Emissions and immigration policy

Just listened to an RNZ interview with National’s climate change spokesman Todd Muller, around the silly question of whether or not a “climate emergency” should be declared.  Muller called it symbolism, but symbols have a place –  it is much worse than that, just empty feel-good virtue signalling  (whether or not you think our governments should be more aggressive in doing something to lower New Zealand emissions).

But Muller introduced his comments referring back to a sense as early as 1990 that something needed to be done.  And it reminded me of the single worst policy National and Labour have presided over for the last 30 years, in terms of boosting emissions from New Zealand: immigration policy.

New Zealand’s population in 1990 was about 3.3 million.  Today it is almost five million.  And here is a chart, using official data (which has some weaknesses, but the broad picture is reliable) of the cumulative inflow of non-New Zealand citizens since 1990.

PLT 2019

That data series was dumped last year, but you can add another 60000 or so people in the year since then.    Almost all of them needed explicit prior approval from New Zealand governments –  more than 1.1 million of them.

Over such a long period, the cumulative inflow becomes a little misleading.   It understates the impact.  Of course, over 30 years some of the migrants will have died, but many more will have had children (or even grandchildren).  Those children will (mostly) be New Zealand citizens, but that doesn’t change the fact that their presence –  and their emissions (resulting from their life and economic activity) – results from explicit immigration policy choices.

Those who are made uncomfortable by all this but simply wish to dismiss it will say “oh, but emissions and climate change are a global problem, and it doesn’t really matter where the people are”.  Strangely, this is not usually an argument the same people invoke when they favour (say) New Zealand oil and gas exploration bans, or other New Zealand specific actions that will have either no impact on global emissions, or only a trivial impact.

As you will no doubt recall, it is not as if New Zealand is already some low-emissions nirvana.  Per unit of GDP (average) emissions in New Zealand are among the very highest, and per capita (average) emissions are also in the top handful of OECD countries.    The typical migrant to New Zealand is not coming from a country that has higher emissions than we do.    Rather the reverse.  Of course, it isn’t easy to distinguish (empirically) the marginal and average emissions, but it is simply silly to suggest that the policy-driven rapid population growth has not had a material impact in boosting total New Zealand emissions –  migrants drive cars and fly, migrants live and work in buildings (that often use concrete), migrants have even helped maintain the economics of the dairy industry.  On a cross-country basis, I showed in an earlier post the largely unsurprising relationship betwen population growth and change in emissions over decades.  New Zealand’s experience was not an outlier (except perhaps in the sense of much faster –  policy-driven –  population growth, reflected in the emissions growth numbers.  If anything, and at the margin, New Zealand’s immigration policy has probably increased global emissions.

Of course, there would be a reasonable counter-argument to all this if it could be confidently shown that the high rates of immigration –  highest in the OECD for planned immigration of non-citizens over the period since, say, 1990 – had substantially boosted average productivity in New Zealand.  Then the additional emissions, and associated abatement costs (not small), would simply have to be weighed against the permanent gains in material living standards from the immigration itself.  But even the staunchest defenders of high –  or higher still – rates of immigration can’t show those sorts of productivity gains and (since demonstrating it would be a tall order) can’t even come up with a compelling narrative in which large productivity gains from immigration go hand in hand with the continued decline in our productivity performance relative to other advanced economies.

If the government (or the National Party) were serious about “doing our bit” (or just “being seen to do our bit”) about emissions and climate change, and if –  at the same time –  they really cared much about living standards of New Zealanders (‘wellbeing’ if you must), they would be taking immediate steps to cut permanent immigration approvals very substantially.  Not only would that lower population growth and emissions growth relatively directly, but it would result in a materially lower real exchange rate, which would greatly ease the burden on competitiveness that other anti-emissions measures are likely to impose over the next few years, would ease pressures on the domestic environment (and might even, thinking of my post earlier this week, ease the economic pressures on the dairy industry, while providing margins to deal directly with the environmental issues around that industry).

For the country as a whole –  New Zealanders –  it would be a win-win.   That isn’t to pretend there would not be some individual losers –  we’d need fewer houses, potentially developable land would be less valuable, and some industries (particularly non-tradables ones) that have come to rely on migrant labour would face some adjustments.  But, and lets face it, there is no sign the existing model –  in place in some form or another for several decades –  has worked well for the average New Zealander –  the productivity performance has been lamentable, and we’ve created a large rod for our own back on the emissions front.

But our political parties – every single one in Parliament, based on words and on their records in government –  would prefer to pretend otherwise, and keep on with the failed, corrosive, immigration policy, which hasn’t worked for us, is unlikely to ever do so (given our remoteness etc) and is so far out of step with what the bulk of advanced countries do.

 

40 years on

The almost-always-upbeat Herald “Business Editor at Large” Liam Dann had a column yesterday reflecting on the changes in the New Zealand economy  in the 30 years since he was studying 7th form economics in 1989.  “Studying” may be an overly generous term here: in Dann’s words

Let’s ignore the fact that I was a distracted surfer with a bad blonde haircut, prone to sitting with the most disruptive kids in the room.

As it happens, it is 40 years since I was studying 7th form economics (I was the nerdy kid).

In the 30 years since Dann’s 7th form economics teacher was bemoaning all that was wrong with the New Zealand economy then, inflation has come down, the unemployment rate is lower, and governments normally aim to run operating surpluses. We were in the middle of an extensive economic restructuring back then, and the full aftermath of the massive credit and asset price boom of the previous handful of years was just about to be felt (DFC, for example, failed in late 1989, while the second BNZ crisis was still another year away).    Net public debt in 1989 was about 40 per cent of GDP  –  not disastrous, but far from good either –  but (little recognised at the time or later) the government was already running primary surpluses (ie deficits were mostly financing costs, the real consequences of which were, in turn, overstated by the effects of inflation).

But I wondered how the comparisons looked with 1979, my 7th form year.   Inflation in 1979 had been even worse than it was by 1989 (when we were already well on the way to getting back to something like price stability), but on the other hand the unemployment rate in 1979 is estimated to have been (backdated HLFS estimates) only  about 1.4 per cent.  Quite a difference from today.     And, somewhat to my surprise when I checked the Treasury’s numbers, net public debt as a share of GDP in 1979 was much the same as it is now.  And if the financial sector in 1979 was still more regulated than it is today – I was regaling my kids yesterday with stories about how the last restrictions on current account foreign exchange transactions didn’t come off until 1982 –  at least at the time the policy changes were in the right direction (liberalising), not the wrong direction as we’ve now been for the past six years.

Some things are clearly better than in either 1979 or 1989 –  New Zealand’s terms of trade reached the end of a longrunning decline in about 1988 and (equally outside our control) have been quite a lot stronger since then.  For such small mercies we should be grateful (a 20 per cent lift in the terms of trade is roughly equivalent to a 6 per cent lift in average national incomes).

And I’m not here disputing that in material terms the average New Zealander is materially better off than our parents were in 1979 or 1989 (be it life expectancy, smartphones, cheaper cars, overseas holidays etc).  That is true of almost every country in the world (think Venezuela for the sorts of places that are exceptions.    And those also aren’t the arguments Liam Dann seems to be making when he says of the present –  the headline to his column  –   “The economic numbers that would have blown us away in the 1980s”.

Instead he talked about how hard it was (in prospect) to get a job as a young person in 1989.  Maybe, but as it happens the employment rates for 15-19 and 20-24 year olds are pretty similar now to what they were in 1989 (and, sure, more people go on to tertiary education now, but it will be a rare tertiary student now who doesn’t have a part-time job.

Now, in a way I have been a little unfair to Dann so far.  Despite the headline, I don’t think his intention was to be that upbeat.  Later in his column he notes high levels of private debt, and the incidence of homelessness (although weirdly he presents the latter as being in some sense the “price of economic stability” –  which is simply wrong.    But he avoids actually identifying the policy changes –  land use restrictions etc –  that have meant that whereas in 1979 (in particular, near the trough of a multi-year real house price slump) or in 1989, houses were relatively affordable, they simply are not today.  I’ve noted previously, that I bought my first house in 1989.  In today’s dollar terms, that house cost just under $300000, just down the road from where I live now.  The same house today would probably cost $850000+ (the median price now for this suburb is just over $900000).    It leaves me very glad I was 26 then, not 26 now.

Perhaps the worst of it is diminished ambitions.

Back in the late 1970s, people talked in terms of how we’d crippled out export prospects, recognising that a small country’s prosperity depended on lot on the ability to create a climate in which locally-based firms were taking on the world and winning.  People talked in terms of the tax on actual and potential exporters that tariffs and quotas represented, and looked forward to a day  when we’d stop tying two arms behind our back.  By 1989 many of these restrictions etc were well on the way to being removed, but everyone knew it took time for the gains to flow –  indeed, we had expert overseas advisers highlightin the significance of the real exchange rate (then temporarily boosted by the drive to get inflation down).

And yet 30 or 40 years on, the foreign trade shares of GDP (exports and imports) are much the same now as they were then.   There is still lots of talk about export-led growth etc, but no remotely credible story from our politicians or officials as to how this might –  at last – come to be.

And then, of course, there is the small matter of productivity. It isn’t everything, but (in words not original to me) when it comes to long-term average material living standards it is almost everything.

The 1970s were a disastrous decade for New Zealand productivity.  We slipped a long way down the OECD rankings in a single decade.

And here is an adaptation of a table I’ve shown here previously (I’ve just added a 1980 column), comparing average labour productivity in New Zealand and in the leading bunch of OECD countries.

Table 1: Labour productivity: New Zealand and a leading OECD group
GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1980 1990 2017
New Zealand 21.4 22.7 28.5 37.3
Netherlands 27.5 40.2 47.7 62.6
Belgium 25 37.9 46.6 64.8
Denmark 25.1 34.8 44.7 64.9
France 21.6 32.0 43 59.8
Germany 22.3 32.2 40.6 60.5
Sweden 27.2 34.5 38.8 61.7
United States 30.9 35.9 41.8 64.2
Median of seven 25.1 34.8 43 62.6
NZ as per cent of median 85.3 65.2 66.3 59.6

We’ve lost quite a lot more ground since 1979/80 or 1989/90.  In fact, the period of worst relative performance on this metric has been in the last few years, when we’ve managed no productivity growth at all.  No individual year is disastrous, but cumulatively it represents as astonishing slippage, that should be alarming – and once seemed so to our elites.

(This table compares New Zealand with the OECD leading bunch now.  I also did the comparison against the seven countries in the leading bunch in 1989 (Italy was one of those countries).  We also kept on losing ground against them, although –  logically –  a bit less so.)

Relative to what might have been our potential –  the global advanced country productivity frontiers, in a countries none of which have anything like ideal policies –  we’ve done poorly on the economic fronts that really count.  Sure, we have achieved a much higher degree of macro stability –  and that is no trivial achievement, although most countries like us (small advanced) have done something similar.    But we’ve fallen further behind on productivity, and rendered the housing and urban land market seriously dysfunctional.  Firms don’t find it more attractive to trade globally from here.   And there isn’t much sign our “leaders”  –  political or bureaucratic –  care much, are interested in finding the answers or acting to bring about better tomorrows.

Liam Dann writes

It has struck me that were I to time-travel back and share New Zealand’s current economic statistics with Mr Shaw, he would be gobsmacked by the nation’s success.

To be honest, reflecting on what I’ve written here, if I could time travel back to 1989 and share New Zealand’s economic situation now with my 1989 self –  a young policy manager and economist at the Reserve Bank – the young me would have been gobsmacked by the extent of the failure and (more so) by the apparent indifference to it, the refusal to grapple with what it would take to make things better.  (Although I would have been pleasantly surprised by the inflation track record –  I recall in the early 90s casually offering a bet to one bank chief economist that inflation wouldn’t average below 3 per cent for the following 15 years.)

What is really depressing – with a son doing Year 12 economics this year (a year that focuses on macro) – is the thought that in thirty years time he might look back astonished at how poorly New Zealand has continued to do relative to countries that were once its peers.

More data on our feeble economic performance

The media coverage of the outgoing Air New Zealand CEO Christopher Luxon’s political ambitions prompted me to dig out a post I wrote a year or so ago, inspired jointly by the Prime Minister and her Business Advisory Council (which Luxon chairs) and by an old article by Paul Krugman, “A country is not a company”.    As he ponders what to do next, I hope Luxon takes the time to read Krugman’s piece.  Of course, it is fair to note that the current crop of politicians –  across all parties – is generally so unimpressive, accomplishing so little for New Zealanders, that I wouldn’t want to be thought of as suggesting that retired CEOs would be any worse than (say) crown prosecutors, political advisers or whatever.

Also yesterday, the latest quarterly national accounts data were released.  The headline numbers seemed to be a touch higher than those who forecast these things in detail had expected, but not in a way that really changes the underlying picture: it has been a weak recovery (now eight or nine years into it) and whatever supported moderate growth appears to have been fading.

In that post from last year, I quoted a speech by the Prime Minister on the economy, including launching the Business Advisory Council.  I wasn’t that impressed, but did quote some of her aspirations.

Yesterday morning the Prime Minister gave her promised speech on the economy.  It was, frankly, astonishing how little there was there.   There was some mention of the problems

Our overall objective is to build a productive, sustainable and inclusive economy.

On each score we have some way to go. When it comes to productivity, the OECD has said we are “well below leading OECD countries, restraining living standards and well-being”

and

We need to transition from growth dominated by population increase and housing speculation, to build an economy, that as I said, is genuinely productive, sustainable and inclusive.

and

First we want to grow and share more fairly New Zealand’s prosperity.

That means the gap between the highest and lowest income and wealth deciles reduces, real per capita income increases; the value and diversity of our exports grows and home ownership increases.

In particular we want to build our exports and have export led growth.

Which is all well and good, but there is nothing –   nothing –  in the speech about what the government proposes to do

Another year on, how are we doing?

On productivity, shockingly poorly.  Recall that we start with labour productivity levels barely 60 per cent of those of the leading OECD countries (US and various northern European countries).

Here is a chart of labour productivity growth since just prior to the last recession. (As ever, I here average the two GDP measures and the two hours measures.)

GDP phw mar 19

The orange line is the average for the last five years.

Since the current government took office, total growth in labour productivity has been 0.2 per cent.  But there is quarter to quarter noise, and as the chart illustrates whatever is going on was in place well before the current government took office.   There is no sign this lot are doing anything that is producing new and better results, but since the start of  2012 total productivity growth has been not much more than 1 per cent.  That is over seven years.  It is a shockingly poor record.

What about that talk of “building exports and export-led growth”?  No doubt the PM and her ministers are repeatedly fed lines about how successful New Zealand’s strategy of signing up preferential trade agreeements with all manner of countries has been. There are certainly lots of documents, but here is a chart showing exports and imports as a share of GDP, starting from the same point as the previous chart, just prior to the last recession.

ex and im

The numbers bounce around a bit with fluctuations in commodity prices and in the exchange rate, but broadly speaking the share of our economy accounted for by foreign trade has been shrinking, not expanding.    That isn’t a good sign (those with longer memories will recall that the previous government once had a specific goal of raising the export share to 40 per cent).   There are much more important issues –  than busy, busy trade agreements –  that simply aren’t even being addressed, or (it seems) even recognised.

I don’t have a chart for it, but everyone recognises that nothing has yet been done that would make any material difference to the housing price disaster that successive waves of central and local governments have inflicted on us.

It isn’t clear that, on matters economic (which have real implications across numerous dimensions of “wellbeing”) this government is really any worse than its predecessor.    But what a low bar that would be.  Neither main party –  or, as far as one can tell, any of the minor parties –  seems interested in getting to grips with creating a climate that generates materially better economic outcomes.    Easier, I suppose, to just pretend.   That way, among other things, you don’t need top-notch economic advisers and institutions.  But what a betrayal of New Zealanders.

 

 

 

Productivity by the numbers

That is the title of a new paper, intended (it appears) to inaugurate an annual series, from the Productivity Commission.   It is full of interesting tables and charts, and usefully drives home the point –  made repeatedly on this blog, and elsewhere –  that (a) longer-term productivity growth in New Zealand has been poor, and (b) that productivity growth matters for all sorts of other things New Zealanders individually or collectively care about.

Productivity growth in New Zealand has lagged since at least the 1950s.  On the data we have, the worst decade (falling further behind) was the 1970s, but the Productivity Commission usefully highlights that we have on slipping even in the last couple of decades.  This is one of their charts, showing the level of labour productivity in 1996 (about when the full OECD data series starts) and growth in productivity since then.

NZPC prod

Broadly speaking, the cross-country story has been one convergence: countries with lower initial productivity catching up (top left quadrant) and those with higher initial productivity growing more slowly (bottom right quadrant).   There is only one country in the top right quadrant (Ireland), but that is substantially a measurement issue stemming from the corporate tax rules.

But, as the Commission highlights, New Zealand is in the bottom left quadrant: countries that had only modest productivity levels in 1996, and still managed to grow slowly in the subsequent decades.  The real basket-case is, of course, Mexico, but we find ourselves grouped with Portugal and Greece, and Israel and Japan  (as I’ve noted here previously, it is well past time people in New Zealand stopped talking of Israel as some sort of high-growth exemplar).

I like the chart, and I’ve highlighted here previously the contrast between the productivity growth performance of the central and eastern European OECD member countries (top left) and New Zealand, including noting that several of them now have productivity levels very similar to those in New Zealand and are still growing fast.   I dug out the data for a similar chart going back to 1970 (when the OECD database begins, but for a smaller sample of countries).   Over that full period, we stand out as the underperformer.

But the Productivity Commission does rather tend to pull its punches (they are a government-funded agency, and depend wholly on (a) the resources the government allocates to them, (b) the quality of the Commissioners governments appoint, and (c) the character of the issues governments invite them to investigate).  (On (b) it seems somewhat overdue for the government to announced a replacement for now-departed former Secretary to the Treasury, and highly-regarded economist, Graham Scott, who has served as a Commissioner since the Productivity Commission was founded).

Pull its punches?  Reading “Productivity by the Numbers” you would have no idea how absolutely poor our labour productivity performance had been over the last few years.

Tsy productivity GDP phw

And there is, therefore, no sense of what light this experience might shed on possible explanations for our continued long-term underperformance.

They are also a bit self-promoting, suggesting that reversing the productivity underperformance “has been a central theme of the Productivity Commission’s work since 2011”.  If anything, the opposite has been true.  The Commission research team (when led by the now-departed Paul Conway) has at times produced some interesting papers on the issue, but the Commission’s core work is the inquiries successive governments have asked them to undertake, and not one of those inquiries has had as its focus economywide productivity failures and challenges.  Some of the inquiries have led the Commission down pathways which can, at best, be described as limiting the (economic) damage –  eg the low emissions inquiry.  On the other hand, the Commission has done a (mostly) positive job in helping to develop a more widely shared recognition that land use regulatory restrictions (and associated infrastructure financing perhaps) are at the heart of the housing disaster successive central and local governments have presided over for the best part of three decades.

“Productivity by the numbers” is mostly descriptive – tables, charts, and comments thereon – but the authors do weigh in a little on possible explanations.  They include this table, taken from another recent article

NZPC prod 2

A couple of the items in the left-hand column are clearly intended as a nod in the direction of my ideas (referenced in the article the table is drawn from), and I welcome that.  But it isn’t clear that the Commission –  let alone the government’s official departmental advisers – is even close to a current integrated and persuasive narrative of what has gone wrong and how, if at all, things might be fixed.    As is perhaps inevitable in a summary table, many of the items are at best stylised facts (some probably not even facts).

The report goes on

This work has highlighted that New Zealand’s poor productivity performance has been a persistent problem over decades and turning this around will require consistent and focussed effort over many fronts and for many years. There is no simple quick fix.

It is a convenient line –  especially as there is no political appetite for change anyway –  but I don’t believe it is true.  Sure, we aren’t going to close the productivity gaps overnight, and sure there are (always) lots of useful reforms that could make a difference in a small way.  But here we aren’t dealing with the small differences between, say, productivity in the Netherlands and that in Belgium.  For an underperformance as large and as sustained as New Zealand’s – in what is substantially a market economy with passable institutions (rule of law etc) – it is highly likely that there are (at most) a handful of really important policy failures (things done or not done) where most of the mileage from reform would be likely to arise.  And there the Commission just does not engage.   Instead it tries to move on to a more upbeat story, and to shift the “blame” onto the private sector.

Indeed, work is already taking place in many areas, including in competition policy, infrastructure, science and innovation, and education and the labour market. There is growing interest in the need to improve Kiwi firms’ management practices and ability to learn (absorptive capacity), which shape their ability to innovate and improve their productivity (Harris & Le, 2018).

To me, much of this seems like dreamland stuff, deliberately choosing to avoid hard questions, while flattering the egos of ministers and officials in Treasury or MBIE.   Whatever the Productivity Commission thinks is good among those topics in the first sentence (and I struggle to think of anything much), it isn’t credible to suppose that the things they like about current policy even begin to make the sort of difference required to reverse the productivity failures.  And much as officials and academics like to suggest there is something wrong with New Zealand businesses (convenient that), there is no evidence that New Zealand firms and employees (managers and others) would be any less able to identify and respond to opportunities if government roadblocks and obstacles, including distorted relative prices, were fixed.

In the report, the Productivity Commission highlights how much we will miss out on if productivity growth continues to underperform the (somewhat arbitrary) 1.5 per cent per annum growth assumption in Treasury’s medium-term fiscal model.  The point is that small differences compound in ways that make for big differences in material living standards and opportunities.  And on that count I totally agree with them.    I made a similar point the other way round in a post on productivity last year.

I’ve banged on here about how dismal productivity growth in New Zealand has been in the last five years in particular. The best-performing OECD countries over the most recent five years were averaging more than 2 per cent productivity growth per annum – and all of them were countries catching up with the most productive economies, just as we once aspired to do. If we’d managed 2 per cent productivity growth per annum in the last five years, per capita GDP would be around $5000 per head higher (per man, woman, and child) today.

Catching up to the top tier will, in a phrase from Nietzche, take a “long obedience in the same direction” – setting a course and sticking to it. But here is a scenario in which the top tier countries achieve 1 per cent average annual productivity growth, and we manage 2.5 per cent average annual productivity growth. Here’s what that scenario looks like:

nzpc prod 3

I’ve marked the point, 15 years or so hence, where the gap would have closed by half.

I don’t usually quote Nietzsche, but here is the full quote

“The essential thing ‘in heaven and earth’ is… that there should be a long obedience in the same direction; there thereby results, and has always resulted in the long run, something which has made life worth living.”

What matters in an economy like New Zealand now isn’t finding 100 or 300 things to reform – sensible as many of them might be –  but finding the one (or two or three) things that might make a real difference, adjusting policy accordingly, and then persevering long enough to start seeing real and substantial results.     There is no reason why New Zealand should not again manage something close to top tier OECD average labour productivity, but –  on the demonstrated –  there is no reason to suppose that (a) anything like the current policy mix will deliver it, or (b) that tiny changes at the margin will deliver very substantially different results.    Welcome as the Productivity Commission’s statistical compilation is, those are the messages that need to be heard more loudly.

Sadly, of course, not a single political party seems to have any appetite for reversing our decades of economic decline.  But, just possibly, a compelling narrative from an authoritative body like the Productivity Commission might one day begin to change that.  At present, instead, the Commission seems in some unsatisfactory place where they don’t have the answers, and to the extent they sense some elements of an answer, they don’t want to upset anyone.

 

 

 

Reading Treasury’s economic forecasts

Belatedly working my way through The Treasury’s Budget economic forecast tables, I checked whether they had become any more optimistic about the success of the government’s economic strategy.  Successive governments have talked about a more outward orientation,  and it seems likely that any successful and sustained lift in New Zealand’s overall economic performance would have as one marker of success an increasing share of GDP accounted for by trade with the rest of the world (big markets out there, big opportunities to buy and sell).

But the numbers in The Treasury’s latest forecasts translate into the same downbeat charts I’ve been generating now for some years.

Here is exports as a per cent of GDP.

x gdp

By the end of the forecast period, when the government is likely to be finishing its second term, Treasury (on current government policies) thinks exports as a share of GDP will then be about where they were in 1977.

And imports?

m gdp

There is nothing remotely transformational.  Just more mediocre underperformance.

What about productivity?  Well, here The Treasury is rather upbeat.

This is the actual record of labour productivity growth, including an estimate for the March quarter 2019 using Treasury’s published GDP forecast.

Tsy productivity GDP phw.png

That’s next to no actual productivity growth for five years, and none at all for four years.

But, as ever, Treasury thinks things are just about to come right.  “As ever”?   Here’s a table I included in a post at the end of last year, suggesting that Treasury simply had the wrong model for thinking about productivity.

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

The forecasts in the latest BEFU for the three out years (to 2023) are exactly the same as those published in December’s HYEFU.

Treasury has consistently expected a significant recovery in productivity growth, and it has equally consistently failed to arrive.   Is there any reason to think they are more likely to be right now?   It isn’t as if anything much in the policy framework has changed for the better.

(Of course, if the productivity growth fails to materialise, so –  most likely –  will the headline GDP growth, and the revenue estimates will be threatened.)

The other thing I find consistently odd about The Treasury’s macro numbers is their view all our inflation problems (undershooting the target that is) are now behind us: from this quarter, the forecast inflation rates are consistent with annual inflation at 2.0 or 2.1 per cent all the way to the end of the forecast period.    As a result, on their numbers, there are no OCR cuts (their numbers will have been finalised before the recent actual cut) and before too long OCR increases start being implemented: three years hence they expect to have seen 75 basis points of increases.

And, of course, this is the same sort of story they’ve been telling us for years.  Wrongly.

In many respects, medium-term macroeconomic forecasting is a mug’s game.  Few, if any, can do it consistently well.  So the numbers aren’t interesting in their own right –  they tell us nothing  much about what actually will happen –  but they do tell us something about the forecaster’s models, and when the forecaster is also the government’s lead economic adviser that in itself can matter.

On these numbers, we have a Treasury that sees no sign of an increasing outward orientation to the economy, seems to think an unemployment rate of about 4.5 per cent is as good as it gets in normal times (ie roughly the NAIRU), and continues to pick projections of productivity growth seemingly out of thin air, even against a backdrop of years of little or no productivity growth for recent years, no change of economic policy approach, no nothing,

For all the (quite appropriate) fuss about the outgoing Secretary to the Treasury, it is now only three weeks until his scheduled departure date and no replacement has yet been announced.    That in itself should be quite concerning, suggesting SSC is struggling to come up with someone with the right mix of competence and go-alongness.  There is a whole range of institutional performance issues a new Secretary should address, but the characteristics that might qualify someone to be appointed by the current SSC regime may well be exactly the wrong sort of characteristics to expect any material change for the better from after 27 June.

 

Economic failure: the reluctance to recognise the implications of extreme remoteness

As regular readers know, I tend not to be particular upbeat about the New Zealand economic story.  For anyone new, there should be a hint in the very title of the blog.  If, by chance, you are still attracted to an upbeat take, only last week in a post here I critiqued a recent book chapter taking that sort of view.

And so I was a bit surprised when, more than a year ago now, I was asked to write a chapter for a forthcoming book on aspects of policymaking, and associated outcomes, in a small state (this one).  In principle, the book sounded potentially interesting, and they were approaching a bunch of pretty serious and senior people to contribute.  But it wasn’t clear there was much in it for me, and since the plan was for the introduction or foreword to have been written by the head of the Department of Prime Minister and Cabinet, it seemed likely that the thrust the organisers were looking for was a positive take on the New Zealand story.   So as not to mess people about, I declined the invitation, only to have my arm twisted, with assurances that there was no such agenda.  In the end I agreed to write something, and although the organisers/editors still seem keen on a more positive spin, by the time I discovered that I was committed.

The latest draft of my chapter, attempting to be positive where I can, is here.

An underperforming economy; the insufficiently recognised implications of distance (draft chapter)

I’ve had useful comments from various people on an earlier draft (none of them bear any responsibility for the current version though), but if any readers have comments you’d like to add to the mix, you can earlier leave them as comments to this post or email me directly (address in the “About Michael Reddell’s blog” tab).

The potential market for the book, as I understand it, is people like students of public policy, perhaps in parts of Asia.  Many of these potential readers, I’m given to understand, see New Zealand as a sucesss story.   Within the (severe) limitations of length, I’ve set out to provide a more balanced take on the economic story.  In a way, I guess, New Zealand is a sort of success story.  200 years ago on these islands there was not much more than a subsistence economy, and only recently had overseas trade resumed after the inhabitants had been isolated for several hundred years.  From that to one of the richest countries in the world in a hundred years was remarkable.  And even now, after a century of relative decline,  there is only a handful of countries in east Asia and the southwest Pacific with material living standards matching or exceeding our own (Australia, Japan, Singapore, Taiwan, with South Korea coming close).   And from a macroeconomic policy perspective, we’ve now had low and stable inflation again for 25 years, have had low and stable public debt, and a considerable measure of financial stability.  That isn’t nothing by any means.

But it doesn’t exactly mark us out.  What does mark us out is that century of relative decline: of course, we are much richer than we were 100 years or so ago, but then we were among the top three countries in the world (GDP per capita), and now we languish a long way down the advanced country rankings (especially on productivity measures).    With productivity levels not quite 60 per cent of those in the leading bunch of advanced economies, we are getting closer to the point where New Zealand could really only be described as an upper middle income country.

My story, as a regular readers know, is that our physical remoteness –  in an era where, internet notwithstanding, distance appears to be not much less of a constraint than ever in many respects – is the key issue in our underperformance.  It isn’t that –  as some models and sets of estimated equations suggest –  distant countries are inevitably poorer, but that distant countries seem to thrive (to the extent they do) mostly on natural resources, and industries building directly on those resources.  And with a limited stock of natural resources, there are limits to the number of people that such places can support top tier incomes for (a very different proposition than for economies –  eg those of northwest Europe – where most of the most productive economies are found) where natural resources are simply no longer that important, and where the advantages of proximity can be realised more readily.    The story is much the same for Australia as for New Zealand –  and Australia has also been in (less severe) relative decline over the last 100 years – with the difference that Australia found itself able to utilise whole new sets of natural resources, either unknown or uneconomic previously.  New Zealand has had nothing – that material – similar, and no big asymmetric technology shocks in our favour for a long time either.   Against that backdrop, using policy to drive population growth (rapid by advanced country standards) simply did not make sense –  putting more people in a fairly unpropitious location, albeit one with some reasonable economic institutions (rule of law etc).  It didn’t make sense decades ago –  before people fully appreciated the nature of New Zealand’s relative economic decline –  and it doesn’t now.   There was a valuable signal, that policymakers and their advisers simply chose to ignore, when New Zealanders –  who know New Zealand best –  starting leaving in numbers that (while cyclical variable) are really large by international or historical standards (absent a civil war or the like).

Perhaps the new bit to my story in this draft chapter – which was prompted by the way the initial specification was framed –  was to think about why the stark economic underperformance has been allowed to go on, not just by our politicians and political parties, but with no compelling remedies offered by our major economic policy advisory institutions (The Treasury in particular) or by international agencies that offer advice (notably the OECD).  I suggest a story in which it is simply difficult to identify that right comparator countries when thinking about economywide productivity and economic performance issues.  For many areas of policy –  monetary policy is an example, but it is probably true of health and education and welfare –  pretty much any advanced market economies can offer useful benchmarking, but if remoteness really does matter (not just to, say, defence, but) to the viable options and business opportunities available here, then the experiences of –  say –  Belgium or Denmark just aren’t likely to be that useful, even if Denmark has a similar population and was once the major competitor for UK dairy markets.

We may be able to learn something from reflecting on the differences, but it is typically much more compelling if one can point to another similar country (or 2 or 10 of them) and learn from them.   And thus I note an important difference between New Zealand and many of the (now fast) emerging advanced economies of central and eastern Europe.  Not only are they physically proximate to various highly productive economies (easy and cheap to meet fellow policymakers and analysts regularly, including in EU fora), but have a lot of similarities across each other (similar location, similar communist past, and so on).     I don’t claim to know Hungary, Slovenia, the Czech Republic or Slovakia in great detail, but if I were a policymaker in any of them, I’d be (almost obsessively) benchmarking my economic policies against those of the others, and of nearby rich and productive countries (eg Austria and Switzerland).  There are never exact parallels, but in New Zealand’s case it is hard to find good parallels at all. I suggest that Israel might be in some respects the best for New Zealand –  but it is little studied here (and its productivity performance is about as bad as ours –  partly, I’ve suggested, for similar reasons).

The lack of easy examples to benchmark ourselves against isn’t really an acceptable excuse, but I suspect it is part of the explanation.  It is long been a problem for the OECD in their advice to New Zealand: they’ve repeatedly brought a northern European mindset to a remote corner of the world, after early on investing quite a lot in the idea that the New Zealand reforms were exemplary, and almost sure to reverse our underperformance.  Places like the OECD work a lot on illustrating cross-country comparisons, but they simply never found the right ones for New Zealand (on these economywide issues) and have not shown much sign of trying.  It is particularly problematic because the OECD are full-on committed to high immigration, regardless of the experience of an individual country (see my post about the then OECD Chief Economist extraordinary performance when she launched their 2017 New Zealand report – there is a new report due out in a few weeks, and I’m not holding my breath).

Of course, New Zealand politicians no longer seem to have any appetite for trying to reverse the staggering decline in New Zealand’s relative performance.    But just possibly they might if their advisers were offering a compelling diagnosis and set of prescriptions.  As it, The Treasury seems to have no more idea than the OECD, and seems to have abandoned much interest in the productivity issue, in favour of the feel-goodism and smorgasbord of random indicators that makes up the Living Standards Framework, supporting the “wellbeing Budget”.  I was exchanging notes the other day with someone about the mystery as to who the next Secretary to the Treasury will be (there is a vacancy a month from now, and applications closed three months ago).  It is hard to be optimistic that it will make much difference who gets the job –  given the hoops they will have to have jumped through to get it –  but sadly it is a story of a low-level equilibrium: no political demand for answers and options to reverse our decades of relative decline. and no bureaucratic supply of such answers or the supporting analysis either.

Anyway, for anyone interested here are the concluding paragraphs.

Conclusion

After the bold reforming period of the 1980s and early 1990s, official and political economic policymaking in New Zealand appears to have been at sea, without a tiller or compass, for at least a couple of decades.   Much that was positive was done during the reform era, and various good institutional reforms were put in place.  Much needed to be done, and in some respects it was to the credit of a small country that so much – initially attracting considerable international admiration –  could have been put in place so quickly.    Seared by the experience of the quasi-crisis of 1984, and rapid escalation of official debt in the previous decade, New Zealand has since enjoyed an enviable degree of macroeconomic stability: low and stable public debt, low and stable inflation, and domestic financial stability (even amid severe policy-induced upward pressures on house prices and household debt).  Unemployment rates that are fairly low on average are another successful element.   In those areas of policy, meaningful international benchmarks have provided a routine check of policy, and the external advice sometimes provided has typically been drawn from countries (small floating exchange rate countries), where the comparisons are apt and insightful.

But if stability has been successfully regained and maintained, on the wider counts of economic performance only a “fail” mark could possibly be assigned.  Among the failures, policymakers managed to preside over reforms that have created artificial scarcity of urban land and sky-high housing prices, in common with many of their Anglo peers.  But the productivity failure is more stark, because it is more specific to New Zealand.   Despite numerous (de)regulatory steps taken to open the economy to international competition –  and a considerable increase in the real volume of exports and imports –  foreign trade as a share of GDP has shrunk and with it the relative size of the tradables sector.  The export sector itself remains heavily dominated by industries reliant on domestic natural resources (a fixed asset) – services exports have been shrinking as a share of GDP – and, despite rapid population growth, business investment has been modest at best.

To an outsider, perhaps the surprising feature of such an underperforming advanced economy is that population growth has nonetheless been quite rapid. Birth rates have been below long-term replacement rates for several decades now. But defying the revealed preferences of New Zealanders, who have left the country in huge (but cyclically variable) numbers over the last 50 years for 25 years now policy has been set to bring in one of the largest migrant flows (per capita) of any advanced country.   Regularly presented as a skills-focused approach, it has remained difficult to attract many really talented people to a small remote country with lagging incomes and productivity[1] and there have been few (apparent or realised) outward-oriented economic opportunities in New Zealand for either natives or migrants.

Advocates and defenders of New Zealand immigration policy often attempt to invoke arguments and indicative evidence from other countries.  Even then, the value of insights appears more limited than the champions believe: not one of the high immigration advanced economies (Canada, Australia, New Zealand, Israel – or the United States) has been at the forefront of productivity growth over the last 50 years, and only the US is now near the frontier in levels terms.  But even if those arguments might have some validity in some other countries, there has been too little serious engagement with the specifics of the New Zealand situation: remoteness, lack of newly-exploitable natural resources,  and the actual experience (lack of demonstrable gains for New Zealanders) following 25 years with a high level of (notionally) skills-based immigration.    As by far the most remote of any advanced country, it is perhaps the last place one might naturally expect to see policy actively working (encouraged by local officials and international agencies) to support rapid population growth.

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies)   Past experience –  1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand.  But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s –  it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

[1] OECD (2016) adult skills data suggest that although the gap between skills of natives and migrants is small, migrants to New Zealand are, on average, less skilled than natives.

There won’t be any posts for a few days as we are heading off this morning to attend the funeral for my wife’s (extremely aged) grandmother.  Back blogging on Tuesday.

(Un)successful public policy

Yesterday afternoon I saw this in my Twitter feed

My first thought was along the lines of “well, I guess there is nothing about New Zealand economic policy”, (a) so poor has our long-term performance been, and (b) because surely outcomes matter?.   But I’m a policy geek sort of person, ANZSOG is chaired by our very own State Services Commissioner, and ANU is the top-ranked university in Australasia, so I clicked the link to see what examples of successful policymaking in New Zealand they’d found. To my surprise I found this

New Zealand’s economic turnaround: How public policy innovation catalysed economic growth (PDF, 0.2MB)Michael Mintrom and Madeline Thomas

(Downloads of all the individual chapters appear to be free, and there are pieces on ACC, early childhood education, Kiwisaver, nuclear-free New Zealand, and so on, some of which may interest some readers.)

But I was a bit flummoxed even by the title of this economic chapter.  I recognised the “public policy innovation” –  thirty years on I still support most of it –  but the idea of an “economic turnaround” or “catalysed economic growth” seemed, to say the least, at odds with the data.

Mintrom is a public policy academic, now at Monash University in Melbourne. He worked for The Treasury for a few years in the late 1980s before heading off to do his PhD.  But, from the look of his publications, he seems to know a lot about public policy processes, but not necessarily a great deal about economic growth or overall economic performance.  Thomas is his research assistant, with a psychology degree and some experience working on social policy with local governments.

When I got into the chapter itself it turned out the authors were focusing on a handful of specific initiatives undertaken in the late 1980s and early 1990s:

  • reduction of market interventions (controls, subsidies, import restrictions etc),
  • creation of SOEs and subsequent privatisations,
  • simplification of the tax system and introduction of GST, and
  • passing responsibility for monetary policy to an independent Reserve Bank.

And they lay out early on how they define success.  Their first criterion is endurance, and thus they argue that “these policy innovations have now remained in place for decades. Thus, judged by endurance, they have been highly successful.”

There, it would appear, speaks someone more interested in processes than outcomes.  After all, the broad range of policies the 1980s and 90s reforms replaced –  exchange controls, heavy import protection, monetary policy set by ministers – also lasted for decades, and were generally not accounted a success.   The Soviet Union managed 70 years.

But the authors offer three other perspectives from which to view the success of the policy programme.  There was something called the “programmatic perspective”, which seems to be encapsulated in these two sentences:

A highly coherent theory of change guided the development of these policy innovations.  After a relatively short time, it was clear the changes were producing beneficial outcomes.

Then there is the “process perspective”, where they claim (and I mostly wouldn’t disagree) that “the policy innovations were well designed and generally well managed”.

And, thirdly, there is the political perspective, which they describe as “more complicated”.  That, presumably, does duty not only for the deep divisions that opened up in the Labour Party, Jim Anderton’s breakaway, and the divisions that opened up in National, culminating in the founding of New Zealand First, to all of which one could add the public sense that politicians hadn’t been straight with them (many readers will be too young to recall that in 1987 Labour published its manifesto the week after the election) and the replacement of FPP by MMP (you may think that change good, but it simply wouldn’t have happened without the ructions of the previous few years).

Remarkably, in a chapter focused on economic policy and –  at least according to the title –  economic growth, the authors take as their “starting point” several very positive assessments of the reforms written from 1994 to 1996.    Some of those articles are valuable, but each was written with the benefit of almost no distance or perspective, and were written a quarter of a century ago.  I found it remarkable that in a chapter about New Zealand’s economic growth, there were no references at all to the literature over at least the last decade about New Zealand’s disappointing productivity performance (sometimes, but quite wrongly, characterised as the New Zealand “productivity paradox”).    Those concerns, from extremely orthodox sources, have been around much longer than that: I happened to be dipping into the OECD’s 2000 report on New Zealand yesterday and found explicit concerns there about the failure of the New Zealand economy to converge, highlighting in particular the disappointing productivity growth.

The first part of the chapter is devoted to rehearsing some of the political and economic context for the reforms –  with which I mostly have only relatively minor quibbles – before they move on to focus on the four areas of reform (listed above).  Again, as pure description, it isn’t too bad –  with the odd annoying mistake (eg the exchange rate was not pegged to the US dollar in 1984, the price freeze had been lifted before the 1984 election), but whenever there is any sort of evaluative tone it is almost always very upbeat.  And perhaps only a young Treasury official from those days could describe, with a straight face, the Treasury’s approach to other departments as “Treasury analysts showed a great desire to….seek insight from colleagues in other departments”.

There is a variety of odd claims.  Thus,

The move to a more independent Reserve Bank came after several years of a floating New Zealand dollar, which was also viewed as a key element of market liberalisation; it was therefore uncontroversial.

Where did they get that from?  The Reserve Bank Act was intensely controversial at the time, with considerable opposition (wrongheadly in my view, but it was there nonetheless) from most prominent academic economists in New Zealand and some vocal business lobby groups.  The authors talk up the legislation passing Parliament unanimously (perhaps so if Jim Anderton was away that day), but if they’d done even the slightest refreshing of memories, they’d have been aware that the legislation divided both major party caucuses.  National – in Opposition – voted for the legislation, but Ruth Richardson’s former economic adviser recorded later that the vote in favour at caucus secured a majority of only one: Sir Robert Muldoon (opposed) was away seriously ill, and Winston Peters (opposed) for some reason skipped the meeting.   And I’ve perhaps mentioned before that in every subsequent election –  down to and including 2017 – one or other political party was campaigning on a platform of changing the Policy Targets Agreement or the Reserve Bank Act.

There are other odd claims.   The authors are mildly circumspect about aspects of the privatisation programme (“some sales were poorly managed”), but then cite as evidence of the “policy success” of the Labour government’s privatisation programme, that the succeeding National government did more privatisations.

The authors begin their Analysis and Conclusions section suggesting that in the early 80s New Zealand was heading towards “economic collapse”, but that is simply overblown political rhetoric for a process of stagnation, fairly high and variable inflation, and rising debt.  The broad direction of policy was still towards liberalisation, but it was a halting, half-hearted, and inconsistent process.  A crisis it wasn’t –  even if forced devaluations make good headlines.  Thus, the authors note that “unemployment grew” and yet the historical backdating of the HLFS suggests that the unemployment rate in June 1984 was 4.4 per cent, almost identical to the current rate.

What else struck me?  There was the claim –  about the 80s period –  that “through listening and working with others – even those who might have strong objections to a proposals –  it is possible for advocates of change to improve policy design and build a strong colation to support change”.  No doubt that is true generally, but it bears very resemblance to anyone else’s impressions of 1980s/90s reform period –  it was. after all, Roger Douglas, who championed the approach of “crash through or crash”.

Our authors carry this lesson forward:

“subsequent New Zealand governments have achieved important reforms while moving more slowly and working to ensure implementation is well managed. For example, the National Party-led coalition of 2009-17 [wasn’t a coalition, and it was 2008-17, but I guess those are details] established a new program of privatisation of government assets. Important work was done that drew on lessons from hre past and met considerable success.”

You might –  as I did –  have supported those more recent partial privatisations, but lets remember how small they were.  One of the companies involved was already market-listed (Air New Zealand) and all are still majority state-owned.    And the list of “important reforms” undertaken by that more recent government was limited, to say the very least.

The very final (short) paragraph begins this way.

In sum,we judge New Zealand’s economic turnaround to have been a major public policy success. Innovative public policy changes catalysed economic growth.

And yet, remarkably, in the entire chapter there is not a single number or chart or even a discussion of the specifics of economic growth. Not one.  And despite (rightly) lauding the removal of protection and subsidies, no mention of the fact that foreign trade as a share of GDP is no higher now than it was in 1984.   Absent evidence of this “catalysed economic growth”, perhaps we are just supposed to imagine it, and somehow feel better for the thought?   But I hope this isn’t how ANZSOG helps train our public servants.

My own take on the reform and stabilisation effort of the 1980s/90s is roughly as follows:

  • stabilisation was a major success.  We have low and stable inflation, low and fairly stable government debt.  We also have a considerable measure of financial stability.  For all that, we should be truly grateful.  But we should also recognise that (a) low and stable became a pretty global phenomenon (especially in the advanced world) around that time, and (b) that various other well-managed countries (eg Australia, Canada, Sweden, Switzerland) have much the same sort of fiscal record we do.  That leaves me sceptical of stories which put too much emphasis on specific New Zealand events, circumstances, law, individuals, or policy processes.    Moreover –  and I don’t think this appears in the chapter at all – we have greatly benefited from a big increase in the terms of trade (reversing the couple of decade decline that policymakers from the late 60s to mid 80s had to cope with),
  • many of the specific reforms (including those Mintrom and Thomas deal with) served us well.   Lower import protection, a well-designed GST, injecting much greater efficiency into state trading operations and a bunch of others benefited most New Zealanders.
  • but that isn’t true of all the reforms.  One might focus in on the RMA and associated provisions which have given us among the most unaffordable house and urban land prices in the developed world, or one might look at the tax treatment of savings.  And then there are the immigration policy reforms.
  • and, as honest observers have known for 20 years, there has simply not been the productivity turnaround that champions of the reforms hoped for at the time (and there is also no reason to suppose that problem is just that we didn’t engage in radical enough reform.)

Here is a table I was working on the other day, comparing average productivity in New Zealand with that of a leading bunch of OECD countries.

prod 1

The book was an ANZSOG project.  Here is labour productivity for New Zealand relative to Australia, indexed to when the New Zealand domestic data start in 1989.

prod 2.png

I reckon there is a plausible argument that the whole reform programme taken together slowed the rate of decline in New Zealand’s relative fortunes (although even that isn’t clear-cut: the rate of decline slowed, but I’ve not seen any careful attempt to assess how much of that was policy and how much about, say, improvements in the terms of trade).

But that isn’t the case Mintrom and Thomas attempt to make.  Judged by economic growth outcomes –  the sort of criterion their title asks us to use –  the programme just cannot be judged a great success. Perhaps the processes were good in some respects, and there was certainly a lot of intellectual rigour behind some of the reforms. It remains a fascinating case study in concentrated far-reaching reform.  But the productivity results really suggest that the episode belongs in another book, about the disappointing results despite the very best of intentions.  Those are salutary lessons policy advisers need to be trained in too.

How we –  certainly anyone who supported, voted for, worked on the reforms –  wish the outcomes had been different –  much better.   But they weren’t.  That is a failure –   uncomfortable as it is, there is no other word for it –  politicians and policy advisers have to grapple with honestly.