A wager for the Minister of Finance to consider

In the speech I linked to in yesterday’s post, I noted that

…from all appearances, our leaders (political especially, but also bureaucratic) have largely given up, perhaps idly hoping that something will turn up. And occasionally inserting “higher productivity” into a speech isn’t evidence of serious intent – if anything, it seems more like a substitute.

and

Judging by the inaction of our leaders in tackling the persistent productivity failure it seems that when it comes to crunch ours (regardless of party) care much less about the kids – of this generation and the next – than the cheap rhetoric of election campaigns might suggest. Giving up on productivity – in practice, and whatever the rhetoric – is a betrayal of our kids (and their kids). And most especially it betrays the children towards the bottom of the socioeconomic scales, those who typically end up paying the most severe price of economic and social failure.

I’d written that a few days ago, but if anything events of the last few days just confirm my concern.

I gave the speech the first time over breakfast on Thursday morning.  I’d just read Amy Adams’ pre-Budget op-ed on Stuff.    There was nothing in that at all about productivity (word or idea), only self-satisfied comments about the allegedly wonderful economy National had bequeathed labour.  That, you’ll recall, was the one with 1.5 per cent productivity growth in total over the past five years.

I didn’t listen to her boss’s speech in Parliament, but I get Simon Bridges’ emails and this was his post-Budget line

This Government was gifted an incredible legacy by hard working New Zealanders and by National. They inherited a strong, growing economy improving the lives of New Zealand families. They inherited a much more prosperous and outward looking country.   

Yet today they’ve delivered a Budget that is strewn with broken promises. No universal cheaper doctor’s visits, 1800 extra cops that aren’t coming anytime soon, no money to build Dunedin Hospital, not to mention a raft of new taxes from a Government that promised ‘no new taxes’ in its first term.

Again, nothing at all about productivity, or the possibilities that it can offer all of us.  This was, after all, the man of whose first economics speech as leader, I noted

500 initiatives [something he’d boasted of in the speech] and we still had barely any productivity growth in the last five years.  And, as I recall, one of the BGA goals was a big increase in the export (and, presumably, import) share of GDP: those shares have actually been shrinking.  Productivity levels languish miles behind the better advanced economies, and the gaps showed no sign of closing.

But what of the current government?

Sure enough, there were quite a few references to productivity, and lifting it, in the Minister’s material.    Eight (to “productive” or “productivity”) in the speech alone.  In the Minister’s Fiscal Strategy Report (with the subheading “Foundations for the future”) there were 17 references to productivity (quite a few of them mentions of the Productivity Commission) and another fifteeen uses of “productive” (often prefaced by the aspiration “more”).

Which is fine and good as far as it goes.  But what backed it up?  Not much.

On the very first page of the Fiscal Strategy Report, the government’s priorities are described

The Government’s priorities were set out in the Budget Policy Statement in December 2017. They are:

• Building quality public services for all New Zealanders and improving access to core services, such as health and education.
• Taking action on child poverty and homelessness.
• Supporting families to get ahead and sharing the wealth generated by our economy with a wide range of New Zealanders.
• Sustainable economic development and supporting the regions.
• Managing our natural resources and taking action against environmental challenges, such as climate change.

That document outlined the Government’s ambitious plan to reduce child poverty, protect the environment, create decent jobs, and build more affordable houses.

And not a word, not even an allusion, to beginning to close those productivity gaps.  The Budget material as a whole looks as if referring quite often to lifting productivity was a substitute for actually doing anything serious about it creating a better climate for it.

If I recall correctly, there were a couple of references to things that might help.  For example, there was mention of tax reform flowing out of the Tax Working Group’s recommendation.  We all assume a limited capital gains tax will emerge at the end of the process, and not much more (land taxes, for example, became infeasible once the land under the family home was ruled out).  There might be a decent case for a limited capital gains tax, at least on grounds of (apparent) equity, but no one thinks a CGT is going to make any material difference to New Zealand’s productivity performance.  If the Minister really did, he’d be making the case, documenting the evidence etc.

There was also mention of the new R&D tax credit.  I guess reasonable people can differ on how much impact that will have –  my doubts are here and here – but I don’t know anyone who thinks it is a big part of changing the overall picture of productivity performance in New Zealand.

And then, of course, there is the Provincial Growth Fund. I guess the Minister’s party is in a coalition with New Zealand First, so he has to talk up the benefits of spending all that money.  Everyone else recognises that it is no part of a serious growth (in productivity) strategy.

And, on the other hand, there is not a mention of the (real) exchange rate, one of the more pressing imbalances in the New Zealand economy.

But don’t just take it from me.  The Treasury does the  economic forecasts.   They do expect a bit more productivity growth in the next few years than in the last few years, but (a) mostly that looks like an assumption that things just get back to less-bad “normal”, and (b) the assumed rates of productivity growth aren’t going to make any inroads at all on the huge gaps to the rest of the advanced world.   And although an increasingly open economy –  trading more with the rest of the world –  is usually part of any successful catch-up strategy, as I showed yesterday the Treasury forecasts suggest no reversal in the decline in the export/GDP share that took place over the last few years.

Treasury does its forecasts on the basis on government policy, but that doesn’t take account of things that are still just political promises (even if quite likely to be), like the capital gains tax.

So perhaps the Minister of Finance –  like his colleague the Minister of Housing – thinks The Treasury has it all wrong, and is far too pessimistic.  Perhaps he’s really convinced that his government will successfully turn round our productivity performance, and get us on the track for catching the OECD top-tier.   As I noted in my speech, with the sorts of productivity growth rates various catch-up OECD economies have managed over the last 15 years (crisis, recession, and all) we could halve that gap in fifteen years, and close it altogether by 2050.

US economist Bryan Caplan encourages people who really believe an argument to express it in the form of a wager (typically for reasonably modest amounts, of around $100).  Doing so forces the parties to identify clearly what they do and don’t believe, and think carefully about the probabilities.  In that spirit, I’d be happy to offer a wager to the Minister of Finance (and/or his colleagues, the Prime Minister, or the Minister for Trade and Export Growth).

Conditional on them remaining in government, I’d expect that, if they are really serious about productivity –  lifting the possibilities for our kids –  and believe they have the strategy to do it (even if not all the bits are yet on the statute books), they would be willing to wager that New Zealand will average annual labour productivity growth over the next six years of at least 2 per cent.  I’d be only too happy to take the other side of such a bet, because I see no sign in government policy of anything that will substantially turn around our productivity performance.  No doubt, there will be the odd good year –  some of which might just be measurement –  but I’d be very surprised if we manage total labour productivity growth of anything close to even 5 per cent in the next five years.  Of itself, that wouldn’t be disastrous –  it would be quite a bit better than the last five years –  but, once again, it would mean no progress in closing those gaps.      (Of course, if I were to lose such a bet, I’d mostly be delighted –  better prospects for all of us and our kids.)

In fact, I’m sure the Minister of Finance knows his strategy won’t make any material difference to New Zealand’s dismal productivity performance.  If so, the words are just a substitute for action, and the betrayal of our kids stretches on through yet another government.

 

Breathtaking indifference

On TVNZ’s Q&A programme yesterday, the Minister for Workplace Relations, Iain Lees-Galloway was interviewed.

The Minister and his government are keen to increase union membership and are putting in place further significant increases in the minimum wage.

From his interview yesterday, here is part of the Minister’s story

….all the evidence from around the world shows us that when you have more people covered by collective agreements, that helps to drive wages up. It also helps to drive productivity, and yes, we’re a government that’s focused on transforming our economy into one that’s productive, more sustainable.

It almost invites one of those Tui ads.  We’ll come back to wages in a moment, but just consider for moment that claim that there is causal relationship between steps to increase union membership (and collective bargaining) and higher (economywide) productivity.  It is a shame the interviewer didn’t push the Minister on the point, but his comments suggest that he really has little idea what productivity is.   It is about businesses, old and new, finding new products, new markets, new ways of doing things, new ways of combining capital and labour in ways that successfully take on the world.   I’m not suggesting that unions can never play a constructive role –  although they can also play a destructive one.  But the Minister offers no credible story for how a greater role for unions in New Zealand will make any material positive difference to the ability of firms operating in New Zealand to take on the world from here.

That is especially so because he is quite open that his goal to shift the balance in the labour market, so that a larger share of GDP flows to labour.

CORIN So the purpose of these changes is to boost union power.

IAIN Well, it’s to get a better share of the economy. We’ve talked about having an economy that’s more inclusive, where working people can actually bargain for a fair share of a prosperous economy. That’s what we’re trying to achieve.

I’m not going to debate what is “fair” here, but as a matter of arithmetic, more for one side means less for the other, unless somehow the size of the cake itself increases faster.  And since firms are the ones making the investment and location decisions, it isn’t self-evidently obvious that increased union power would lead to faster rate of real GDP growth.

In support of his claims, the Minister attempted to use the example of Australia.

If you look at the wage gap between us and Australia, that has broadened over the last 30 years. Australia didn’t dismantle their collective bargaining framework in the same way that New Zealand did. That’s part of the story, but absolutely, we’re strongly of the view that people not being in a strong bargaining position has meant they haven’t been able to make the demands on the employers.

Reading that, I had hazy memories of some posts last year (eg here) drawing attention to an increase in the labour share of GDP in the last 15 years.    But what about the comparison with Australia?

Here is the change in the labour share of GDP (less net production taxes and subsidies) since 1990.  Why 1990?  Well, the Minister talked about the last 30 years, but also explicitly highlighted the labour market reforms most of which date to 1991.   I’ve shown the numbers not just for New Zealand and Australia, but also for the other three Anglo countries.

lab share may 18

New Zealand is the median country.  The labour share of income fell a bit less here than in Australia.   If one takes the comparison just over the terms of the last two governments, so starting from 1999, the labour share of income here has increased – and in each of these other Anglo countries, it either fell or increased less than the increase in New Zealand.

I don’t want to make very much of pretty small differences.  But the numbers just don’t seem to support the Minister’s case.  And to revert to productivity, Australia has had one of the faster rate of productivity growth (real GDP per hour worked) among the older OECD countries since 1990.  I’m not aware of any evidence suggesting that collective bargaining and the role of unions has been a material (positive) part of that story.   A rather more common story is to emphasise the role of the rapid increase in Australia’s mineral exports.

The interviewer moved onto minimum wages

CORIN You talk about balance. How fair is it for a business, let’s say a business making a product that’s sold globally, with 25 staff, to now face the higher minimum wage; they lose their fire-at-will rights; they’re going to face much stronger unions, more compliance costs; they are operating in a global marketplace; they’ve lost their flexibility; how fair is it for that business?

IAIN I don’t think they’ve lost any flexibility at all. And operating in a global market means that businesses need to be resilient. They need to be able to work with the different market forces. Now, if a small change to the minimum wage is going to be that detrimental to them, they don’t sound resilient, and so what we actually need is to signal to businesses, as we have done, what our plans are for the minimum wage and for our other industrial law changes, give them an opportunity, if they don’t feel like their business model can operate in those in that environment–

CORIN So tough luck if they can’t make that work?

IAIN To give the opportunity to transition. Because we need businesses to transition into an environment where in a high-skill, high-wage economy, they are able to operate.

CORIN I think there’ll be plenty of people watching this morning who run small businesses, very frustrated and will be yelling at the TV, saying their margins are small; they’re battling away; they’re trying to employ Kiwis. They will see these changes, and certainly Business NZ is arguing that this week, as being unfair and unreasonable.

IAIN Look a lot of businesses come and go, regardless of any changes the government makes. So, yeah, most start-ups, for instance, don’t actually last beyond a couple of years. That’s the nature of doing business. What we as a government have to do is make sure there is an environment in which new businesses can develop; new jobs can be created; and as thing change for people, new opportunities become available for them. That, I think is the most important thing – that we have a strong economy where if businesses do come and go over time, which they do, that there are new opportunities for people to take up.

Now, no one is going to dispute that firms come and go, that is the nature –  the desirable nature –  of a market economy.  But the indifference of the Minister here is all but breathtaking.   His attitude appears to be that somehow we don’t want firms that can’t manage to turn a profit paying what has already been one of the highest minimum wages (relative to median wages, or to the overall productivity of the economy) anywhere.

He mightn’t, but the people who hold those jobs at present might have a rather different attitude.  Sure, they’d prefer a higher wage, all else equal.  Who wouldn’t?  But that isn’t the scenario the Minister paints.  It isn’t even the usual line the advocates of higher minimum wages run, that somehow hardly any jobs will be lost.  The Minister seems to recognise that some firms will be forced out of business, and he just doesn’t care.  Because amid all the blather about “new opportunities” and the earlier rhetoric about “transforming our economy into one that’s productive”, there is nothing in what the Minister is saying –  or what his leaders and colleagues have been saying –  to give anyone any confidence that government policy is about to transform our underwhelming productivity performance.

It is true, of course, that there might be some small measurement effects from big increases in the minimum wage.  If some people are priced out of work altogether they will tend, on average, to be the least productive workers.  Average productivity of those who remain may be a little higher as a result. But that is no comfort to anyone, and doesn’t earn New Zealand as a whole better opportunities in the wider world.   In some cases, firms may even respond to higher minimum wages by mechanising more, but again that isn’t a gain for New Zealanders as a whole –  but rather a second-best response (not the production process they’d have preferred, and which market opportunities would have warranted) to a direct government intervention.    Pricing some people out of the labour market is no way to improve opportunities (and incomes) for all.

It is also not as if the increases in minimum wages are small.  The minimum wage was set at $15.75 last April, and under coalition agreement it is to reach $20 per hour in April 2021.  That is a 27 per cent increase in four years.  There will be some inflation over that period.  But on the Reserve Bank’s forecasts the other day, that will total only 6.7 per cent over four years.  In real terms, minimum wages are rising by 19 per cent in only four years.

All of which might be fine if there was productivity growth to match.    Over the last five years there has been only about 1.5 per cent productivity growth in total.

real GDP phw may 18

Perhaps the next few years will be different?  But there is nothing in the Minister’s remarks offering any sort of credible explanation as to how, or why we should expect something better?  Most likely, some firms –  not very resilient, in the Minister’s terms –  will be forced to close, to downsize, or to adopt production patterns that are less efficient than market opportunities and market prices would lead them to prefer.

Those losses are more likely to be concentrated in the outward-facing tradables sectors of the economy.   Domestically-oriented firms don’t have unlimited pricing power, but they often have some –  especially when across the board regulatory changes like this are put in place.  Most outward-oriented firms –  whether in tourism, export education, farming or wherever –  have very little, if any.

And it is not as if the economy has been successfully becoming more outward-oriented over recent years either, even before this latest scheduled lift in the real (unit labour cost) exchange rate.

export share may 18

One mark of a successful economy tends to be an increasing share of the economy accounted for by exports and imports –  local products and services successfully taking on the world, enabling locals to consume the best the world has to offer.

Perhaps the Minister wishes for a world of abundant home-grown high-performing, high margin businesses.  It might even be a worthy aspiration, but wishing doesn’t make it so, and there is no sign that government has any credible story as to what might make it so.

Changing tack, as I noted in my post on Saturday, I did an interview with Wallace Chapman for yesterday’s Sunday Morning  programme on Radio New Zealand.   Later in the same programme, Chapman had an interview on population issues with Massey university sociologist Paul Spoonley (he runs the government-funded immigration advocacy research programme CADDANZ) and with environmental economist Suzi Kerr, of Motu and Victoria University.

It was a slightly unnerving discussion, at least to anyone who counts children as a blessing.  Kerr seemed set on encouraging people to have fewer children for the “sake of planet” (observing that she and all the people she worked with had chosen to have two or fewer), observing that adjustment to climate change would be easier with fewer people.  In the course of the discussion, she was careful to disavow any particular expertise in immigration –  and didn’t come across as a particular immigration booster (countering Spoonley’s arguments in a couple of placs) – but never once did she suggest that if we were concerned about reducing the number of people here that immigration policy –  affecting non-New Zealanders –  would be an obvious place to start.  Non-citizen immigration is, after all, an increasingly large share of New Zealand’s population increase, and the total fertility rate here is already below replacement, reaching a record low last year.    I suspect she isn’t much interested in New Zealand specifically and is more interested in “saving the planet”, including talking of redistributing people round the world.  It was a little disconcerting given that she has just been appointed as a member of the government’s new Climate Change Commission (a fact Radio New Zealand failed to point out in introducing her).  One hopes that in her new official role she will think rather harder about the easier options –  if not ones necessary welcome to the political masters to whom the owes her appointment –  open to New Zealand to ease the cost of adjustment to the government’s carbon targets.

As for Spoonley, he asserted –  of my comments on immigration (lack of NZ specific evidence of benefits) in the earlier interview –  that I was partly right and partly wrong.    If he remains convinced of the economic benefits of immigration to New Zealanders as a whole, perhaps he could engage with some of the indicators I’ve referred to in various recent posts (eg here and here) –  the underperforming Auckland labour market, the outflow from Auckland of New Zealanders, the way in which the margin by which real GDP per capita in Auckland exceeds that in the rest of the country is small and shrinking, all in an economy with an underwhelming overall productivity performance, and a shrinking share of the outward-oriented sectors.  Spoonley’s apparent preference –  to encourage/incentivise immigrants to move to places other than Auckland – is no (economic) solution either, just transferring the problems to even less productive places.

 

Is vapid rhetoric all our leaders can offer?

The Prime Minister gave what she billed as a “pre-Budget” speech yesterday to the leading business lobby group, Businss New Zealand.  It was, I’m pretty sure, her first prime ministerial speech mainly on economic matters.  In introducing her speech  she indicated that she would

outline our plans for the economy and how we want to partner with New Zealand businesses to bring about transformative change for the good of all New Zealanders.

and a few sentences later she added

We are committed to enabling a strong economy, to being fiscally responsible and to providing certainty. We have a clear focus on sustainable economic development, supporting regional economies, increasing exports, lifting wages and delivering greater fairness in our society.

But in the rest of the speech there was almost nothing there.   There were slogans, and feel-good phrases.  But there was no plans for the economy.  No plans to lift productivity –  a point she touched on not infrequently during the election campaign –  and barely even an acknowledgement of the problem, no plans to reverse the decline in the export/import shares of GDP in New Zealand, and no sign that she –  or her advisers or her Minister of Finance –  have a serious well thought-through story of how New Zealand ended up underperforming as badly as it has done, let alone how we might reverse the underperformance.

Governments of both political parties deserve credit for keeping the government’s finances more or less in order.  As I noted yesterday, that is more than most large OECD countries have managed in recent decades.  But it isn’t a substitute for policies that might finally offer a credible path out of the 70 years of relative economic decline –  drifting a bit further behind even as every country is richer than it was – that New Zealand has experienced.

Instead, we get attempts to shift the goalposts, aided and abetted by The Treasury.

On that score how we measure our success is important. In the past we have used economic growth as a sign of success. And yet a generation of New Zealanders can no longer afford a home. Some of our kids are growing up living in cars. Our levels of child poverty and homelessness in this country are much too high.

We all want a strong economy. But why do we want it? What is it for? It is vital that we remember the true purpose of having a strong economy is for us all to have better lives.

Well, sure.  GDP isn’t an end in itself, but it (and cognate measures) are a pretty important means to those ends, and a reflection of how well a society is providing for itself.    And how does the Prime Minister suppose that the crushing specifics of (New Zealand) poverty 100 years ago –  when New Zealand was the richest country on earth – became largely non-existent today?  By achieving sustained productivity growth.   And if we now score badly on some of the poverty indicator measures, it isn’t entirely surprising when productivity (real GDP per hour worked) isn’t even two-thirds of that in countries like France, Germany, the United States, and the Netherlands.  When it now also lags well behind Australia too.

In her speech, she claims that her plans are already clear

We have already spelled out our ambitious agenda to improve the wellbeing and living standards of New Zealanders through sustainable, productive and inclusive growth.  Now we want to work with business and investors to get on with it and to deliver shared prosperity for all.

and

We will encourage the economy to flourish, but not at the expense of damaging our sovereignty, our natural resources or people’s well-being. Our plans have been spelled out from the beginning, in the Speech from the Throne, in the first 100-days plan, and very soon you will see more detail in our first Budget.   ……

You will see a clear plan to build a robust, more resilient economy. You will see a strong focus on delivering economic growth, on running sustainable surpluses and reducing net debt as a proportion of GDP.

 

There was little of substance on this score in the Speech from the Throne.  And much as I wish it were otherwise, I won’t be holding my breath waiting for the “clear plan” for stronger sustained real economic (and productivity) growth in the Budget.  There is nothing in anything the government has said so far that suggests they or their advisers really grasp the issues.     Quite why simply wishing businesses would “get on with it” would now be expected to produce better outcomes than we’ve seen in recent decades is a bit beyond me.

Of course, there are nods in the direction of things Labour (or their partners believe in)

My Government is keen to future-proof our economy, to have both budget sustainability and environmental sustainability, to prepare people for climate change and the fact that 40 percent of today’s jobs will not exist in a few decades.

I’d love to see some data on what proportion of jobs that existed 40 years ago don’t exist today (the majority of the jobs that existed in the Reserve Bank I joined in 1983 don’t exist any more).  But while the government worries about work –  setting up a new tripartite forum involving the CTU and Business New Zealand – actual employment rates don’t seem to be the problem.

E rates by age

(Lack of) productivity is.   It is productivity growth that underpins any long-term growth in real incomes and living standards.

There is talk of skills, when OECD data have shown that New Zealander workers have some of the highest levels of skills anywhere in the OECD (indeed, the chair of the Productivity Commission was retweeting an OECD chart to that effect just a few days ago).

There is talk that “no-one has the same job for life any more”.  Perhaps, but there is data overseas suggesting that average length of time with a single employer is little different now than it was 30 years ago.

There is talk of “lifting R&D spending”, and the government has out for consultation at present its plan for new R&D subsidies, but no sense that the Prime Minister or her advisers have thought at all hard about why firms might not have found it worthwhile to do more R&D spending (or why, by contrast, firms in some rich countries with no R&D subsidies do a great deal).

There was lot of rhetoric

Business can be assured that this Government will support those who produce goods and services, export and provide decent jobs for New Zealanders.

But little substance, and nothing that shows signs of pulling it all together into a coherent narrative.

And, for all the mentions of climate change and related issues, nothing at all about how faster overall productivity growth –  and a stronger export/import orientation –  might be achieved in the face her government’s commitments to sharply reducing net emissions in a country with high marginal abatement costs.  “High marginal abatement costs” has meaning: it costs to do this stuff, and the cost is likely to be reflected in lower levels of economic activity (and productivity) than otherwise.  Perhaps the government disagrees –  and perhaps her audience were too polite to challenge her –  but there is nothing in the speech suggesting she has thought hard about squaring that circle.  There seems to be lots of wishful thinking, and not much substance.

And then there were “the regions”

And the regions need not fear they will be neglected. We have committed $1 billion per annum towards the new Provincial Growth Fund and over coming months there will be more detail about how this spending will be targeted. After all, nearly half of us live outside our main cities and our provinces also need to thrive if New Zealand is to do well.

The Provincial Growth Fund aims to enhance economic development opportunities, create sustainable jobs, contribute to community well-being, lift the productivity potential of regions, and help meet New Zealand’s climate change targets.

There might be a bit of a lolly scramble, redistributing the current cake.  But there is nothing from the government, or from the architects of the PGF –  and nothing in the announcements to data (eg here and here) suggesting that the government has any concept of how overall productivity growth rates, nationwide or in the regions, might be lifted.  (And not once was the real exchange rate mentioned.)

Perhaps defenders of the government would push back on one or another point.  But there is no sign of any sort of integrated narrative –  a rich understanding of how we got to our current sustained underperformance or, reflecting that, how might hope to reverse the decline.  No doubt in an attempt to woo her business audience, there weren’t even any references to tax system changes (CGT and all that) in this economic speech.

Perhaps that isn’t entirely the government’s fault.  The Treasury seems at sea as well.  But we don’t elect bureaucrats, and we do elect governments.

Of course, I wouldn’t want to be misinterpreted as suggesting that the Opposition was any less bad.  The new Leader of the Opposition also gave his first economic speech this week.   There were a few bits where I was nodding my head as I read

Labour and NZ First are more focused on government intervention. They believe they know how to run your businesses better than you do.

Shane Jones’ $1 billion Provincial Growth Fund is a good example. It’s terrible policy.

Now I’m sure there are some worthy projects that will get funded. But it will shift businesses from focusing on becoming more productive to chasing a subsidy from Matua Shane.

That’s not how to drive long-term productivity improvements.

Couldn’t disagree, but what did Bridges have to offer

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

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

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

But together they were effective.

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

500 initiatives and we still had barely any productivity growth in the last five years.  And, as I recall, one of the BGA goals was a big increase in the export (and, presumably, import) share of GDP: those shares have actually been shrinking.  Productivity levels languish miles behind the better advanced economis, and the gaps showed no sign of closing.

He ends

New Zealand is a great country. And if we maintain our direction and momentum of recent years we can make it even better for our kids.

Moving into opposition is a chance for National to look at our position on certain issues, and understand the things that New Zealanders want us to focus on.

Although the one thing I hope you’ll take from my speech is we won’t be changing our focus on the economy.

If we don’t start seeing a lot more hard-headed thinking –  and a quite material change of direction – from our political leaders and their advisers, a country that really was once the best place in the world to bring up kids, will increasingly be a country where wise parents can only counsel their kids that if they want first world living standards, the best option is to leave.     In my lifetime, 970000 (net) have already done so.  The Prime Minister and the Leader of the Opposition –  representing two sides of the same coin when it comes to our economic failure – are younger than me, but in just the 37 years the Prime Minister has lived, a net 780000 of our fellow New Zealanders have left.   Outflows of that scale – which, of course, ebb and flow with short-term developments in Australia and here –  just don’t happen in normal, successful, countries.

 

 

 

 

 

R&D tax credits: more ill-considered corporate welfare

In the minds of members of our new government, much of whatever hope they have of transforming New Zealand’s economic performance (productivity, foreign trade and so on) seems to rest on the proposed R&D tax credit.

Don’t just take my word for that.  Yesterday, they released a discussion document on details of the new tax credit, which is scheduled to take effect next year.  The document is headed Fuelling Innovation to Transform our Economy” .  In the Foreword, ministers gush

This Government’s vision is to build a better New Zealand for all our people and we see an incredible opportunity ahead of us to do this.

That means a country with affordable, healthy homes; an environment we can be proud to leave to future generations; and a diverse, sustainable, and productive economy that delivers for our people.

This vision can’t be delivered with the same old approaches. We need new ideas, new innovations, and new ways of looking at the world.

And that is where science, innovation and research can play an important role. That is where we see our innovators, our scientists, our entrepreneurs and our visionaries building a better New Zealand.

In the view of the government, businesses don’t spend enough on research and development.  They need to spend more.   Knowing better than businesses apparently, the government is to fling another subsidy into the mix.  My mind is carried back to bad old days of export incentives, and other patchwork attempts to avoid addressing the real issues (in those days, heavy import protection and a (typically) overvalued real exchange rate).

As far as I can see, the only thing released yesterday was the discussion document.  There was no officials’ advice on the economics of the proposal, no Cabinet paper, no regulatory impact statement. Not really anything at all, other than few assertions and then straight to the details of the proposed scheme –  the only bit they seem actually interested in consulting on.  Not once –  in yesterday’s document, or in anything else the government has published –  have I seen any considered analysis of why profit-maximising firms might have not regarded it as worthwhile to do more R&D spending here.   If you don’t understand that, it is unlikely that any proposed remedy is a serious well-structured response.  Much seems to rest on the fact that most –  but by no means all – OECD countries also offer these subsidies.

There is quite a reasonable argument to suggest that research and development spending is already rather favourably treated by the tax system.   Purchase a physical asset as part of your firm’s production, and you can only deduct it against taxable income through depreciation, over the expected economic life of the asset.  But research and development spending is really just another form of investment –  it is even in the national accounts (GDP numbers) as such.  But most of that spending is immediately deductible for tax purposes.   The R&D spending that Boeing did to come up with the 747 generated sales and profits over decades, but instead of that spending being offset against those profits in the  years they were earned, it would all have been deductible up-front.  The time-value of that favourable treatment is considerable (huge when the R&D leads to a product with a long period in the market).  And since New Zealand has now one of the higher company tax rates in the OECD, the value of that standard ability to deduct is already larger here than in many other OECD countries (and before people start invoking our imputation scheme, it is the company tax rate that matters for foreign investors and in the document the government says “We also want to attract large
international R&D intensive firms to New Zealand”).

In the discussion document there is a full page graphic highlighting gross R&D spends in a variety of advanced countries.  For some reason, even though the R&D credit is aimed at businesses, they don’t quote business R&D expenditure, so in this table I’ve added that column as well, using data from the OECD.

Total R&D Business R&D
% of GDP
United States 2.8 2
United Kingdom 2.9 1.1
Canada 1.7 0.9
Ireland 1.5 1.1
Finland 2.9 1.9
Denmark 3 1.9
Israel 4.3 3.6
Switzerland 3.4 2.4
Australia 2.8 1.2
New Zealand 1.3 0.6

Which is interesting, but it is perhaps worth pointing out that of those countries, Finland, Denmark, and Switzerland (as well as New Zealand) don’t have R&D tax credits.  As I’ve pointed out in other posts Germany doesn’t either –  and business expenditure of R&D there is about 2 per cent of GDP.    On OECD estimates, the value of the US tax credit is also very small.

R&D tax credits aren’t the only form of government spending to subsidise business R&D – in fact, the government’s new scheme involves doing away with the current grants.   And as it happens, OECD numbers suggests we already spend more (per cent of GDP) on such subsidies than Germany (DEU), and quite a lot more than Switzerland (CHE).

Direct government funding and tax support for business R&D, 2015

All of which might suggest taking a few steps back and thinking harder about why firms themselves don’t see it as worth undertaking very much R&D spending here.  But given a choice between hard-headed sceptical analysis and being seen to “do something”, all too often it is the latter that seems to win out.

In an earlier post, I pointed out

Formal research work done previously suggests that the rate of business R&D spending in New Zealand partly reflects the sort of stuff we produce.  One way to see that is to look the OECD’s commodity exporting countries, and compare them with seven economies at the heart of advanced Europe.  These are simply different types of economies.

BERD (% of GDP) BERD ( % of GDP)
Australia 1.23 Austria  2.03
Canada 0.93 Belgium  1.58
Chile 0.14 France  1.44
Mexico 0.17 Germany  1.96
New Zealand 0.57 Netherlands   1.10
Norway 0.87 Switzerland   2.05
Denmark   2.oo
Median 0.72 Median 1.96

In passing, it is also perhaps worth highlighting Israel –  an economy with very high business spending on R&D, and yet not only an economy with GDP per capita around that of New Zealand, but with a similarly poor longer-term productivity record.  They make and sell different stuff –  some of which clearly needs lots of R&D –  but not, overall, any more successfully than we do.

A reasonable counter to this sort of line of argument might be “ah yes, but we want to be Denmark –  after all, in some sense they once were New Zealand (agricultural exporter etc)”.     But if the opportunities are really here for such a transformation, has the government and its advisers stopped to think about why firms don’t seem to see investing in more R&D as offering a worthwhile expected return?  Danish firms didn’t seem to need an R&D tax credit to get there.

Personally, the 2025 Taskforce’s approach to the issue seems more persausive

The 2025 Taskforce addressed some of these issues in their 2009 Report (around p 70).  They argued that more attention should be given to the possibility that high levels of business R&D spending might reflect more about where particularly economies are at (near the frontier or not, differences in product mix) rather than being some independent factor explaining the success or failure of nations.  In their view, a highly successful New Zealand was likely to be one in which more business research and development spending was taking place, but as a consequence of that transformation rather than an independent cause of it.  That still seems like a pretty plausible story to me –  although New Zealand is long likely to be primarily an exporter of commodities, and richer commodity exporters (Norway, Australia and Canada) don’t have particularly high levels of business R&D spending.

And part of the transformation in New Zealand seems almost certain to involve a much lower real exchange rate for a prolonged period.  It was an important message in the 1980s –  when officials actually took it seriously –  and remains no less important today, even if ministers and officials now seem to ignore the issue.

I don’t want to spend time on the detailed issues of the design of the new tax credit.   But I did notice this

A business will need to spend a minimum of $100,000 on eligible expenditure,
within one year, to qualify for the Tax Incentive. The rationale for setting the threshold at $100,000 of eligible expenditure is to filter out claims that are not likely to be genuine R&D. $100,000 of expenditure is roughly the cost of one full time employee’s salary and related overhead costs.

It isn’t clear why small claims should be less likely to be all genuine R&D than large ones. But then juxtapose the planned threshold with this chart

BERD by firms NZ

In other words, a large proportion of the companies doing R&D won’t be eligible for the new subsidy at all, while the “big end of town” can gobble up generous subsidies from the taxpayer.  It is corporate welfare, deliberately skewed to the bigger firms.

An interesting feature of the proposed new tax credit is that there is no attempt to structure it to incentivise increased levels of R&D spend.  The tax credit will apply to the first dollar of R&D expenditure (for firms above the $100000 threshold) –   much of it spending the firm would have done anyway.  No doubt there are arguments for such an arrangement in practicality and minimising compliance costs.  But it also means that the returns to whatever additional R&D spend might take place as a result of the tax credit will have to be very high, to cover the cost of the whole programme.  And yet there is no attempt at any sort of cost-benefit analysis (actually not even an estimate of the fiscal cost) in the discussion document –  or even a hint that one has been done elsewhere.  It is as if the government believes that any increase in recorded deductible gross R&D spending will offer gains in material living standards for New Zealanders.   Perhaps, but it would be nice to see the case rigorously made, and the detailed assumptions exposed to scrutiny.

A visiting Australian politician

A fairly prominent Australian politician was in town last week.   Andrew Leigh was previously a professor of economics at ANU, and for the last eight years has been a Federal Labor MP.  He is the Shadow Assistant Treasurer, Shadow Minister for Competition and Productivity (and spokesman on various other minor portfolios), and so presumably fairly likely to become a Federal government minister if the next election result follows the polls and Labor is elected.

Leigh was here to give a couple of lectures in the series being sponsored by the NGO Presbyterian Support Northern on topics related to child poverty and wellbeing.  As it happens, next month I’m also giving one of the lectures in this series –  on the role productivity growth plays in ending poverty – and if anyone is interested you can book  one of the (free) sessions here   (there is one in Auckland and one in Wellington).

I didn’t get to hear Andrew Leigh while he was here, but both his Auckland text  and his Wellington text are available on line.   The substance of both addresses is well worth reading –  he is a widely-published researcher on inequality (the Auckland address) and has just published a book about the use of randomised control trials as a tool in better evaluating which policy interventions might work and which don’t (the focus of the Wellington address).   I don’t claim to be a fan of the Australian Labor Party, but politics is likely to be better for having at least a few people, preferably on both sides of politics, able to address serious issues this seriously.

Having said that, I was mildly amused by the introduction to his Wellington speech.   I guess it is standard advice to butter up, and flatter just a bit, your audience.

New Zealand has turned out to be a pretty good predictor of what’s likely to happen next in Australia.

New Zealand women won the right to vote nine years earlier than Australian women.

Your country enacted same sex marriage four years before we did.

You even gave Barnaby Joyce citizenship before we did.

So to be in New Zealand isn’t just a chance to see the sun rise a couple of hours earlier – it’s also an opportunity to get a sneak peak into some of the things that might shape Australia’s future.

And I have to say that as a member of the Labor opposition in Australia, I’m keenly hoping that this year or next will see Australia’s voters follow your lead in electing a progressive government.

I’m pretty sure that, even if it got a good laugh, he is wrong about Barnaby Joyce –  a citizen by birth of both countries, and there was only a single birth.

But no mention at all –  none, as far as I could see across two speeches –  of the most striking area of New Zealand/Australia comparisons where Leigh must surely hope that New Zealand doesn’t offer a “sneak peak” into Australia’s future.  And that is the, not trivial, matter of relative productivity and prosperity.

As I noted yesterday, for 100 years or so (from the time of our gold rushes onward) New Zealand and Australia are estimated to have had average real per capita incomes that were much the same.   Each country had specific idiosyncratic events and influences, so that at times we did better, and then for a time they did better.  Those differences were reflected in the trans-Tasman migration data –  at times the (significant) net flow was one way, and at times the other way.

The standard collection of such data is that by former OECD researcher Angus Maddison  Here is the chart of the data he judged best (no doubt far from ideal in both cases), starting from 1870 when he first reports annual numbers for New Zealand.  (Maddison died a few years ago so the data aren’t updated to the present.)

aus vs nz real gdp pc

The red line is the average of the series for the full period 1870 to 1970: on average, on these measures, New Zealand had very very slightly higher average incomes than Australia.  On different measures you might get a slightly different picture, but the overall story won’t change much.  The performance of our two economies was pretty similar.  But it is no longer.   The IMF’s current estimate is that New Zealand real GDP per capita, converted at purchasing power parity exchange rates, is about 76 per cent of that of Australia.

We don’t have a time series of productivity data for the historical period, and although Australia has an official series of real GDP per hour worked back to 1959, here official data can only take us back to the late 1980s.    In this chart, I’ve shown the relative performance of labour productivity (real GDP per hour worked) in the two countries since 1989 (for New Zealand, using the average of production and expenditure GDP measures, and the average of the QES and HLFS hours series, as in earlier posts).

real GDp per hour aus vs nz

In 29 years, we’ve lost a lot more ground –  15 percentage points-  relative to Australia.  It isn’t a particularly steady process (at least as represented in these data) but the trend decline shows no sign of ending, let alone reversing.

And thus when, as in one of his speeches, Andrew Leigh notes that

It is not as though the child poverty rate is noticeably different in our two countries. According to the OECD, the child poverty rate – measured as the share of children living in households with disposable incomes of less than half the median – is 13 percent in Australia and 14 percent in New Zealand.

what he is omitting is that incomes in Australia are a lot higher, and thus so too is the relative poverty line measure he is using.  Australia’s poor should be less badly off than our poor, because Australia’s relative economic performance is so much better.

For Australia’s sake, I hope New Zealand’s path doesn’t foreshadow their own.  Then again, in some respects it already has.    On the Maddison numbers, back in 1870 both New Zealand and Australia were more prosperous than the United States.  As recently as 1938, we were about equal with the US.  And now, we do particularly poorly, but Australia’s relative performance is nothing to write home about.

rel to US

Interestingly, Leigh touches on one possible aspect of the story.

Third is to recognise the role that foreign investment plays in sustaining employment. As you know, the antipodes enjoyed among the highest wages in the world at the end of the nineteenth century. One reason for this was the high amount of land per person. While Europeans lived cheek-by-jowl, there was plenty of room to swing a sheep in Australia and New Zealand. In economic terms, one reason that wages were high was that the capital to labour ratio was high.

Today, both Australia and New Zealand have strong immigration programs. Migrants can fill skill gaps and start businesses, boost innovation and encourage exports. But they also have the inevitable impact of lowering the capital to labour ratio. To the extent that migrants are adding to the number of workers available to do a given job, this may put downward pressure on wages.

It was former Treasury Secretary Ken Henry who pointed out to me that foreign investment has the opposite effect. By increasing the available capital, it pushes up the capital to labour ratio. So by accepting foreign investment as well as migrants, a country can keep its capital to labour ratio constant, and therefore its wage rates.

I think that is partly true and partly not.  As he notes, in the 19th century what marked out both countries was abundant land – which in turn attracted both migrants and foreign investment.  These days, foreign direct investment can help improve prospects –  and I’m strongly supportive of us being open to FDI –  but FDI doesn’t add to the stock of land and natural resources (even if it can help exploit those resources more fully), and even when regulatory restrictions are out of the way, it flows in the direction of opportunity.  Neither country has been particularly successful in seeing internationally competitive industries not based on our natural resources develop.  Attractive opportunities in either location don’t seem thick on the ground,

It is, nonetheless, good to see a left-wing politician openly addressing these issues.  Would that it were happening here.

Leigh’s other speech was devoted to the merits of randomised trials of proposed or actual policy interventions or welfare programmes.  In many areas, they are the single best way of identifying what works and what doesn’t.  Here are a couple of examples from his text (in this case, of programmes that proved not to work).

In some cases, the Education Endowment Foundation trialled programs that sounded promising, but failed to deliver. The Chatterbooks program was created for chil­dren who were falling behind in English. Hosted by libraries on a Saturday morning and led by trained reading instructors the program gave primary school students a chance to read and discuss a new chil­dren’s book. Chatterbooks is the kind of program that warms the cockles of your heart. Alas, a randomised trial found that it produced zero improvement in reading abilities.

Another Education Endowment Foundation trial tested the claim that learning music makes you smarter. Students were randomly assigned either to music or drama classes, and then tested for literacy and numeracy. The researchers found no difference between the two groups; suggesting either that learning music isn’t as good for your brain as we’d thought, or that drama les­sons are equally beneficial.

In a similar vein, a recent randomised trial of free school breakfast programs in New Zealand schools found that it reduced hunger rates (by 8.6 units on the ‘Freddy satiety scale’, in case you’re curious). However, free breakfasts did not improve school attendance or academic achievement for low-income children.

Unfortunately, attractive as this approach is, it isn’t really an option for most of the sorts of policy interventions I write about here, which are economywide by construction.  One can’t split the country into 100 different monetary regions, and apply different OCRs to each (chosen randomly) –  and nor, frankly, should one want to.   Even if some global dictator could do it across countries, there are far too few countries (and so many differences across them) for the results to be anything as valid as those from an evaluation of (say) a school music programme with (say) 500 kids split randomly into groups participating and not participating in the programme.  The same goes for aggregate fiscal policies, or immigration policies.  One might, perhaps, be able to do randomised trials around small aspects of, say, the Essential Skills visa programme, but not about overall approaches to immigration.  I

Instead, we are forced back onto looking what is really a small range of countries (say 40 advanced countries), over relatively short periods of history (the last couple of hundred years), and –  given that and all the other individually confounding factors –  it is perhaps less surprising that people of goodwill still differ on quite what role some of these policy interventions have to play, and what their overall effects are.  Of course, many other areas of policy are much the same –  think foreign affairs and defence –  and the difficulty of reaching of conclusive results doesn’t change the importance of ongoing analysis, research and debate, testing and evaluating the relevant comparisons and insights that history (our own and others), theory, and current experience appear to be offering.

Small size simply isn’t the issue

Just yesterday I wrote, in response to a comment, that

My point simply was that there is no obvious correlation, in the cross section, between population size and GDP per capita (or productivity). I’m not aware of any serious observer arguing otherwise

At the level of very simple correlations, I’d illustrated this lack of relationship –  whether for all countries, just advanced countries, excluding the handful of extremely large countries, or whatever.  Bigger countries (by population) don’t, on average, have higher per capita incomes than smaller countries.

But then I went to a seminar at the Productivity Commission yesterday afternoon, attended by various private and public sector people.  The substance of the seminar –  a new MBIE report on the manufacturing sector, and the discussion of it and of possible policy responses –  is embargoed until David Parker releases the report next week.   But I hope I’m not breaching any rules in simply reporting that I noted around the room an almost unquestioned acceptance that size (small) is one of New Zealand’s economic problems.  Normally I might barely have noticed it, but having been writing about the topic in the last few days, it niggled away at me.

The more I’ve thought about that issue over the years, the more I’ve concluded that those who hold it are simply wrong, and perhaps in the thrall of the political equivalent of Keynes’s “defunct economists”  –  the long tradition of political leaders, dating back at least to Vogel, who’ve wanted, as a matter of policy, a lot more people in New Zealand, believing (presumably) that New Zealanders would be better off as a result.  There doesn’t seem to be much –  any? –  evidence in support of any economywide economic benefits flowing from this preference.

One hears talk in such discussions of ideas like “markets work better in big economies”, or even talk of economies of scale –  or opportunities for specialisation – in government/regulation.  In principle, the arguments sound plausible enough.

But they rarely seem to confront the simplest stylised data.  For example, Australia and New Zealand are almost equally remote (on standard measures), but Australia’s population has been consistently much higher than ours, and yet for a century (say 1860 to 1960) material living standards (GDP per capita) were much the same on the two sides of the Tasman.

Or we could look at some advanced countries where distance/remoteness is much less of an issue.  In what follows I’ve looked at the OECD member countries in Europe (continental plus the UK and Ireland).  There are 24 of them, ranging in population from Germany’s 82 million to Luxembourg’s 0.6 million.  Five of these countries – New Zealand’s size or smaller – didn’t even exist as independent states thirty years ago.

In this chart –  for 2016 –  I’ve ordered those 24 countries by population size and shown the real GDP per capita for each.  I’ve also shown the median (so not distorted by Luxembourg, or issues around Irish tax) for the group of countries with a population less than 10 million, and also the median for the large European OECD countries.

europe real GDP and popn

If anything, the typical larger country has a lower per capita income than the typical smaller country.  Of course, these are small samples, so not much weight should be put on them, but there is nothing to suggest bigger countries are performing better than smaller countries.  And if one insisted on excluding the former communist countries – even though they are now 25 years on as market economies –  the gap (in favour of the smaller countries) – is larger.

In many respects,  real GDP per hour worked  (labour productivity) is a better metric of economic performance.  Here is the same chart, for 2016, using the OECD’s data on productivity.

europe real gdp phw and popn

I could exclude Ireland and Luxembourg, I could exclude the ex-communist countries, I could add to the “small” category the countries (Portugal to Belgium) with populations just over 10 million, and it won’t change the story.  There is nothing in the simple stylised facts of European OECD countries suggesting that bigger countries do better than smaller ones.  Even at the most prosperous core bit of Europe (London is the richest –  by income –  region in Europe), Belgium, Switzerland, Denmark and Austria do really well.  And so do France and Germany (the UK less so).

Of course, there are lots of other things that help explain any individual country’s performance. Norway, for example, wouldn’t rank so high without oil, or Ireland without the features of its corporate tax policy which see a lot more economic activity booked in Ireland than directly results from economic activity occurring in Ireland.  One issue, of course, is the quality of policy.  There are lots of different dimensions of that, and sometimes one sees a story in which small countries try harder, regulate less, or whatever to overcome the alleged disadvantages of size.   One widely-used indicator is the OECD’s index of product market regulation.  As it happens, the PMR score for the median small country in OECD Europe is less good (ie more less-liberal regulation exists) than in the median large country.

Smarter people with richer datasets and serious econometric skills can produce much more complex models, encapsulating a lot more information simultaneously.  But whatever the results of such models –  which often end up depending on the modellers’ embedded assumptions –  it is always worth bringing them back to check against the simplest stylised facts.  Even in a region where distance is much less of a differentiator among countries (it isn’t nothing –  Portugal and Greece would have it tougher than Belgium and the Netherlands even with great policy) population size doesn’t seem to be an advantage, and isn’t associated with either higher GDP per capita or higher productivity.

For decades, I’ve used the line that if only we could detach New Zealand from the ocean floor and relocate it –  land and all –  in the Bay of Biscay, just off the coast of France we’d be much better off materially, all else unchanged.  Perhaps the North Sea would be even more propitious.  But the point remains, the biggest handicap to economic success in New Zealand is our distance/physical remoteness –  in an age when, across the board (although with individual pockets otherwise) distance isn’t becoming less of an issue, but perhaps even more of one.    A modest number of people probably can do very well here, but not many.   And yet our policymakers –  aided and abetted by official advisers –  keep driving policy to locate ever more people in a really quite unpropitious –  even if beautiful and (now) peaceful –  location.

There is simply no evidence supporting the notion that our small size is “the problem” (or even a material part of it), and when the story continues to be invoked it simply serves as a distraction –  mostly unwittingly so –  from a focus on the real issue, responding realistically to the unchangeable (absent quite different technologies) constraints of our physical isolation.

A “very, very healthy economy”?

In his press conference with the Minister of Finance, the day before taking office last week, the new Governor of the Reserve Bank offered some brief and gratuitous thoughts on the state of the New Zealand economy.

Orr said he was happy with where the economy was at the moment.

“I’d say that we are running a very, very healthy economy at the moment,” he said.

In one sense, it doesn’t greatly matter what the Governor of the Reserve Bank thinks.  His primary (monetary policy) job is to keep core inflation near 2 per cent (something Graeme Wheeler failed to do).  There isn’t much connection between whether or not an economy is doing well in some medium-term fundamental sense and the average inflation rate.

Then again, Orr is now the most prominent (and powerful) public sector economist, and was sharing a stage with the Minister of Finance.  Intended or not, his comments could reasonably be seen as an endorsement of economic management and performance by past and present governments. An endorsement of the status quo in fact.

Perhaps that wasn’t the Governor’s intention. Perhaps it was just the first thing that came to mind on his big day and he didn’t stop to think what he was saying? But perhaps he genuinely believes it, which in some ways would be even more concerning.   Especially as it is presented as an unconditional, absolute, statement, with two intensifiers.  If we take the Governor seriously, things must really be doing well here.

I’m not sure what the Governor had in mind.  But when I rack my brain and look for whatever positives I could find, this is what I came up with:

  • the terms of trade are near record levels,
  • government debt is pretty low, and the government operating accounts are in surplus,
  • the financial system appears to be sound,
  • after nine years above, the unemployment rate is now finally down to around the level the Reserve Bank thinks of as the NAIRU (the non-accelerating inflation rate of unemployment).

Try as I might, I couldn’t find anything more that suggested a “very very healthy” economy.  There were a few other indicators that perhaps a lay observer might try to cite, but economists probably shouldn’t:

  • employment rates are quite high.  We don’t put too many regulatory/tax obstacles in the path of employment (a good thing), but employment is a still cost –  foregone leisure –  not a particular achievement.  Unemployment and underemployment rates are typically the better indicators (when lots of people want work and can’t find it that is a problem),
  • interest rates are low.  As they are around the world, reflecting how difficult the advanced world has found it to achieve sustained growth since the last recession.  Ours remain well above those in most other advanced countries,
  • our balance of payments current account deficit is less than it was (and the external debt –  % of GDP –  is less than it was).  This is partly a reflection of unexpectedly low interest rates –  servicing costs are less than they were, and partly of pretty subdued investment,
  • headline annual GDP growth rates have not been high –  by standards of earlier growth phases –  but have sounded respectable enough (typically with a 3 in front of them).   But much of that simply reflects unusually rapid population growth rates.

And on the other hand, and in no particular order

  • how could we go past house prices?  How can the Governor –  of all people –  consider our economy to be “very very healthy” when house and urban land prices are so far out of whack that few young can any longer afford to buy a basic first home?
  • even if, on some metrics, we’ve done less badly than some countries in the last decade, almost the whole advanced world has done absolutely poorly.  Investment and productivity growth have typically been weak, and interest rates have needed to be astonishingly low for prolonged periods (not yet over) simply to support demand and activity.
  • real per capita GDP growth, even at peak, has been weaker than in previous recoveries,
  • if most of the advanced world has done quite poorly, New Zealand started so far behind that we needn’t have been badly affected.  Simply catching up some way towards the frontier would have been a considerable achievement.  But we haven’t. There has now been almost no labour productivity growth here for the last five or six years, and that shows no sign of changing yet.
  • inflation has been (is still) persistently below target (and thus below the level successive governments and Governors have considered desirable for the best possible economic outcomes),
  • although interest rates are low in absolute terms, they remain above those in most other advanced countries, for reasons that have nothing to do (see above) with superior productivity performance.
  • rates of business investment remain very subdued (despite, for example, the strong terms of trade, or rapid rates of population growth).
  • the growth in the economy has continued to be concentrated in the non-tradables sectors, rather than the bits in which New Zealand firms successfully compete against international competition here or abroad.   I haven’t shown this (indicative) chart for a while
  • T and NT to Dec 17
  • relatedly, the export share of GDP has been shrinking, when a typical aspect of any successful economic catch-up has involved a rising share of exports, as the success of domestic policy and domestic firms translates into more firms and more products beating the world (in turn, enabling more of what the world produces to be imported).
  • the real exchange rate remains very high, well out of line with developments in relative productivity and terms of trade trends.
  • meanwhile, among the other relatively poor OECD members many that did far more wrenching economic reforms than we did 25 or 30 years ago (and they needed to do more) really are making progress to catch the OECD leaders. In some cases, their average productivity levels are already at New Zealand levels, and almost all are growing faster than New Zealand.

And all that without even getting to the risks and costs that seem set to flow from grappling with things like improving water quality, and with successive government’s commitments to reducing carbon emissions, in a country with some of the highest marginal abatement costs anywhere.

Quite how the Governor can seriously think –  if he really does –  that this is a “very very healthy” economy is a bit beyond me.  It has the feel of ill-considered quasi-political rhetoric.  In a post a few weeks ago (with charts illustrating some of the points above) I called it a rather moribund economy, and that still seems right to me.

My young daughter asked me “what boring stuff are you writing about this morning”.  I told her it was about the health, or otherwise, of New Zealand’s economy.  “Does the economy have cancer?” she asked.  It isn’t like that I said, more like some chronic condition that won’t kill us, probably won’t even end in a crisis, but constantly holds us back from achieving what we might, from delivering better material living standards for New Zealanders.   The Governor of the Reserve Bank has a defined and limited job to do, which he can do whether or not the chronic ailment is fixed.  But he shouldn’t use his office and bully pulpit it provides to help politicians evade responsibility for the decades of disappointment.  The status quo has failed, is failing, and seems set to go on failing.