more of my story, there is this older paper from 2013, a speech on related topics from 2017, and a chapter in a recent book on New Zealand policymaking in which I look at some of the issues around New Zealand’s long-term economic underperformance, with an emphasis on the notion that however sensible large scale immigration may be for some countries, it seems not to have been more recently so for a remote land heavily reliant on a fixed stock of natural resources, and with few or no asymmetric shocks having worked in our favour for 100 years or more.

Coda

And so we now have a single political party in a position to form a majority government. Between our single-chamber Parliament and the historically very tight party discipline on Labour MPs, the new government will be able to do whatever they like over the next three years. And where significant things are not done, it will be entirely down to them: their choice.

Of course, they didn’t promise much, so most don’t seem to expect much. But the issues, challenges, and problems don’t go away just a party or government chooses to ignore them. House prices for example – where the Prime Minister has consistently refused to suggest she might act in ways designed to markedly lower the price of urban land/houses.

Or, and the economic issue that mostly drove the creation of this blog, New Zealand’s dismal long-term economic performance. In short, productivity growth (and the lack of it), and our continued decline relative to other advanced economies.

The outlook wasn’t good before Covid – the last government was doing nothing, and Labour was promising nothing, that would have prevented those well-established and dismal trends continuing. But now there is Covid to confront too.

One view of the outlook was contained in the International Monetary Fund’s World Economic Outlook forecasts published last week. The IMF doesn’t have a particularly good track record as a forecaster, but its forecasts do have two particular values at present: first, they are compiled consistently for a wide range of countries, and second, they forecast/project five years ahead, which on most readings is currently far enough out that one could think of things by then being back to some sort of new normal. For what it is worth, the IMF also has no particular partisan interest in New Zealand, but has also, over the years, tended to run relatively upbeat stories about New Zealand when it does comment.

Unfortunately, the IMF does not publish productivity (eg real GDP per hour worked, or MFP) forecasts. But here is a chart showing their forecasts for growth in real GDP per capita for their “advanced country” grouping over the period from 2019 (pre Covid) to 2025).

IMF WEO 0ct 20

Third worst of all the advanced countries over this period, at least on the IMF’s telling. And do note that the countries a few to either side of us all have materially higher levels of labour productivity than New Zealand does, while the countries to the far left of the chart – best-performers – are mostly the countries (I’ve previously highlighted here) that started way behind and are now matching, and move to roar ahead of, New Zealand. On these projections, our relative decline – underway now for 70 years – keeps on keeping on.

Are there any silver linings? I couldn’t find any when I dug a bit deeper:

  • as I noted, since these numbers are for 2019 to 2025 they shouldn’t be affected by either measurement challenges, or real differences in economic structure, that contribute to quite different GDP outcomes for some quarters this year,
  • the difference also can’t be down to differences in how quickly unemployment drops back to normal (itself a thing amenable to policy, especially in a country with its own exchange rate): in most countries by 2025 the IMF thinks that unemployment rates will have got back to pretty close to 2019 levels (NZ’s is about 5 per cent, so not quite there, but it won’t explain anything like the differences in the real GDP chart).  For what they are worth, the IMF also publishes output gap estimates for G7 countries, and they are also back near zero by 2025. 
  • I didn’t look deeply into what border assumptions the IMF is making, but I did check their population growth projections, and they continue to forecast high rates of population growth over 2019 to 2025 (hardly lower than the rate for the previous six years, and third fastest in this group of countries), which again suggests they must think something like a new-normal re-establishes before too long.
  • the IMF seems to think that investment as a share of GDP will also be more or less back to pre-Covid rates by 2025 (unfortunately in New Zealand business investment in the last decade was very subdued, especially once one took account of the needs of a rapidly-rising population).

Sadly, the only realistic interpretation one can take is that the IMF thinks that over 2019 to 2025, on current government policies, New Zealand’s productivity growth performance –  labour productivity and MFP – will be simply shocking.  Most probably negative –  the only way to square falls in real GDP per capita, unemployment returning towards normal, and a reasonable level of investment – and almost certainly far worse than in almost all other advanced economies, and especially far worse than the performance in the countries that were aiming to close gaps with the OECD leaders.

It is a really dismal outlook.

Of course, it is only one set of forecasts.  The IMF may be completely wrong, even specifically about New Zealand’s relative performance.  But it isn’t clear what about policy or the economic environment should be expected to generate decent productivity growth over 2019 to 2025, especially after the fairly dismal performance in the pre-Covid years.

One would like to suppose it was the sort of issue the Minister of Finance would be intensely focused on.  One would like to think that The Treasury’s post-election briefing would have extensive analysis on the issue and possible remedies, and indeed how political party promises may even worsen the outlook.  But such is the malaise around New Zealand economic policy and performance that it seems unlikely.

Changing tack, for some months I’ve been writing much less here than I’d really intended or hoped to. I’ve made occasional references to my indifferent health. I’ve had bugs occasionally in the past that have hung around for a couple of months, never amenable to medical diagnosis, and then eventually gone away and I kept expecting this would be the same. But despite some moderately good weeks at times – this week wasn’t one of them – it hasn’t, and my doctor now reckons that I have some – perhaps fairly moderate – version of chronic fatigue syndrome. And while it still seems most likely that it will eventually go away again, there is no immediate timeframe for that. It seems a rather pathetic thing to have, but I can’t really ignore, say, the three daytime naps I needed on Tuesday.

As a result, I’ve decided for the time being to stop attempting to maintain any sort of regular blog output. As I’ve said to various people who’ve asked, I’m probably only able to operate at 50 or 60 per cent of normal, and while I’m fortunate in not having to try to hold down a fulltime job, I have other fixed commitments (household and other) that demand almost all that energy. Since there are good days, and even a few relatively good weeks, and there many issues (even if I don’t have the concentration to dig into all of them as I’d like), I expect I will probably post here from time to time. But I won’t be trying to meet any schedule. For anyone who wants to not miss out on those posts, feel free to subscribe to get posts by email, and I also use Twitter (@MHReddell) to, among other things, provide links to any posts here.

And now it is time for a lie down…..

National’s five-point plan

At the end of my post yesterday morning I noted briefly

Of course, if Labour’s approach is bad, at least (being the government) it is on the table.  It is now less than two months until voting starts and we have no idea what National’s approach might be, but no reason to suppose it would be materially different or better.

Within a couple of hours we had a plan from National, or at least what Todd Muller describes as “the framework for the party’s Plan to create more jobs and a better economy”.   Just like the Prime Minister, he has a five-point plan, outlined in a speech given in Christchurch yesterday.   If you want the potted version there is even a one-page graphic.

graphic nat

I was no more impressed than with Muller’s previous speech, although at least he has dropped the (historically ill-grounded) paeans to Michael Joseph Savage.   There still seems to be a great deal of me-too-ism about it: we’ll be just like Labour only more competent.   If he has values and a political philosophy, they seem to bear little or no relationship to those the National Party was built on.    It is the sort of speech any (losing) centrist Labour Party leader could have given.

It is explicitly an economic speech, but there was no obvious economic framework, no sign that he or his advisers had thought hard about what has ailed the New Zealand economy for a long time, about how National might fix it, and how that might tie together with the immediate recovery needs (having been accused by one commenter yesterday of being an “armchair theorist”, here was my post-Covid note on such issues).

Anyway, to step through the speech.  First, there was the flawed framing.

According to the Reserve Bank, New Zealand faces its worst economic downturn for 160 years. I don’t think the magnitude of that has yet sunk in to the public or the media. That’s partly because, these past few weeks, everyone has quite rightly been more preoccupied with the shambles at the border and in our quarantine centres. But, if the Reserve Bank is to be believed, ahead of us lies the greatest economic and jobs crisis that anyone in this room has ever known.

Even though the fall in the GDP in the month of April was absolutely huge –  could we have measured it, perhaps 40 per cent –  no one supposes that what lies ahead is worse than New Zealand’s experience of the Great Depression.   Most likely, what we face is something more like, perhaps a bit worse than, the severity of the late 80s and early 90s.  That’s quite bad enough.

And a scale of loss and dislocation that National, at least in this framework speech, appears to have no answer for.

Thus, we learn that they are quite happy with macro policy as it stands and don’t appear to think the Reserve Bank needs to be doing anything more (than the little they have done so far).  And we get rather florid rhetoric on fiscal policy, supported by (it appears) nothing.

Since the Fiscal Responsibility Act, the economic and political debate in New Zealand has tended to be on the quantity of borrowing or debt repayment each year. These remain critically important. Getting back to fiscal surplus and then paying down debt to 20 per cent of GDP is necessary, not least because New Zealand will inevitably confront another natural, economic or health disaster in the next couple of decades or beyond. But just as important is to focus on the quality of spending.

Labour forecasts net core debt will reach 53.6 per cent of GDP in 2024 under their policies. That’s an eye-wateringly high level. We will work hard to try to keep it lower than that, which would put New Zealand in a better position to recover. But of far greater longer-term importance is that Labour projects that under its policies, but with a far stronger economic environment than we face today, net core debt will still be as high as 42 per cent by 2034. That means Labour intends a mere 11 per cent reduction in net core debt, over a decade. At that rate, we will not get back to the safe 20 per cent mark until perhaps the mid-2050s.

National does not regard Labour’s attitude as anything like prudent. It would leave an enormous debt, not so much to our children but to our grandchildren. And it would leave our children and grandchildren – and also ourselves – profoundly vulnerable were the global economic and strategic outlook anything other blissful for three successive decades. Covid-19, the trade war between the US and China and this city’s recent history all say that is not a safe bet.

There aren’t many specifics there but Muller is clear that National would be spending less (not necessarily a lot less, but less) than Labour, so that source of support for a faster demand recovery is apparently off the table.   He plays up the debt numbers but never mentions the large assets (NZSF) on the other side, which mean that even the peak debt numbers would last year have put us among the less indebted half of the OECD.  He never engages at all with the possibility that lower long-term interest rates might –  just might –  make a higher long-term debt ratio sensible.  And, of course, there is no hint of when he expects to get back to 20 per cent of GDP, or on what sort of path.

(To be clear, I am not a fan of high levels of public debt, but on a proper measure we’d peak at around 40 per cent of GDP even on this government’s numbers.  And like most rhetorical fiscal hawks in the current context, he offers no other path for a prompt return to full employment).

And then, of course, there is the question of how seriously to take the talk of future fiscal restraint. There was this, for example,

Let me tell you what that means in practice. In 2020/21 and 2021/22, my Government will not be scared of investing more in retraining, if we are confident it will genuinely improve productivity, lower unemployment, increase the tax take, reduce the cost of welfare and improve wellbeing over the following decade. My Government will not be scared of investing over the next decade more in the first 1000 days of life, if we are confident it will improve outcomes from the school system for a generation. Similarly, social housing and mental health. Nor will my Government be afraid of investing more in roads and public transport, if we are confident they will still be improving New Zealand’s productivity 50 or 100 years hence. And my Government will not be afraid to invest more in water storage or carbon-replacement technologies, if they will support higher living standards and greater wellbeing on an even longer timeframe.

It would be surprising if a public transport project now were boosting productivity 100 years hence, but you are left wondering what Muller wouldn’t be spending on.

Now, to be fair, he tells us there will be a series of major speeches outlining details of the five point plan.   But the gist –  what was in yesterday’s speech –  wasn’t encouraging,   Of their headings

Responsible Economic Management consisted of nothing but rhetoric.  We can probably all agree that quality of spending matters, but there is little in National’s track record suggesting they’ve done much better on that in the past (just different specific waste) and –  more importantly –  no clue as to why we’d think they’d better in future.  Labour has been spraying money at favoured entities in recent weeks, but which ones (specifically) is National opposing?

Delivering infrastructure had this promise

Before the end of this month, I will announce the biggest infrastructure package in this country’s history. It will include roads, rail, public transport, hospitals, schools and water.

My heart sank somewhat.  A new and different Think Big? But lets see the specifics.

Muller boasts of delivery, but wasn’t it the previous National government that put in place the contracting structure for Transmission Gully.  And I’m always a bit surprised at National using the Christchurch repair and rebuild process as a plus.

Reskilling and retraining our workers is flavour of the day (it was a big part of the PM’s speech the other day too), this time with rhetoric about capturing something called the “Creativity Wave” in the 2020s.    But from a party offering no more macro stimulus to demand (see above), uninterested in our high real exchange rate, and (previously) opposed to fees-free it all has the feel of rhetoric and displacing headline unemployment figures at present.   When there are jobs on offer, firms and individuals tend to invest in the skill development required.

A Greener, Smarter Future may be good political rhetoric, or the sort most Labour ministers could have delivered, but seems about as empty.   This section concludes thus

National’s vision is of a post-Covid economy that is greener, smarter and better than the one we had before.

Sounds fine, but what (specifically) is the government’s role in getting there, and what is National proposing to do to give us some hope of achieving all this environmental stuff while also reversing the decades-long decline in relative productivity?  Nothing was on offer in this speech.

And finally, there was

Building Stronger Communities.  I’m sure Muller is genuine about some of this, but what of this gratuitous line

Every community needs strong community institutions to maintain and enhance their social capital. Many of those institutions were damaged a generation ago, and I don’t believe they have been repaired.

Another opportunity for Muller to have a go at the reforms instituted by the 4th Labour government and by his own mentor and former boss Jim Bolger?  So the decline of churches, sport clubs, Scouts and Guides, marriage and so on is down the evil reforms of the 80s and 90s is it?  If so, which of those reforms does he think specifically contributed and which is he proposing to undo?    Of course, the answer to the latter question is “none of them”.  It is just shallow opportunistic political rhetoric.

I don’t really disagree with Muller that

our opponent doesn’t believe in having a plan, hasn’t delivered on her promises, and has a track record of failure across the board.

But when he claims

Ladies and Gentlemen, in the end, I have a very simple message for you and all New Zealanders this election campaign: National has a plan to rebuild our communities and our economy, to get Kiwis back to work and to deal with the economic and jobs crisis.

There was nothing at all in the speech to lead any reasonable observer to think it was so.   Perhaps those future “major speeches” will give us something concrete, as part of a serious well-thought-out strategy that links the immediate challenges with the longer-term deep-seated problems in the New Zealand economy.  But on what we’ve seen so far, I wouldn’t be optimistic about that.

 

Small economies

The Productivity Commission last week released a report done for them by David Skilling on “frontier firms”.  That is the topic of the Commission’s latest inquiry, handed to them by the Minister of Finance.  Personally, I reckon the topic is mis-specified and will tend to drive people to focus on symptoms more than causes, but I’ll come back to that in more detail at some point.

Skilling was formerly Executive Director of the former (somewhat centre-left) New Zealand Institute and these days runs a consultancy, based in the Netherlands, with a focus on small advanced economies.  I’m a bit under the weather today so in this post, I wanted to touch on only two points from his report.

The first was to draw attention to footnote 10

10 The one policy foundation setting that I identify as having had a meaningful impact on New Zealand’s productivity performance and the development of frontier firms is with respect to immigration (or more precisely, the absence of a strategic migration policy).  The substantial net migration inflows that New Zealand has received over the past 25 years has been a strong source of support for headline GDP growth, but has created a series of distortions and pressures in the New Zealand economy: infrastructure and cost pressures, greater residential real estate demand (with implications for allocation of investment capital), downward wage pressure that deters business investment, as well as upward exchange rate pressure.  An explicit immigration policy that was focused on quality and filling skills gaps, with lower gross inflows, would create a more supportive environment for higher levels of international engagement by New Zealand firms (although the transmission mechanism to outcomes is more indirect than those discussed in the body of this paper).

There isn’t much about policy that I agree with Skilling on  –  and find it strange that in a 30 page report with an emphasis on the tradables sector, this is the only mention of the exchange rate –  but, as you can imagine, I agree with much of that.

And the second was about this chart

Forbes 2000

of which he observes

This seems to be the case in small advanced economies also.  One of the striking characteristics of successful small advanced economies is their reliance on large firms, with a disproportionate representation of small economy MNCs in measures such as the Forbes Global 2000 (Exhibit 6).

I wasn’t particularly familiar with this listing, so went and had a look.  But I also had a look at a wider range of countries.  For his paper, Skilling uses the IMF classification of advanced economies, focusing on those with a population under 20 million.   However, that grouping leaves out the central and eastern European countries (the Baltics, Hungary, Czech Republic, Slovakia, Slovenia) that are both OECD and EU members, and which are either catching or already overtaking New Zealand in terms of labour productivity (all but Hungary have had faster productivity growth than New Zealand since, say, 2007 – just prior to the last recession).

I’m not really going to dispute what I take to be one of Skilling’s propositions, that a successful New Zealand would probably see more large and internationally successful firms.   Nonetheless, it is perhaps worth noting a few things:

  • the Forbes listing is of public companies.  That’s fine; it is what it is.  But the implied market capitalisation of Fonterra makes it large enough that were it be tomorrow transformed fully into a listed company, it would almost certainly make the list (five Greek banks, with a combined market cap less than Fonterra make the list).  If anything, Skilling is too kind about Fonterra –  which has woefully underperformed the marketing pitches of 20 years ago –  but big and international it still is,
  • while we are the only advanced country in Skilling’s chart not to have a company in the list, none of the Baltics nor Slovenia nor Slovakia has an entrant either.   The Czech Republic and Hungary (both about twice our population) have one and two  respectively, in the Czech case a power company that appears to have a market capitalisation not much larger than that of Meridien,
  • Iceland and Luxembourg are both small successful advanced countries; the former has no entrants on the Forbes list, and the latter quite a few (more per million than any of the countries shown).
  • Portugal and Greece are not that successful small advanced countries, and both have several entrants on the list.

I guess A2 and Xero are increasingly not New Zealand companies, but appear large enough that they could well have shown up on a listing like this.

There are always going to be pitfalls in any illustrative indicator –  this one simply happened to catch my eye –  but if I agree with Skilling that it makes sense to pay attention to other small advanced economies in trying to make sense of the New Zealand story (and of our constraints and policy options), starting from where we are now, it is probably at least as useful to think about the central and eastern European countries –  and Israel, which does quite well on various of Skilling’s indicators but has productivity very similar to ours –  as the more traditional western European ones.

queen 4

.

Two recent contributions

For anyone interested, here is the link to my discussion with Prof Steve Keen on Jim Mora’s show on Radio New Zealand yesterday morning.    Despite the RNZ headline, the trans-Tasman travel “bubble” idea wasn’t any sort of focus, although Keen and I have quite different views on the issue beyond the very short-term.  The thrust of my policy prescription post-Covid is outward to the entire world as much as we can, on the basis that there is no credible alternative path to a more productive and prosperous future.  Keen, by contrast, favours a future in which New Zealand and Australia together trade as little as possible with the rest of the world.   It seemed like a pretty bleak future to me, but at least he was honest enough to acknowledge that his preferrred path is one in which as nations we would be materially poorer in future, for the environment.

Sadly, the discussion did not get to Keen’s “modern debt jubilee” proposal that I discussed in a post last week.

The Small States and the New Security Environment (SSANSE) project is a collaboration of university researchers in a number of countries, including (in New Zealand) Canterbury University’s Anne-Marie Brady.   Here in New Zealand, the initiative seems to encourage research and debate on a wider range of issues than the programme title itself might imply, and they have a page of contributions on a range of policy issues from quite a range of authors, under the heading “Pop-up Think Tank“.  Anne-Marie has launched what she calls a Commission for a Post-Covid Future, and invited various people to contribute short papers.

As her tweet says, mine is apparently the first such paper to be released, in an abbreviated form on The Spinoff this morning.  (The fuller version should eventually be on the SSANSE site, but here it is as well

Rebuilding New Zealand’s shattered economy post-Covid

(UPDATE: More nicely formatted on the SSANSE site here)

From the first page

post-covid 1

and from the body

post-covid 2

Macro policy has a big part in getting back to full employment

post-covid 3

And longer-term, there are bits my friends from the market-oriented right will like

post-covid 4

and a bit many of them will deplore

post covid 5

ending this way

post covid 6

For anyone doubting that “we haven’t done well” bit in the last few lines, I refer you to the charts in my post on Saturday.

Oh, and the allusion to the once-upon-a-time campaign promise to “restore New Zealand’s shattered economy” was conscious and deliberate.  They had good intentions too, even did some useful reforms, but they wouldn’t embrace the outward-oriented market-led approach that the situation really demanded.  In many respects, our starting position now is quite a bit worse than it was then.

 

 

New Zealand: the foreign trade failure

To have listened to Winston Peters’ speech in Parliament the other day –  which wasn’t all as bad as the media reporting had led me to believe – or the joint Herald op-ed from the New Zealand, UK, Australian, and Singaporean trade ministers, you might have supposed that New Zealand’s was some great foreign trade “success story”.  I put it in quote marks because of course Winston Peters –  our Foreign Minister –  seems to want to undo some of that alleged “success”, seeking “far greater autonomy for New Zealand”.  Here is the full relevant quote

Now, New Zealand First is resolved that our future economy will have these features about it, because they’ve learnt something. One: far greater autonomy for New Zealand. In short, if we can grow it or make it at near competitive prices, then we will grow it or make it, use it or export it, rather than use valuable offshore funds importing it.

Some mix of mercantilism  (more exports good for their own sake) and insulationism (less international trade all round).

And here was a key quote from the article by David Parker and his peers

We are four independent trading nations who have derived success by operating globally. Almost two-thirds of Britain’s economy is made up of trade. One in five Australian jobs is trade related. In New Zealand that number is one in four. Nearly two-thirds of Singapore’s GDP is generated by external demand.

Success story? That would be the country that has spent 70 years slipping, sporadically but decisively (never really interrupted) down the OECD productivity league tables.  Productivity growth, after all, being the main basis for improved material living standards, and for many non-material options.

Here is foreign trade as a per cent of GDP (average of imports and exports) for each OECD country for the latest calendar year the OECD has data for (mostly 2019).

foreign trade as % of GDP

I use foreign trade (imports and exports) to make the point that, for a whole economy, we mostly export to import (some of vice versa as well).  But we are also fourth to bottom if one looks as exports alone.

Perhaps you think that doesn’t really matter much; after all, much richer Australia and the United States have lower trade shares than us.  Unfortunately for that story, larger countries tend to do a lot less foreign trade (as a share of GDP) than smaller ones –   there simply are lots more home markets for firms in the US – and even Australia has a population five times our size.

Ah, but we opened up our economy decades ago –  all that stuff Winston Peters lamented much of –  and we’ve signed all those trade agreements ministers and officials like to boast about.  Surely, then, we trade more heavily than we used to, surely we’ve improved our relative performance?

foreign trade since 1970

But no.    New Zealand’s foreign trade now is a bit less (share of GDP) than it was in 1980, and if we started behind the other small countries, we’ve lagged further behind, especially this century.

And since the OECD only has data for all countries since 1995 here is the NZ vs small countries comparison just since 1995.

foreign trade since 95

I suppose at least the gap hasn’t widened further in the last five or six years.

And then people (reasonably) point out that in some countries –  notably in Europe –  there is a lot of cross-border trade in partly-assembled products.  That is a plus for those countries, whose firms really can gain by specialisation in specific aspects of a production chain, but it does inflate the gross foreign trade numbers.

Fortunately, the OECD has developed indicators of the amount of domestic value-added in each country’s exports  (there is a range of other indicators in the value-added database as well, but here I’m just going to fall back on exports).  In some (particularly central European) countries only just over 50 per cent of gross exports represent domestic value-added.  In New Zealand (and Australia and the US) that share is close to 90 per cent.

So how does domestic value-added in exports look as a share of GDP across the OECD countries (these data are available only with quite a lag, so the latest numbers are for 2016)?

value added exports

It lifts New Zealand slightly up the league table, but all the countries below us have much larger populations –  and domestic markets –  than we do.  By contrast, all the countries to the right of the chart are small (or in the Dutch case just a bit above small).  And of the small countries – 12 million or fewer people (from where there is a step up to the Netherlands) our population is pretty close to the median.

dom value add and popn

It isn’t the tightest relationship in the world –  there is a lot else going on –  but the point that small countries tend to export (and import) more is pretty clear.  And New Zealand –  red dot –  stands out well below the line.

Our trade performance has been –  is –  woeful.  We simply don’t export (or import) much for a country as small as we are. In fact, not many countries –  even very large ones –  export/import less than we do as a share of GDP.

So the self-congratulatory lines that David Parker (and MFAT officials, and a succession of previous National trade ministers) run is deeply flawed.  But at least, in some sense, their hearts are in the right place, seeming to recognise that a more outward-oriented New Zealand is the only sustainable path to much greater prosperity.  From Winston Peters, on the other hand, the idea that we should be importing even less –  in a small country that already imports the fourth lowest share of GDP in the entire OECD –  is just headshakingly bad.

(If perhaps not quite as bad as Steve Keen who proposes that New Zealand and Australia are ideally placed to be some sort of long-term “trade bubble” –  doing as little as possible, even beyond Covid –  with the rest of the world, as if we’ll suddenly become a major market for coal, LNG, and iron ore and they will suddenly become a leading market for dairy, lamb, and export education.)

 

On “ancient history” (the last business cycle)

One very slight side-benefit to the savage collapse in economic activity that began a little over a month ago is that we now know, with a great degree of certainty, when the last business cycle ended.  In the quarterly series that we mostly rely on in New Zealand the peak will have been the December quarter of 2019.

The nice thing about knowing when the cycle ended is that we can then look at the full cycle and see how things went over that full period, encompassing the previous recession and recovery and more recent years of relative normality.  And we can compare the most recent business cycles with the previous couple.   In time, we will be able to do some useful comparisons with other countries and see how our business cycle compared with those of other advanced countries, but it will take a while for all the relevant data to turn up in OECD databases, so this post is almost all about New Zealand.

If we use as the basis for dating business cycles the period from peak to peak in real GDP –  which seems reasonable for New Zealand, absent a business cycle dating committee –  the last cycle ran from 2007q4, the previous peak just prior to the domestic recession and global crisis, to 2019q4.   That is a fairly long growth phase for New Zealand.  It was interrupted by a “double-dip recession” in the second half of 2010, but people tend to discount such dips for these purposes because GDP had not yet got back to pre-recession levels before that modest setback took place.

What of earlier periods?  The official quarterly New Zealand GDP series only go back to 1987, and official quarterly population series only starts at the beginning of 1991.  So here I am going to focus on comparisons only with the cycle that ran from 1990q4 to 1997q3, and the cycle from 1997q3 to 2007 q4 –  so all peak-to-peak comparisons.

(It is worth noting here that there will be revisions to the data for several years to come, probably most substantially after the annual national accounts for the year to March 2020 are produced at the end of the year –  coronavirus permitting.  But there is no obvious reason at this point to suppose the GDP numbers are biased one way or the other.)

Here is average annual growth in real per capita income for the three full business cycles.

Cycle GDP pc

Allowing for terms of trade effects improves the picture for both the 97 to 07 cycle and the most recent one, but doesn’t do much to close the gap between the two: the latest cycle just wasn’t that good.

What about productivity?  You’ll recall that my preferred labour productivity measure is real GDP per hour worked, in this case using both measures of GDP (production and expenditure) and both measures of hours (HLFS and QES).  Here is the same chart for that series.

cycle GDP phw

As it happens the average rate of productivity growth for the last five years was even lower than for the full cycle.   And this in an economy starting (a) so far behind the OECD leaders, and (b) therefore less affected by any slowdown in productivity growth at thre frontiers.

What about foreign trade?  Our ministers and officials like to talk up our commitment to open trade and all the special trade deals they like negotiating.

But here are exports and imports as a per cent of GDP.

cycle foreign trade

Highly successful economies tend to be ones that, for their size, export and import a lot.  We don’t.  (It isn’t a great starting point for a time when quite a bit of trade is going to be disrupted by the coronavirus, perhaps for several years to come.)

The poor overseas trade performance may have something to do with whatever mix of factors delivered us such a high real exchange rate.

cycle real TWI

I couldn’t help myself and did take a quick look at how other OECD countries had done on the headline growth numbers, in per capita terms.  Here are the top ten OECD countries

Avg ann % growth in real GDP per capita: 2007q7-2019q4
Poland                                           3.4
Lithuania                                      2.8
Korea                                             2.4
Hungary                                        2.1
Slovak Republic                          1.9
Latvia                                            1.7
Estonia                                          1.6
Israel                                             1.5
Chile                                              1.4
Czech Republic                            1.3

Every one of those countries started the business cycle well behind the productivity leaders, and gained ground relative to those countries over the 12 years.

On this particular metric –  real GDP per capita –  we didn’t do too badly, in that we more or less matched the performance of one of the leaders (the US), which had been at the epicentre of the crisis at the time of the last recession.   There isn’t cross-country comparative data for productivity growth for the full period yet,  but –  using annual data –  for the eleven years to 2018, our productivity growth lagged behind most of the OECD leaders, including the United States.  For us, the gaps to the leaders –  opening out for 60 years or more now –  have just kept widening further.

Sadly, whether in the latest speech from the Minister of Finance or what little we’ve seen from the Opposition, there is nothing to suggest any major party contesting this year’s election is going to offer an alternative that might make a real difference for the better.  Amid the coronavirus implosion I’m guessing productivity failures won’t even get much attention this election.  But they should, and any serious recovery plan should go hand in hand with a strategy that has some credible chance of finally beginning to reverse decades of failure.  Turning inwards and looking more heavily to the state is most unlikely to be such an answer.

National’s economic plan

I’d seen a few underwhelmed comments on the speech by Simon Bridges earlier in the week, “National’s economic plan for 2020”.   But just possibly some of those critics had missed some real gems, that might signal an Opposition party really serious about addressing New Zealand’s longrunning economic failures. For anyone wanting the short version, there was nothing of that sort.

I was quite critical of Bridges’s speech to the National Party conference last July

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing –  not a word –  to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments –  led only by National and Labour –  have presided over.    There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) –  and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

But I was a bit more positive about the economic policy discussion document released a month or so later.

Quite a few of things National is proposing look sensible. The general direction looks sensible.   The rhetoric is better than it was –  although, by itself, such rhetoric is cheap, and is the sort of thing most Oppositions for 25 years have eventually come round to saying.  But the scale of the policy response they are talking about is simply incommensurate to the scale of the problem (much of the policy mix they are suggesting is carrying on a broad approach they adopted in government, and productivity growth was very disappointing then).  For New Zealand average labour productivity to match that in top-tier OECD countries would require a 60 per cent lift from where we are.    That is simply huge.  Huge problems are rarely successfully answered with small changes (even a succession of them).

And so my challenge to National is along the lines of that the rhetoric is great, and I hope it reflects a shared sense that New Zealand’s long-term economic performance really is deeply disappointing, and has not sustainably improved –  relative to other advanced countries –  for any prolonged period for many decades now.  As they say, that has real implications for us, our children and our grandchildren, for the material living standards –  and public and private services –  we can achieve for the population as a whole.

But if you are serious, and you really mean what you say – all those good quotes I posted earlier –  you need to keep thinking harder, digging deeply, consulting broadly and testing and evaluating the proposals and analysis put to you.   Great ambitions need to be matched by excellent analysis, courageous policy, and skilful management of the political challenges.   Perhaps for many in the National caucus, winning the next election is all that matter, but I’d urge the party, and its members, not to focus on the small ambitions, but on the really big challenge that, successfully confronted, would so much transform New Zealand for the better, for almost all New Zealanders.

That was six months ago,  The election is now only seven months away, and if the speech earlier this week wasn’t intended to set out too many details (specific tax rate changes etc), if there was any sign at all that they were serious about more than just gettingback into office, it should be showing through by now, reflecting some sort of integrated story –  and telling that story –  about what has gone wrong, what needs to be done quite differently, and how National under the leadership of Mr Bridges proposed to set about doing it.   But no.

So what does he have to say?

It is pretty much all cyclical stuff.

The first page is pretty much a boilerplate recitation of the woes and challenges of the wider world, and there isn’t anything very much to disagree with.    Then we get this

Our commodity prices are high and our terms of trade are near the best they have ever been. From our primary sector through to our technology and innovative sectors, New Zealand should be booming and the envy of the world.

Perhaps there is a small amount to such a story on a cyclical basis, but no one in their right mind would envy our structural performance, among advanced economies, at any time this century (arguably, for most of the previous half-century either).

I’m not going to disagree with much of the shorter-term stuff

Because Jacinda Ardern’s Government has failed to deliver on its promises, has piled on the tax, cost and red tape, made things more uncertain domestically at a time of global uncertainty, and as a result New Zealand has become a country of lost opportunities.

They [people] deserve a government that does what it says it will, that delivers with certainty and removes barriers and burdens like tax, cost and red tape.

But then it starts getting a bit odd.

We have slipped to the seventh lowest GDP per capita growth in the OECD. We are behind countries like Chile, Hungary, Poland, Latvia, Estonia, Lithuania, Spain and even Greece.

Which is a rather odd list to be anguished about, seeing as all those eight countries have lower per capita GDP than we do (Spain is very close).  In conventional analysis of such things, one might reasonably expect (and hope) that poorer countries will grow faster than rich countries so that, over time, economic performance converges.    Oh, and Greece was coming off the back of probably the most savage economic downturn in the advanced world in almost a century, so it would be a surprise –  nay, a worry –  if they did not eventually begin to limp back towards full employment.

So, really strange list of countries, but it is certainly a fair point that seventh lowest per capita GDP growth in the OECD is pretty bad.    Unfortunately it has become par for the course.  For the whole period since 1970, we’ve had the third lowest growth in real per capita GDP in the OECD (small sample of countries for which there is data for the whole period).    There is complete data for the whole OECD membership since 1995, and over that period –  after all the reforms we did, but also period presided over by both National and Labour governments – we were 11th worst (out of 36 OECD countries).

And on productivity growth –  real GDP per hour worked – the only secure underpinning for long-term improvements in living standards, we’ve been 7th worst in the entire OECD over that whole period since 1995.

We’ve been doing poorly, mostly drifting backwards, relative to other advanced countries for a long time.     And if one year’s growth –  thrown around by all sorts of things, including measurement challenges (who knows how our latest annual growth rate will finally be measured, or ranked against those of other countries, when all revisions are in several years hence) makes for short-term political headlines, it is mostly a distraction from the real long-term failures.    A deliberate one one might suggest.

I couldn’t exactly replicate the Bridges claim that we were 7th worst in per capita growth –  I’m sure it is so on some or other series, but the ones I happened to check gave slightly different results.   I’m assuming he was using annual data, for which the most recent numbers are of course 2018 –  quite a lot (good and ill) has happened since then. I also checked the OECD quarterly seasonally adjusted per capita data, and as happens can offer a factoid Bridges might like: in the two years to September 2019 (latest official data, and covering the full period of this government) New Zealand’s per capita GDP growth shows as being 11th worst in the OECD, while for the previous three years (final term of the National government) we were 14th best –  ie actually better than the median OECD country.

But…..productivity.  Have I mentioned productivity?  (Bridges didn’t)   Over that whole five year period, our labour productivity was fifth worst in the OECD.   That was National’s failure, and it is Labour’s failure.  It would now take a 67 per cent lift in average New Zealand labour productivity to match average productivity in the leading OECD group (a bunch of north European countries and the US).

Now, in fairness to Bridges, there is one vestigial reference to such gaps

In comparison, if our GDP per capita were as good as Australia’s, the average Kiwi would be 35 per cent richer.

By my reckoning that is more like the productivity gap than the GDP per capita gap, but either way it is a big number.   No narrower now that it was –  wider on the productivity measure –  before the last recession.

Bridges goes on

That doesn’t happen by accident, it doesn’t take a country the size of Australia to achieve it. It happens when you have a strong economy focussed on you. Led by a competent government with a track record of delivering.

As Economic Development Minister and Associate Finance Minister, I saw how real this is.

Except that the gaps didn’t narrow then either, and all he goes on to enumerate is a series of either modest cyclical points or wholly rhetorical ones

It’s about getting up in the morning and seeing New Zealand ambitious and confident about itself again.

National’s response

National’s focus is simple and resolute.

  1. We will keep taxes and red tape low and grow incomes to help with your cost of living
  2. We will be responsible managers of the economy
  3. We will focus on growing the economy for all
  4. We will invest more in core public services like health and education
  5. Finally, we will create more jobs and opportunities for all New Zealanders

Except for the first half of item 1, Labour could – probably did – trot out exactly the same list in 2017.

He then gets a little more specific

To do this, today I am announcing five key measures that I want the sixth National Government’s first term to be measured by. They are things that matter to Kiwis because they impact us in our everyday lives.

  1. New Zealand’s economic growth is back to at least three per cent per annum.
  2. New Zealand’s growth rate per person is in the top half of the OECD
  3. We are reducing the after-tax income gap with Australia
  4. More New Zealanders feel they can reach their potential at home, rather than overseas
  5. We have revived business confidence so that businesses feel like they can take more risks and create opportunities for you and your family

Nothing very wrong with that I guess, but not much ambition either –  nothing about the level of GDP for example.   Nothing about productivity, and –  re the final point – business investment was really rather subdued under the previous government as well.

How will this be done?

Over the next few months I will be announcing our comprehensive Economic Plan.

The five major planks to it are five packages on:

  1. Tax relief
  2. Regulation reduction
  3. Infrastructure
  4. Small Business
  5. Families

Details to come, to be sure, but it is hard to believe it will amount to much, beyond a bit of political product differentiation, and (no doubt) a few useful steps at the margin.     If you plan to spend more, and keep the budget more or less in balance, for example, there is hardly room for game-changing tax reform.     And if I really quite like this

We have already promised to cut red tape and regulation. We will light a regulations bonfire in our first six months of government, and cut two regulations for every new one we create.

it isn’t much different to what National always says in Opposition, which never amounts to very much in government.  Why will this time be different?  Did Bridges have a reputation as a reforming liberaliser when he was a Cabinet minister?

The speech goes on with some soft-soap stuff that I won’t trouble you with.   And then we get to the conclusion

National’s view is that the 2020s should be New Zealand’s decade.

Which sounds good, but there is nothing in the speech suggesting thought, ideas, plans, ambition commensurate with the scale of that challenge.   It is really just a promise to manage a bit more compentently –  not an unworthy goal necessarily, but just part of keeping our ongoing relative decline tidy.   Ours kids deserve better.

Then there is this sentenc.  I read it first yesterday and read it again today and it still makes no sense –  or, most generously, just repeats itself in saying nothing.

Our ambition as a country can never be too great for what we need to achieve.

The decades of economic failure just keep on mounting up, on watches overseen by both National and Labour.  The scale of the failure –  the extent to which relative material living standards here have slipped away – is huge.  But while Bridges –  just like Ardern, or Key, or Clark, or Shipley –  might like to leave the impression they might finally be the one to wave a magic wand, all the evidence is that they (a) they don’t really care, and (b) have no serious ideas about what went wrong and no serious interest in knowing, or doing, what it might take to really turn this country’s economic future around.

If, perhaps, none of that is a surprise, I suppose we should simply be “grateful” that Bridges’s speech, just a few months out from the election, makes that indifference utterly clear.

 

 

Product market regulation

Writing yesterday about the Productivity Commission’s draft report on why firms don’t invest more (in “technology”), prompted me to take a look at the OECD’s Product Market Regulation (PMR) indicators.    In the OECD’s own words

The economy-wide PMR indicators measure the regulatory barriers to firm entry and competition in a broad range of key policy areas, ranging from licensing and public procurement, to governance of SOEs, price controls, evaluation of new and existing regulations, and foreign trade.

There is both a summary economywide indicator (the focus here) and a range of detailed component indicators and sectoral indicators.   As always with cross-country attempts to assess policy, the indicator(s) won’t be perfect, but such indicators can still shed some light on differences across advanced economies and across time –  the OECD has published the data every five years starting in 1998.

Here are rankings for 1998.  (On this measure, the lower the score the less burdensome -or whatever your descriptor – the product market regulation is.)

PMR 1998

In the wake of those numbers, when people talked about the productivity performance in New Zealand you’d often here something like “well, our business regulation is less burdensome than almost anywhere in the OECD” so (among the optimists) gains will follow or (among those less sanguine) whatever the big issues are they seem unlikely to be those relating to product market regulation.   A few years on we were still 2nd (in 2003) or 3rd (in 2008).

But by 2013 we were only ranked fifth.  Perhaps not disastrous, but some slippage evident.  And here are the 2018 numbers, fairly newly released (data for two countries still not there) assessing things as they stood on 1 January 2018.

pmr 2018

That is now a pretty unambiguous drop back in the rankings.   And three former Communist countries now beat us, with another two just slightly behind.

And it isn’t as if New Zealand has just been improving a bit more slowly than the rest of the OECD.  Here is the absolute score for New Zealand and for the median OECD country (no material differences if I used just the subset of countries for which there is a score on all five dates).

PMR 3

We’ve gone backwards, in absolute terms, since 2008.

I get quite a few comments whenever I write about productivity, suggesting that the web of regulation has been more constraining and all-encompassing over the years.  I have a fair amount of sympathy with many of those comments, even while doubting that such regulations will explain much of our poor productivity performance.   But in the PMR indicator we score poorly in a quite different area of government involvement.

The OECD publishes the data broken out into two “high-level indicators”.  One is “Barriers to domestic and foreign entry” and the other is “Distortions induced by [direct] state involvement.   Here is how we did in 2018 on the first of those.

PMR 4

Not too bad I suppose –  5th equal, and very close to the couple of countries just above us.

But here is the other high-level indicator

PMR 5

In turn, there are four sub-components to public ownership bit of this high-level series, and on each of them we score less well than the median OECD country.

PMR 6

On the “involvement in business operations” sub-components of the “distortions induced by [direct] state involvement high-level indicator we are the OECD median on one, and do a little than the median on the other two.

Of the other sub-components in the overall indicator, there were six where New Zealand scored materially differently than the median OECD country: three better, three worse.  Of the “worse” ones, only six countries score worse than New Zealand, and on the FDI one (and I know the interpretation is contentious) we score worst of all: none look like the sorts of areas a small economy, with persistent current deficits, should aim to score poorly.

New Zealand Worse
Assessment of impact of regulations on competition
Complexity of regulatory procedures
Barriers to FDI
New Zealand Better
Admin requirements on new companies
Barriers in service sectors
Treatment of foreign suppliers

One could go playing around in the relevant spreadsheets (economywide, and the additional sectoral ones) at great length.  Perhaps I will come to them in another post next week.

One can also debate just how much regulatory and state intervention poor scores really matter in terms of overall economic performance.  It is no doubt easy to point to any of the sub-components and find some highly successful country scoring poorly.  But when you are starting as far behind the leaders as New Zealand now is, then even if regulation and state control issues –  of the sort captured here –  aren’t the key factors, if we are serious about improving productivity we should be doing whatever we can wherever we can to provide a more facilitative climate for firms to prosper on their merits.

UPDATE: An OECD economist, in comments below, has helpfully drawn my attention to some methodological changes in the 2018 PMR which mean that scores cannot be compared (reliably) across time (the 1998 to 2013 ones should work, but there is a discontinuity to 2018).   I think her comments leave most of this post looking okay (the relative rankings should still be meaningful, and the identification of where we now do poorly) but one should be a little cautious about the time series chart (noting, however, that the trends I was highlighting were already apparent by 2013).