More empty rhetoric, bad history, and absent analysis

There was an op-ed in the Financial Times yesterday that had all the appearances of being written by a fluent sixth former who wasn’t that smart and certainly wasn’t that deep.  But I guess we have to take the FT’s word that the column was in fact written by New Zealand’s Prime Minister, Jacinda Ardern.  It read like several of her other efforts (eg here) if with a bit less feel-goodism than some, and a bit more of just making things up.

Since the column is behind a paywall, I won’t be copying chunks of it directly into this post, but even if you don’t have access I hope you get the gist.

She starts with the claim that New Zealand is “tiny”, apparently oblivious to the fact that in the United Nations list of countries and territories there are 100 with populations less than four million.  But that claim is really just staging for her opening (and closing) claim about the mouse that roared: “we punch above our weight”.  This is the sort of vapid (typically deluded) story that countries –  and perhaps especially countries’ ministers and officials –  like to tell themselves in private, but which quickly become rather embarrassing, a sign of insecurity and doubt more than anything, when uttered in public.

The only concrete evidence she adduces for this claim is 125 years old: New Zealand being the first country to grant women the right to vote, in 1893.  Good for us, but rather a lot of water has flowed under the bridge since then.  (And even from that era, I happened to be reading last week a biography of that courageous British campaigner Josephine Butler, who led the push for the repeal of the Contagious Diseases Act (in 1886) – this was, perhaps well-intentioned, legislation that grossly infringed the dignity and civil rights of women. Out of curiosity, I looked up the New Zealand experience: we finally repealed ours almost 25 years after the Brits.)

Almost every country has some “first” to its name, and some black spots from its past.   In our short history (whether you think of it as 200 years or 1000) New Zealand is no different.  The Prime Minister moves on to the claim that we were “one of the first” to put in place a “cradle-to-grave social welfare system that endures in some form to this day”.  Do note that “in some form”, as if the Prime Minister is trying to suggest that in decades since then the welfare system has been ripped to shreds, only the tattered remains enduring, when in fact we now have 300000 working age adults receiving welfare benefits and about 750000 getting universal New Zealand superannuation.  And today’s health and education spending (numbers, share of GDP or whatever) puts 1938 in the shade.

(And no mention, of course, of the fact that just a couple of years later, New Zealand was putting in place  some of the most restrictive provisions around press freedom and conscientious objection found anywhere in the free world during the war.  As I say, even the sainted Peter Fraser  –  from the Prime Minister’s own party –  has his blackspots.)

The Prime Minister moves on to claim that “we are sometimes the first to learn valuable lessons”.   This is an introduction to the sixth former’s account of the reform process of the 1980s and early 1990s.

Starting in 1984, New Zealand went further and faster than nearly any country in embracing the prevailing neo-liberal economic experiment. We slashed the top tax rate, dramatically cut public spending, removed regulations that were said to hamper business and vastly reduced welfare benefits paid to the sick, those caring for children and the unemployed.

It isn’t even clear where to start here.  There is no recognition that we’d been quite late to the party, have wrapped up our economy in heavy protection and distorting regulation for several decades –  more so again than most other democracies.  Many –  not all –  of our reforms were about catching-up again.   And yet she can’t even bring herself to acknowledge the costs and distortions (notice that “were said to be”).   Or to claim some credit –  for her own party –  for the overdue reductions in trade protection that the reformers put in place.   Or to note that as the top marginal tax rate was cut, so the tax base was broadened, and opportunities to avoid paying tax were substantially diminished.

Here is the evil low-tax regime that was created, as illustrated with OECD data on general government total receipts as a share of GDP going back to 1995 (which is about when the reform process ended, and also when the OECD has fairly complete data).

receipts

Over that quarter-century, we’ve basically been the median OECD country (literally so in in several years this decade).   The comparable spending chart isn’t so very different (although we spend less than most relative to tax receipts –  another way of saying we’ve avoided deficits and kept debt low), although the one period in the last 25 years in which government spending looks quite low by international standards is……the first half of the term of the previous Labour government.

But even now the Prime Minister is just warming up because her theme appears to be inequality.  Never mind that the labour share of GDP hasn’t changed much in 30 years now, or that wage growth has been running ahead of growth in GDP per hour worked.   Never mind the indications that inequality measures haven’t changed much here for 25 years, or that much of any concerning developments seem to relate to the spiralling costs of housing –  a development only made possible by restrictions imposed and maintained by successive National and Labour governments.  No, it is all the liberalising economic reforms that are “to blame”.

And all this while, oddly (but as she did during the election campaign), appearing to accept that narrative that somehow our economic performance has been just fine.  But, of course, there are no mentions of our shockingly poor long-term productivity growth performance (past and present), no recognition that New Zealand export and import performance has been disappointing, no nothing.  Far from “punching above our weight”, it is hard to conceive how a country which had built what it had in, say, 1913 could have done so badly in the subsequent 100 years –  without even the excuse of the physical devastation of war, military coups, or Communism.

Of course, none of this seems to be based on any analysis or research.  Instead, the Prime Minister tells us of her childhood memories, in which kids in the town she was living in “weren’t born into a decade of hope and opportunity, but one of inequality where users had to pay for basic services”.  Perhaps she means they had to pay for food and electricity, but then users have always had to pay for those?  As for schools and hospitals, they were –  and are – more or less free, and we’ve never the British system of generalised free GP visits.  So what on earth is she talking about?

And then the violins start up to accompany a mournful tale of the death of democracy and of prosperity from which she, and the New Zealand way, can save us.

We don’t need to start again, but we do need to change the way we do things. In May, my government will present the world’s first “wellbeing budget”.

All, apparently, premised on the weird, tendentious (and borderline dishonest) claim that any government anywhere –  especially in the free world –  has ever defined success solely in terms of GDP.   Perhaps she could pause a moment in her progress among the left-liberal elites to give us some evidence for that claim?   Have governments not been spending on education, on health, on defence, on age pensions, even on arts and the culture for generations now?  Not just in New Zealand but around the advanced world.   Have not cost-benefit analyses –  that don’t just cover GDP effects –  been part of spending evaluation for decades?

And thus the great mystery of the much-vaunted “wellbeing budget”?  Is anything going to be any different from what we might we might expect from a left-wing coalition government anywhere that happened to be running budget surpluses.   In her column, the Prime Minister talks of spending more on mental health, especially for young people.  You might think that is sensible (I suspect that, even if some of the spending is worthwhile, it is going to be mostly papering over cracks, while refusing to address the social and cultural issues that underlie the problems we observe) but it is what left-wing governments typically do –  they throw more money at things.   Perhaps it is even what the voters want –  after all, globally, government spending as a share of GDP is typically higher than it was 50 years ago –  but don’t try to pretend that it is a whole different approach to life, economic management or government management.  One only has to look at the wellbeing dashboard to see a grab-bag of vapidity, rather than a serious approach to better policy.  It is, among other things, a cover for the utter failure to even begin to grapple with the repeated failure on productivity.

(And, of course, while on the subject of increased spending, there is the oddity that people from the left and right point to: she proposes to change the world, laments how public spending was slashed, but her government published plans just before Christmas that involve

On the government’s own numbers (and these are pure choices, made by ministers), core Crown spending in the coming five fiscal years (including 2018/19) will be lower every single year than the average in each of the three previous governments, two of which were led by National.  

She goes on to claim that “this isn’t woolly but a well-rounded economic approach”.  Perhaps around the Cabinet table and even among some of her Treasury acolytes they even believe this nonsense. In fact, it is no economic approach at all, consistent with a government that has done nothing –  seems to plan nothing –  to reverse the decades of relative economic decline, that have so badly limited the possibilities for New Zealanders (reflected, inter alia, in the decades-long exodus of New Zealanders).   Weirdly, she claims that this “well-rounded economic approach” is same one she plans to use to respond to (inter alia) climate change, domestic violence, and housing.   This in a week when the latest Demographia report again reminds us just dreadfully unaffordable housing is in New Zealand –  and when her surrogate senior minister could go through an interview on the subject on Morning Report yesterday and not even (that I heard) mention land liberalisation.

Warming to her theme, the Prime Minister calls on those around the world to look to her “wellbeing approach” could be a “model” for others to respond to the problems of the world.  She asserts

I wholeheartedly believe that more compassionate domestic policies are a compelling alternative to the false promise of protectionism and isolation.

Spending more is apparently the answer….but (on her own rules) not more than 30 per cent of GDP.   Nothing at all, of course, about lifting productivity growth.  Nothing about fixing the huge regulatory distortions that render housing so unaffordable in many countries, notably her own.  Just more compassion.  More kindness.

As I observed of one of her earlier vapid efforts

We don’t want political leaders who can’t identify with individual need, opportunity and so on.  And yet, when one is dealing with five million people –  and government policy choices affecting many or all of them  –  you need to be able to stand back and think about things differently, to analyse issues systematically, to recognise (for good and ill) the force or incentives, to think about the longer-term as well as the short term, and so on.   And even to recognise that values and interests can, and often will, be in conflict –  in many areas hers aren’t Family First’s or the oil and gas industry’s  (or mine for that matter).  Politics is partly about navigating those differences, seeking reconciliation where possible, but also about making hard choices and trade-offs.

There is no sign that she brings any of those skills to the job.  Just a smile and lots of breezy vapid blather.

The Prime Minister ends her column with another deluded call, suggesting that she hopes New Zealand can once again “punch above our weight” by “forging a new economic system based on this powerful concept [guardianship]”.   Which might perhaps be fine if there were any substance to what she is talking about, but there is no sign of any.  She wants to spend a bit more (but not much), she wants to eliminate net carbon emissions in an country with seriously high abatement costs which her own government’s consultative paper data suggest will fall most heavily on the poorest, and she does nothing at all to fixing the disgrace that is New Zealand housing affordability, or to even think about reversing decades of relative decline.   Perhaps it all sounds good to a few readers –  and Davos attendees –  but it offers nothing of substance to New Zealanders, let alone to the world.

 

Productivity failure: Treasury clearly has the wrong model

In various commentaries on yesterday’s GDP data, I saw suggestions that the revisions to recent years’ data suggested that the New Zealand economy had been growing “strongly” in recent years.

As context for that observation, and perhaps shedding a bit of light on the sadly diminished expectations that appear to have taken hold in New Zealand, consider this chart, of real GDP per capita growth.

real GDP aapc 18

After a deep and quite long recession, the peaks in growth in per capita real GDP were a pale shadow of what had been achieved in the previous two economic cycles.   2 per cent annual per capita growth over the long-term would be a reasonably impressive result, but when the growth rate peaks at 2 per cent, and recessions come along every decade or so, it is no more than mediocre at best.  For the last couple of years  (these are annual average numbers) per capita growth has been at levels only previously experienced –  last 25 years –  on the eve of a recession.

But my main interest in yesterday’s numbers was the productivity estimates derived from them.  As I’ve been pointing out for a couple of years now, there has been next to no productivity growth at all in New Zealand for some years.  But in making that observation one is always somewhat at the mercy of the major annual SNZ data revisions.  Sometimes what looked to be in the data gets revised away completely.

How about labour productivity?  Recall that SNZ does not publish economywide productivity estimates –  there is no obvious reason why, when their Australian and British peers do –  so I’ve calculated one, using an average of the two measures of GDP (production and expenditure) and the two measures of hours (QES and HLFS).   And this is the resulting chart.

real GDP phw dec 18

No labour productivity growth at all for the last three years, and a total of 1 per cent productivity growth in the past six years.  Productivity growth under the previous Labour government wasn’t spectacular, but in the six years to the end of 2007 (just prior to the recession) we managed 8 per cent productivity growth.  But only 1 per cent this time round.    It is dreadfully bad, and there are no acceptable excuses.  You’ll hear people talk about global productivity growth slowdowns, and that is true to some extent, but it is largely irrelevant here, given that we start so far behind the leading OECD countries –  those at or near the productivity frontiers.   We have so much room to catch-up, and yet if anything again we’ve been drifting further behind.

Sadly there is little prospect of much change for the better.    Neither the previous government nor the current one appear to take New Zealand’s appalling productivity record seriously, in the sense of doing anything much about it, or even commissioning expert analysis and advice (reluctant as I’d be to suggest another “working group”).   And in a sense they’ve been accommodated in that stance by their self-proclaimed lead economic advisers, The Treasury.   Treasury publishes their HYEFU forecasts each December and buried in the supporting tables are forecasts for labour productivity growth (on an hours basis).    I could only find those tables back for the last five years, but here is what they have been forecasting (I’ve shown the four complete forecast years for each set of projections).

HYEFU forecasts for labour productivity growth published in Dec
Forecasts for June yrs 2014 2015 2016 2017 2018
2016 2.2
2017 1.6 1.6
2018 1.1 2.1 2
2019 1.2 0.8 1.5 2
2020 0.7 1.3 1.7 1.1
2021 1.4 1.5 1.2
2022 1.3 1.2
2023 1.2

They seem to have become quite a bit more pessimistic about the medium-term outlook in their latest forecast, but they are still picking almost 5 per cent labour productivity growth in the next four years, when over the last four years we’ve had almost none.   Look at the first column in the table done at the end of 2014: Treasury was actually expecting quite strong productivity growth over that period.  It is pretty clear that they simply do not understand what is going on, and do not have even roughly the right model.  Their productivity projections are wrong, in material ways, year after year.   And if they might be getting a little less unrealistic in the latest set of forecasts, that is small consolation because there is no sign they are offering advice to the government that might turn around the disastrous underperformance.   Too busy with the feel-good “wellbeing Budget” perhaps?

It has been another poor year for New Zealanders at the hands of our policymakers and their lead advisors:

  • no serious action to address and reverse the house price disaster that successive governments have been inflicting on us now for 25+ years (house and land prices up again),
  • no action at all to address the decades-long productivity growth underperformance (particularly bad over the last few years) that now sees a country once among the most productive in the world languishing in the league tables among former eastern bloc states, far far behind our former peers among the leading group of OECD countries,
  • and no sign that either the government or the Opposition really care,
  • or that our Treasury really understands at all the factors that explain the utter (and ongoing) productivity failure.

Governments, of course, don’t create productivity.  But they can and do put roadblocks in the path, often initially unwittingly.    But over time every such roadblock comes with own vested interests.    There is the old line from Upton Sinclair about

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Perhaps that explains the resistance of many in the business community to the changes that are needed.   It can’t explain Treasury’s failure.  I suspect that for them, and perhaps for many of our politicians, it is more a matter of ideological commitments, and an unwillingness to shine the light on the issues and policies that really matter if we care at all about lifting economic performance for our fellow New Zealanders.

Whatever the explanation, it is well past time for a change of heart, and for beginning again to take seriously finally reversing the decades of (relative) failure.

 

Earnings advantage of the tertiary-educated

Skimming through the tweets of the chairman of the Productivity Commission –  who often includes interesting charts –  I spotted this picture.

returns to education

It is an interesting chart on a number of counts.  First, in every country shown, except the UK, the earnings advantage to tertiary educated workers is higher –  often materially so –  for older workers than for younger ones.  Second, all the countries at the far left of the chart are among the poorest of all those shown (the sample is OECD countries and “partner countries”).  And thirdly, of course, that New Zealand is over towards the far right of the chart, where the earnings advantage to tertiary educated workers is pretty low (and especially so for older workers).   The chart is drawn from this short OECD note.

Making sense of the numbers isn’t straightforward.    First, note that the chart isn’t claiming to illustrate returns to tertiary education, but the earnings margin of people who have had a tertiary education over those who haven’t.  The difference matters –  people who undertake tertiary education are different, in various dimensions, to people who don’t.    I’m in that older age group, and if I think back to my Auckland high school, only about 10 per cent of those who started in the third form made it to the seventh form.  Most of them probably did go on to university, and perhaps a few others did tertiary study later, but it was a cohort that was much more intellectually capable, on average, than the other group.   Since university was all but free to attend in those days, there weren’t even obvious financial barriers excluding capable people from poorer families.

These days, of course, a much larger share of young people undertake tertiary education.  But that probably means that the intellectual capability of the median tertiary qualifed person today is lower relative to that of the population as a whole than was the case 40 years ago.  It isn’t clear that is true if we compare the median of those with tertiary education and those without it (since the median of those without it is now likely to be quite a bit lower relative to that of the population as a whole).

Productivity performance in New Zealand has been poor for a long time, and we now start a long way behind the better-performing OECD countries.  If there were a lot of really good opportunities here then all else equal, and given how far behind we start, I might have expected the returns to enchanced skills (not, of course, the same as having a tertiary education) to be higher here than in many other countries.  The greater international mobility of people with better educational qualifications might have tended to work in the same direction.

But instead, those with tertiary educations aren’t doing well absolutely (low productivity country) or relative to those without.     And so you are left wondering quite why immigration policy is oriented towards recruiting lots of “skilled”  migrants –  particularly those with New Zealand tertiary education –  and why “education” policy is oriented towards encouraging yet larger proportions of people to undertake tertiary education.  None of which prevent’s Treasury’s living standards dashboard  – which we are told is going to help shape next year’s Budget – including the share of the population with a university degree of one of their “wellbeing indicators”.

(As far as I can tell, this particular chart also doesn’t taken of the fact that getting a tertiary education costs a lot of money –  directly (fees and living costs) and indirectly (foregone time in the labour force) and thus, if anything, probably overstates the advantage held by the tertiary educated.  There are other estimates of overall lifetime earnings advantages (or otherwise)).

Services exports and economic performance

A couple of pieces I saw yesterday got me thinking again about New Zealand’s services exports and our economic performance.

On the one hand, there was an interesting ANZ report on tourism, which included this chart.

Chart of the week

Spending by international visitors has seen impressive growth in recent years.

International visitor spend by country

tourism

Source: MBIE

And then there was speech on the MFAT website by Catherine Graham, their Economic Divisional Manager.  MFAT doesn’t publish many speeches, so it was interesting to see a bit of an economics angle, even if  it was infected with the government of the day’s propaganda.  Perhaps that was inevitable to some degree in a speech by a public servant, but gratuitous endorsement of the Provincial Growth Fund didn’t seem strictly required in a speech notionally on “small state diplomacy”.

There was a certain breathlessness to the speech

All countries and regions face technological mega trends that are consequential to businesses and governments and affect decisions. Digitalisation, artificial intelligence and automation will increasingly affect wage and employment levels, in developing as well as developed countries. The key difference from the past is that the change – driven by computing power – will occur at an exponential, rather than linear, rate. 

Maybe, although the best guess remains that people who want to work will continue to be able to do so.  Markets adjust like that.  And global productivity growth shows no sign of such a dramatic transformation (for the better).

Also from the breathless side was this

Non-state actors such as the major e-commerce platforms (think Amazon and Alibaba) and the social media giants (think Facebook, Instagram and Google) are each on their own much bigger economically than New Zealand (and many other countries’ economies). How do we navigate our relationships with them as a nation state?

This seems mostly (a) meaningless or (b) wrong.  For example, on checking I learned that the market capitalisation of Facebook was US$390 billion, and its annual revenues were less than US$50 billion.  On no meaningful metric is it bigger than New Zealand, but even if it was there is a fundamental difference between a company and a nation state.  For better or worse, Facebook could be regulated out of existence almost overnight.

But the line that caught my eye, and prompted this post, was a couple of paragraphs later

Continuing to create and leverage smart ideas will be essential for New Zealand’s agricultural sector to keep delivering value to the economy and address broader societal and environmental challenges. Elsewhere in the economy, New Zealand’s success in weightless exports – such as software development, services embedded and embodied in physical products, and the creative arts – are growing apace. It is likely that this trend will be supported by ongoing technological advances.

You’d have thought that a senior economics person in our foreign affairs and trade ministry might have thought it worth mentioning that exports as a share of GDP peaked (in modern times) 18 years ago, or that there has been no growth in the real per capita output of the tradables sector in the same period.

But what about those “weightless exports” specifically?  Here is the time series of New Zealand’s services exports for the last 30 years.

services x nov 18

The 1990s looked quite good, indeed the peak wasn’t even until as late as 2003, but since then it has mostly been downhill.   There was a bit of a pick-up a couple of years ago, but even that doesn’t look to be going anywhere in particular.  The services export share of GDP is currently at a level first reached in 1996.  This is success?

That ANZ chart I started the post with looked quite impressive.  Nominal series over long periods of time often do.  But MBIE now has a nice tourism data dashboard (there is a migration data one coming), with some useful summary charts.  Here are a few of them

tourism mbie3

tourism MBIE 2

and, as a share of GDP –  direct and (estimated) indirect contributions

tourism MBIE 1

(UPDATE: A careful reader points out that these charts, which I directly downloaded from the dashboard, have not translated correctly.  Anyone wanting the correct pictures should go to dashboard itself (link above) and click on the “Overview” menu and then “Economic Contribution”.   As represented above the charts don’t capture the pick-up in tourism in the last couple of years.)

And tourism is by far the largest component of our “weightless exports”.    We all know there are specific services firms doing well, either selling abroad directly or (as Ms Graham notes) with their services embedded in other goods exports, and on the other hand we have the film industry (kept alive on massive direct public subsidies) and the export education industry (aided by substantial implicit subsidies, bundling immigration and work access provisions to the sale of educational services).  The bits that are doing very well, standing on their own feet, just have to be very small relative to the size of the economy, and to the scale of the New Zealand economic challenge (closing those huge productivity gaps).

How do we do by international comparison?

Here are exports of services as a share of GDP for the small OECD countries (I’ve left Ireland and Luxembourg off the chart, but –  for various reasons –  their services export shares are “off the charts” high).  Small countries is the relevant comparator here, as countries with large populations naturally tend to have rather lower foreign trade shares.

services x nov 18 2

Services exports from New Zealand have been shrinking as a share of GDP, and our services export share of GDP was low to start with.   This century to date, only three of these small OECD countries have had more of a fall in the services exports share of GDP than New Zealand has.   And all three of them –  Czech Republic, Slovakia and Estonia –  have in any case managed much faster productivity growth than New Zealand over that period.

Our economy isn’t doing well, no matter how much bureaucrats and politicians like to pretend otherwise, and regardless of whether one focuses on the “weightless” bit of the economy or the rest of it.  We do quite well at employing our people, but then wage rates and productivity are now so modest by advanced country standards –  gaps that simply aren’t closing –  that more people feel the need to work.

And strangely, it seems that MFAT’s Economic Divisional Manager has some inkling of this as she ends this particular part of her speech thus

I strongly believe that earth will never be “flat”, as Thomas Friedman claimed, and that geography remains, to a greater or lesser extent, destiny. Digitalisation is not causing the end of geography as a key determinant of prosperity. Industry clusters, international connections and trade, knowledge exchange and IP transfer are all positively correlated with geographical proximity as well as prosperity – in other words, they are much easier for large countries and countries with land borders to achieve. The catch-22 for small, isolated countries is that they are also the very conditions essential to overcoming the disadvantage of geographical distance. This is a huge challenge for New Zealand, both in terms of international policy but also domestically – currently we see the government tackling this challenge through regional policies such as the Provincial Growth Fund.  

Except that it isn’t some sort of “catch-22”.  It is a constraint that New Zealand officials and politicians need to finally get real about.   If – natural resource based opportunities aside – the best opportunities in the world arise from being in close proximity to lots of other people (as markets, skills networks or whatever), then trying to grow New Zealand’s population as a matter of policy –  lots more people in an unpropitious location –  looks crazy.  Many of the people who come would have been better off to have gone somewhere else (if they could).  And the challenge facing the typical longstanding citizen (native or otherwise) –  to manage top-tier global incomes and living standards – is simply made tougher with each new person our governments bring in.  That is not because of access to jobs (that is a straw man non-argument –  you observe full employment in poor, rich and middling countries) but precisely for the sorts of reasons that Ms Graham of MFAT identifies (even if she apparently has not thought fully through the implications of her observation).

Europe’s economic performance

A commenter on yesterday’s Brexit post raised the question of how Europe (EU, euro area or whatever) had done overall relative to the rest of the advanced world.   The question sparked my interest, not just about the last 20 years or so (since the euro was created, and the comparison in yesterday’s post) but about somewhat longer spans of history.

At around the turn of the 20th century no one would have doubted that Europe dominated the world geopolitically, and it no longer does that.  That geopolitical rise was built on technology and associated economics, but just because the geopolitical moment has passed doesn’t necessarily mean the economic one has.

But who to compare Europe with?   Relative to the situation 100 years ago, some east Asian countries (in particular) have caught up considerably.  In most respects that is to be welcomed, and doesn’t tell one anything particularly enlightening about the performance of western Europe.   And some (most?) of the European countries that aren’t in the EU are nonetheless in agreements with the EU that mean that in many respects the policy regimes are similar.

And so here I’ve focused on a comparison with the European “offshoots”, notably the Anglo-shaped ones (the United States, Australia, Canada, and New Zealand), but with some reference also to Argentina, Chile and Uruguay.  Prior to World War One, Europe may have been the geopolitical centre of the world, but individuals in the typical offshoot countries enjoyed a better material standard of living than their peers in western Europe.

europe 1

The first two columns are the group of 11 western European “established” euro area member countries in yesterday’s post, and a subset of those that I’ve got interested recently (France, Germany, Belgium, Netherlands, and Denmark) which today have much the same level of average labour productivity as the United States.

In 1913, the Anglo countries were top of this particular economic heap, and the western European countries weren’t much different than average living standards in Argentina, Chile and Uruguay.  In 1929 and again in 1955 (allowing some time for recovery from the war) the picture still wasn’t so different.  The five top European countries were doing better and the UK a bit worse, but average GDP per capita in the 11 European countries group was only about 10 per cent higher than those in the Uruguay, Argentina or Chile group.

And here is the same chart for 2017, using Conference Board data.

europe 2

It doesn’t take too much study to see where the (relative) decline has been centred: the European offshoots and the UK.  The picture is most vivid for the southern cone countries in Latin America, but isn’t less real for the Anglo countries.  It isn’t that, as a group, they’ve been surpassed by continental western Europe, but that western Europe has caught up. (Since this isn’t a New Zealand-centred post, we will quickly pass over the way those countries now outstrip New Zealand.)

But what about some time series charts for more recent periods?  In this chart I’ve shown the same two European groupings relative to the median for the Anglo offshoot countries (US, Australia, Canada, and NZ) using OECD data which start in 1970.

europe 3.png

(I don’t quite know what was going on around 1990, although I guess it is probably about the recession in many of the Anglo countries).

Over the full period since 1970, Europe has gained ground relative to the Anglo offshoots, on both groupings.  But there is, of course, a big divergence in the two series in the last decade or so.   For the top-5 north European countries, performance has remained pretty strong.  The median of those five countries now has average per capita incomes almost equal to those of median Anglo offshoot country (and, as it happens, the Europeans work fewer hours per capita to achieve that outcome).  But for the wider group, things have gone badly into reverse –  the influence of the poorly performing tail (Greece and Italy in particular, but also Spain and Portugal).

What about a similar chart for productivity?   The OECD doesn’t have labour productivity data for the whole period for Austria and Greece, so in this chart those two countries drop out of the comparison.

europe 4

It is a somewhat different picture.  The cylical effects large drop away, but (not unrelatedly) so does the marked difference between the two groups of euro-area countries over the last decade.   On this measure, Europe’s labour productivty growth has fallen behind that of the Anglo offshoots grouping over the last decade (although not in the first few years of the euro).  But perhaps the bigger story remains just how much average productivity in Europe has improved relative to that in the Anglo offshoots world over the whole period since 1970.  It is a huge relative gain for (western) Europe.

And what of a simple comparison between the leading group of European industrial countries and the US?  After all, if Europe has its laggard, the Anglo world has New Zealand (and Canada).  Here’s that chart.

europe 5

It is interestingly different.  Relative to the US, these leading European countries did poorly last decade.  But the underperformance hasn’t continued into this decade, despite the euro-area crises, even if little of the ground has been made up again.  But again, taking the longer view, surely the bigger story is one of the improvement in Europe’s relative performance since 1970.

And of course, amid all of this there has been no mention of the rest of Europe, the bits that spent decades in the Soviet orbit, and weren’t beacons of prosperity prior to that.    Many of those countries have been making progress in catching up with the Western European leaders even as, over longer runs of time, western Europe has been catching up with the (former) Anglo leaders.

And as one final chart here is snapshot of Conference Board estimates of the levels of labour productivity last year.

europe 6

Five of the top six are European, even if Singapore is almost at the heels of the European leaders.  (Ireland, Luxembourg, and Norway have higher numbers again, each with their own idiosyncrasies.)  Below Singapore, I’ve just put in a few countries out of interest –  China as much because on my walk this morning I listened to a podcast interview with a former European politician convinced that by 2038 China will dominate the world, and that this will mostly be a good thing.

Europe has had its good and its (very) bad times in the last 100 years or so, but when one looks at the data as a whole it is hard not to think that in economic terms Europe’s performance (and especially that of the northern European top tier) relative to the rest of the advanced world has increasingly been as good as it has been at any time since the New World was really opened up to trade and settlement.    By contrast, over the last 100 years or so, of the New World countries only the US has more or less managed to hold its own matching or exceeding the leading group (per capita income and productivity) of European countries.

For New Zealand, Uruguay, Chile and Argentina –  and even Australia –  (the Antarctic Rim countries) it all seems to have proved just too hard.

On Poland and economic performance

Next week we mark the 100th anniversary of the end of World War One.   Whatever else –  good and ill –  the resulting peace process ushered in, it led to the restoration of an independent Poland.   I was reading an article the other day by a British writer, resident in Poland, reflecting on 100 years of (renewed) Polish independence, which in turn prompted me to dig out some economic data.

My own reflection on Poland is that it is hard to think of a place in the western world (say, present day EU, other bits of western Europe, and western European offshoots – eg New Zealand, Australia, Canada, US, Argentina, Chile, Uruguay) that wouldn’t have been preferable to live in over the last 100 years or so, at least as judged by material criteria.   Perhaps if you were German, you have to live with the guilt of World War Two, but most of Germany was free again pretty quickly.   Romanians and Bulgarians might have been poorer on average, but they largely escaped the worst horrors of the German occupation.  To its credit, Bulgaria managed to largely save its Jewish population, while the Polish record was patchy at best.  With borders pushed hither and yon, and not a few abuses of other peoples (notably ethnic German) post-war, sanctioned by the state, the place then settled into 40 years of Communist rule.   There is a lot to admire about Poland, but I wouldn’t have wanted to live there any time in the 20th century.

In economic terms it has always been something of a laggard.   Here from Angus Maddison’s collection of data are estimates of real GDP per capita for 1870 and 1913 for the UK, France, Germany, the territory that was Polish, and New Zealand.

poland 1

Real GDP per capita in Polish territory (mostly ruled by Russia) was about a third of that in New Zealand.

The Maddison database has annual data for Poland from 1929 (excluding the period of the war), and that ratio of Polish GDP to New Zealand GDP seemed to show no real trend whether pre-war or in the communist years, averaging just a bit more than a third.

poland 2

Relative prices – including the purchasing power parity exchange rates used- matter quite a lot in these cross-country comparisons across time.  So not too much should ever be put on any particular levels estimate.  The Maddison database only comes forward to 2008 and the most widely used current numbers are those from the OECD.  On their calculations, at the end of communism Poland was a bit better off (say, relative to New Zealand) than in the Maddison numbers.  Polish GDP per capita in 1990 is estimated to have been about 44 per cent of that in New Zealand.

Here are the OECD estimates for the period since.

poland 3

On OECD estimates, Polish real GDP per capita hit 75 per cent of that in New Zealand.

Here is the OECD estimates for real GDP per hour worked (for which there are no longer-term historical estimates, but we can safely assume the ratio was very low on average –  perhaps averaging 35 to 45 per cent –  in the century prior to 1990.  In 1993, when the Polish data start the ratio was 43 per cent –  almost exactly the same as for real GDP per capita.

poland 4

Last year, Poland’s labour productivty reached 82 per cent of that of New Zealand.

All of which is clearly very good for Poland.   And it clearly isn’t just that they’d thrown off the shackles of communism: as the earlier charts show, Poland had been a laggard in the 19th century, and in the first half of the 20th century.

But, of course, part of the good news in these charts is a reflection of New Zealand’s own poor long-term performance.

Here are the latest OECD labour productivity (real GDP per hour worked) estimates for the same group of countries as in my first chart above.

poland 5

Last year, for the first time, Polish real GDP per hour worked passed 50 per cent of that in France and Germany.  100 years ago, of course, both France and Germany would have lagged well behind both the UK and New Zealand.

Perhaps Poland will go on to achieve much greater convergence with the other big European economies in the next few decades – we can only hope so –  and yet one can’t help wondering whether the leaders of a newly independent Poland wouldn’t have been rather disappointed if they’d been told that 100 years on their successors and fellow citizens would still be achieving only half the output per hour of the French and Germans.

Then again, they’d probably have been astonished to learn that 100 years on they’d be managing 82 per cent of average New Zealand productivity (and even 63 per cent of that of the British –  leading global power a century ago).

Hard to think though how disbelieving our own leaders would have been 100 years ago if they were told how far we would have fallen relative to these other countries, notably including Poland.     With none of the excuses –   wars, shifting borders, genocide, or decades of communist rule.

I might have a look at the data for a few of the other post World War One emergent countries later in the month.

No plan, but not much sign of aspiration either

There was a not overly good article in the Financial Times yesterday marking the first anniversary of the Labour/New Zealand First (and Greens) government.   Among its odd features was the final sentence which reported the suggestion from political scientist Bryce Edwards that the Prime Minister “is now seen as an icon of good family values”.   Really?  By whom?  The FT’s journalist also claimed that the Prime Minister had achieved “near-celebrity status” abroad.   If that were true I’m not even sure it would be a good thing, but is it?  I read pretty widely internationally and I don’t see much sign of it.

But the primary focus of this blog is still economics, and what really caught my eye was this comment from a former ANZ chief economist:

“I’d give the coalition an A grade for aspiration due to their ambitious reform agenda,” said Cameron Bagrie, founder of Bagrie Economics. “But the problem is they haven’t got an economic plan in place yet.

I’d certainly agree with the second sentence (no plan).  But Cameron Bagrie seems to be far too charitable is his talk of an “A for aspiration”, let alone the puzzling talk of an “ambitious reform agenda”.

Sure, ministers occasionally run the line about building a more productive and sustainable economy, with occasional suggestions of shifting the “growth engines” of the New Zealand economy.  But after only a year it has already become nothing more than a cliche, recycled in speeches and press releases, signifying almost nothing, and with no sign of any passion or serious aspiration underpinning it.

And it really doesn’t mark them out from most of the decades of governments that have gone before them, since the problems  –  and underperformance – of the New Zealand economy first started to become apparent, back in the 1960s.  All of them talk about producing something better and then, after they’ve been in office long enough, start pretending that there really isn’t a problem after all (John Key, you may recall, resorted to talk of “quality problems” –  dreadful congestion, and unaffordable house prices.)   There is talk of a more outward-orientation to the New Zealand economy, of a stronger productivity performance, of closing the large gaps that have opened with the older OECD countries.  And then, in most cases, almost nothing happens.  Governments occupy office, and then leave it, and the fundamental failures aren’t addressed.   Housing is a more recent utter failure than productivity –  only really dating back 25 to 30 years –  and again governments talk about how things will be different, but do little of much substance, and never show any evidence that they care much.  To date, the current government doesn’t look materially different on that count.

Has anyone heard rhetoric from the Prime Minister or her ministers about getting house prices back down again –  to perhaps three times income that looks to have been a longer-term norm?   They won’t even say the words, let alone suggest that have a well-researched carefully thought out plan (economic and political) to make it happen.   There is nothing specific either to their talk of a more productive economy –  no benchmarks to which we can hold them to account, no nothing (and indeed things like the oil and gas exploration ban, and net-zero targets that will likely make it much harder to pursue such goals –  if the government were actually serious about them).   There is no sense of open alarm (which a new government could afford, responsibility for those outcomes not yet resting with them) at five years of very little productivity growth –  even though productivity growth almost alone underpins prospective improvements in material living standards –  let alone the decades of relative underperformance that has helped give the outcomes the government probably does care about more (eg child poverty), and the decades-long exodus of New Zealanders to Australia.  If there is “aspiration” –  as Bagrie suggests –  around economics it seems to involve using just enough of the right words to get and hold office.

I wrote the other day about the vacuous nature of the new Business Advisory Council (and a Herald columnist had some other criticisms which mostly rang true). The Prime Minister talked up the Council when she first launched it, but which seems more likely to be a sop to the (upper end) business community than a sign of, or source of serious ideas for, any serious commitment to a much better economic future.  There isn’t a plan –  that much is obvious.  But there is also no sign of a serious aspiration –  the sort that shapes how the government operates in its determination to give concrete form to a better future –  either.  Sadly, that doesn’t mark them out from their predecessors.

What if they really were serious?  Well, of course, then they’d have used the long years in Opposition rather better.  That is water under the bridge now.   But even now they could be looking seriously for some better, more compelling, answers.

Business leaders aren’t typically the place you would be looking to find those sorts of answers –  an economy is, in crucial ways, not like a company.   Economists, for all their faults, are much more likely to be able to help in getting to the bottom of the problem, and identifying policy measures that have a serious prospect of making a real difference.  There are stories and proposed solutions around.  I’ve been developing one, and arguing it here, for some years, but I’m not alone.  Paul Conway at the Productivity Commission has also developed sustained analysis and arguments about the productivity failure –  in some areas, his analysis overlaps with mine and in others not.  If the leadership of the key government  agencies –  Treasury and MBIE –  is beyond hope, there are still individuals in Treasury (in particular) who have thought hard about, and written on, some of these issues.  There are people like David Skilling, now based offshore but formerly at Treasury and the New Zealand Institute, and the academic Phil McCann.  There would, no doubt, be others who would invest in the hard thinking and analysis if a government were to show signs that it was really serious about New Zealand doing better.

I’ve argued for years that what is needed is a serious contest of competing narratives –  credible, well-documented, stories, well-grounded in the specifics of New Zealand’s situation and experience that explain New Zealand’s underperformance and how any policy proposals fit in to such a narrative.   Probably no one story or set of proposals will get everything right, but the active contest of ideas and arguments is a big part of the way in which we could make progress towards a deeper, and shared, sense of what has gone wrong and what could –  and should – be done in response.

But, of course, there is no sign that the Prime Minister or the Minister of Finance, or the leaders of her coalition/support parties, care.  There is no sign that they have anything like the sort of aspiration –  on matters economic (including housing) –  that the Financial Times reports Cameron Bagrie suggesting they have.   That is beyond a shame, and more like a disgrace –  like their predecessors, people who hold office and yet do little or nothing, presiding over a continued relative decline of a country once the most prosperous on earth, that once –  and not that long ago –  had affordable housing for its people.