New Zealand economic performance

Having read the Our Plan speech

Michael Reddell New Zealand economic performance, NZ politics, Uncategorized

The Prime Minister’s speech on Sunday has attracted quite a lot of, generally not very favourable, attention.  I was interested in a few things that were there, and a few others that weren’t, particularly when compared to the Speech from the Throne that inaugurated the government’s programme last November.

The first was the apparent lack of ambition around the economy.    The Prime Minister continues to repeat the meaningless claim that “we’ve enjoyed enviable GDP growth in recent years”, as if headline GDP – as distinct from GDP per capita or GDP per hour worked –  means anything at all.    Here’s the track record: it has been pretty poor over the last couple of years (we’ll get an update on Thursday).

gdp pc to mar 18

Productivity growth has been even worse, and for longer.  Here, for example, is the comparison with Australia.

aus nz rgdp phw

The Prime Minister seems to sort of know there is an issue.

We cannot continue to rely on an economy built on population growth, an overheated housing market and volatile commodity markets. It’s not sustainable, and it risks wasting our potential.

That’s why our first priority is to grow and share more fairly New Zealand’s prosperity.

That means being smarter in how we work. It means an economy that produces and exports higher value goods, and one that makes sure that all New Zealanders share in the rewards of economic growth.

So what will we do?

First, we need a concerted effort to lift the prosperity side of the ledger. Working alongside business, we will encourage innovation, productivity and build a skilled workforce better equipped for the 21st century.

But what Our Plan has to offer is slim pickings indeed.  The only specific is

We are doing that by bringing back significant support for businesses to expand their investment in research and development through the R&D tax incentive, a key component of building a new innovative economy.

Perhaps you think R&D subsidies are a good idea. I’m rather more sceptical, and worry that there is no sign the government has thought hard about why firms don’t regard it as being in their interests to spend more here on R&D.   But don’t just take it from me.  I was interested that in the Secretary to the Treasury’s speech about productivity a couple of weeks back, which I wrote about here , there was no mention at all of R&D subsidies/credits as any part of the answer to our sustained underperformance.  If R&D subsidies were the answer, it would have to be a pretty small question, and our economic underperformance is much worse than that.

It was also interesting that the tax system seemed to have disappeared from the list of answers to our economic underperformance.    In the Speech from the Throne this

The government will review the tax system, looking at all options to improve its structure, fairness and balance, including better supporting regions and exporters, addressing the capital gain associated with property speculation and ensuring that multinationals contribute their share. Penalties for corporate fraud and tax evasion will increase.

and in various speeches since the Minister of Finance has continued to talk up tax system changes,  but in Our Plan on Sunday the only reference I could see to the tax system was those R&D subsidies.

And then there was this

After all, we have always been inclined to do things differently. Or to do them first.

Whether it’s Kate Sheppard championing the right to vote, Michael Joseph Savage designing the welfare state, or Sir Edmund Hillary reaching brave new heights – we don’t mind if no one else has done something before we do.

But we do mind being left behind.

and

You asked us to make sure New Zealand wasn’t left behind.

But the problem is, Prime Minister, that we’ve fallen badly behind, and nothing you or your predecessors did seems to be stopping, let alone reversing that decline.  Nothing.

Here are a couple of productivity charts, comparing New Zealand and some other advanced countries in 1970 (when the OECD data start) and 2016 (the last year the OECD has data for all countries).

First the G7 countries.

G7 comparison

As recently as 1970, real GDP per hour worked in New Zealand was more or less that of the median G7 country (100 years ago, we would have been ahead of all but one, and basically level with the US).    Now it would take a 30 per cent lift in New Zealand productivity –  with no changes in the G7 countries –  to get us back to parity with these big advanced economies.

And here is the same comparison for the (small) Nordic countries.

nordic comparison

It would take a 50 per cent lift in New Zealand productivity –  all else equal –  to match the median of these countries.    Even in 1970 we’d fallen behind them, but 100 years ago  –  in fact even when Michael Joseph Savage was in office – we were richer and more productive than all of them.

We’ve been left behind, and our politicians show no sign of doing anything to remedy the failure.

One could say much the same about housing.  The Speech from the Throne –  only 10 months ago –  was actually quite encouraging.  There were hints –  nothing specific of course –  that the government might actually want to lower the real prices of houses, reversing at least some of the disgraceful lift in house and land prices that policy (various strands interacting) has helped deliver over the last 25 years or so.

But what about in Our Plan?  There is talk of warm dry homes, and of the Kiwibuild lottery for the lucky few (“I cannot tell you how exciting it was to open the ballot for those first homes this week”), but of the market generally only this

“But not everyone wants to own, or can right now.”

And nothing –  at all – about what the government might do to systematically transform the outlook for those –  all too many –  who can’t.  It might be terribly exciting for the Prime Minister that a few can win the lottery –  as no doubt it is in the weekly Lotto draw –  but in a serious government wouldn’t it be much more satisfying to have laid the ground work for systematic, across the board, affordability?  In a country with so much land (in particular), it is pure political choice that we fail to have better outcomes.

There were a couple of other bits that took my eye.  There was this, in prominent bold letters.

That’s why our first priority is to ensure that everyone who is able to, is either earning, learning, caring or volunteering.

Frankly, what business is it of the government’s.  We aren’t resources at their disposal.  Provided someone isn’t a financial burden on the state, why does the Prime Minister think it is for her to suggest –  nay propose to “ensure” – that a life of leisure is not an option?  The mindset is disconcerting to say the least.

And then there was the international dimension.

That brings me to our final priority area- creating an international reputation we can be proud of.

In this uncertain world, where long accepted positions have been met with fresh challenge – our response lies in the approach that we have historically taken.  Speaking up for what we believe in, pitching in when our values are challenged and working tirelessly to draw in partners with shared views.

This Government’s view is that we can pursue this with more vigor – across the Pacific through the Pacific reset, in disarmament and in climate change, and in our defence of important institutions.

Ultimately though, my hope is that New Zealanders recognise themselves in the approach this Government takes.

I’d be ashamed if I recognised myself in the approach this government –  and its predecessors – take.  A government that is slow and reluctant to condemn Russia’s involvement in the Skripal poisoning, a government that appears to say nothing about the situation in Burma, a government that says not a word about the Saudi-led US-supported abuses in Yemen (trade deals to pursue I suppose).  And then there is the People’s Republic of China.

The Prime Minister apparently won’t say a word (certainly not openly –  and yet she talks about “transparent” government) about:

  • the aggressive and illegal militarisation of the South China Sea,
  • the growing military threat to Taiwan, a free and independent democracy,
  • about the Xinjiang concentration camps, the similarly extreme measures used against Falun Gong, or the growing repression of Christian churches in China,
  • about new PRC efforts to ensure that all Chinese corporates are treated, and operate, as agents of the state (is the Prime Minister going to do anything about Huawei for example?)
  • about the activities of the PRC in attempting to subvert democracy and neutralise criticism in a growing list of countries.

And what is she going to do about the Belt and Road Initiative, which the previous government –  in the specific form of Simon Bridges – signed onto last year, enthusing about a “fusion of civilisations”?

But then, why would we be surprised by this indifference.  Her own party president, presumably with her imprimatur, praises Xi Jinping and the regime.  Her predecessor, Phil Goff, had his mayoral campaign heavily funded by a large donation from donors in the PRC.   And she won’t even criticise the fact that a former PRC intelligence official, a keen supporter of the PRC, sits in our Parliament, refusing to answer any substantive questions about his position.

If those are her values, they certainly aren’t mine. I hope they aren’t those of most New Zealanders.

If her “response lies in the approach that we have historically taken” it must seem pretty unrecognisable to the people, many on her side of politics, who protested French nuclear tests, or against apartheid in South Africa (and associated rugby tours).   And would surely be unrecognisable to the ministers and Prime Ministers of that first Labour government, who were among those (internationally) most willing to take a stand against Italian and German aggression and repression in the 1930s.

 

The Secretary to the Treasury and productivity

Michael Reddell New Zealand economic performance, Productivity, Treasury, Uncategorized

As I noted in Saturday’s post about The Treasury, the Secretary to the Treasury –  he of the rushed citizenship presumably on the grounds of some exceptional services the previous government thought he might offer to New Zealand –  gave a speech last week on productivity.

One can feel a little sorry for senior public servants venturing into the public domain.  After all, there are limits as to what the head of a government department can really say, while still retaining the confidence of his/her minister (let alone that of the State Services Commissioner).  Political masters change and with those changes there are changes in what can’t really be said in public by their most senior advisers.  All of which is probably a good reason why heads of government departments shouldn’t really give any but the most anodyne (or perhaps obscurely technical) public addresses (in fact, most simply keep quiet in public – do a search for speeches by the Secretary of Justice or the chief executive of MBIE and you won’t find much, if anything).  After all, their primary job is to advise ministers, not to act as public lobbyists for their own policy preferences  Upon leaving office they are, of course, free to champion whatever causes they like.

But all that assumes some idealised fine public servants, who have laboured to generate judicious but penetrating insights.  Wise men and women whose words shed light in dark corners, enrich our understanding, and could –  if only we listened – help resolve some of these intractable challenges that face any modern government and society.

And then there are the Makhlouf speeches.  I written about several of them here (eg here, here, here and here).  They often read fluently enough at a first glance, before quickly turning to dust under any close examination.

Last week’s effort wasn’t that much better.  At least the Secretary to the Treasury was talking about productivity –  something I noted was strangely totally absent from The Treasury’s Briefing to the Incoming Minister last year – but he didn’t have a credible or robust story to tell.

The speech was delivered in Queenstown, so Makhlouf began with some local colour –  some good, some bad.  Among the less positive indicators was

The mean income for people in the Queenstown-Lakes District in 2017 was about $51,000 compared with the national mean of $59,000.  With low incomes but the highest average weekly rental cost in the country and an average house value of more than $1.1 million, the housing affordability problem in Queenstown is in the same league as Auckland.

To which the Secretary’s response was

In response, the Government’s Housing Infrastructure Fund is contributing $76 million in 10-year interest-free loans to support an increase in Queenstown’s housing supply.

So the Secretary to the Treasury now thinks interest-free loans by the government are sensible economic policy?    This isn’t supposed to be some local MP’s party-political broadcast, but the Secretary to the Treasury, guardian of the public purse.

The Secretary then touches on the failure that is New Zealand productivity growth, recognising that we’ve done poorly (while taking no responsibility as head of the leading economic advice agency).  But there is nothing new, and litttle specific.

There are various unsupported assertions  (emphasis added)

We know that our productivity levels stem from a number of factors including weak international connections, the small size of domestic markets, low investment in knowledge-based capital and weaknesses in the allocation of labour.

as if symptoms (in some cases arguable ones) are causes, and then a string of platitudes

It remains a fundamental truth that successful economies need, among other things, a stable and sustainable macroeconomic framework, sound monetary policy and a prudent fiscal policy. It remains true that a well-regulated financial system matters, that properly functioning markets matter, that price signals matter and that incentives matter. And, perhaps most important of all, it remains true that productivity matters.

No doubt largely true (I’d quibble about the “well-regulated” financial system, substituting “sound and stable) but New Zealand has had these features for decades, and we are just slowly drifting further behind.

The second half of the speech builds off this paragraph

The Treasury believes there are a number of factors that always matter for productivity: our human capital, the management of our resources, our international connections, the dynamism of our markets and the effectiveness of our rule-making. I want to say a few words about each of these. To improve our productivity we will have to be more effective in their utilisation and the interactions between them.

First, skills matter.  As if we didn’t know.

There seemed to be two areas of focus

In the Treasury’s view, to help achieve this there should be an emphasis on attainment of cognitive and non-cognitive foundational skills and social skills that are transferable and support life-long learning, as well as greater rates of progression to higher tertiary qualifications.

But I’m not sure what the first half of the sentence really means (Great Books programmes for all, to teach people to think and write?) and the second half looks like a bid for even more tertiary education, when there is little sign that the massive public and private spend on tertiary education in recent decades has been reflected in commensurate increases in productivity or earnings.  And none of this seems embedded in some comparative analysis about whether, and to what extent, New Zealand is doing worse than other advanced countries.

The other specific was slightly surprising

I should also add that we will need to look carefully at whether our social welfare system – which was initially set up to help people make transitions from one job to another in what was expected to be a similar trade – is optimal for the changing world ahead of us.

I presume he means the bits of the system around the unemployment benefit (or whatever it is now called) since most of the social welfare system wasn’t set up to support employment transitions at all (age pensions, widows’ pensions, DPB, sickness and invalid pensions etc), but as his current political masters have, as a matter of policy, been weakening the sanctions in the welfare system that were, supposedly, designed to assist such transitions, I’m left a bit puzzled as to what the Secretary means by this cryptic observation.  Perhaps he is toying with notions of a Universal Basic Income (but, charitably, I’ll assume not)?

Then there is a section on resources.  Some of it seems sensible enough, including around water use rights.  I’m right with him when he favours congestion charging.  But I’m left wondering whether he or The Treasury really believes that either is a significant part of the story explaining our severe relative underperformance.  I don’t.

And lets just say that I rather doubt the robustness of The Treasury’s analytical framework when the Secretary includes these sentences.

The Emissions Trading Scheme is a good example of a tool that can promote the more productive use of resources. Including agriculture within its scope would provide incentives for investment in R&D or innovation in on-farm practices and improve productivity.

An ETS can, no doubt, be a good mechanism for constraining emissions, and even for doing so in a way which might be economically efficient.  But it simply isn’t a way to improve New Zealand’s economywide relative productivity and/or incomes.  Impose an impost (perhaps quite justifiably) on firms in a particular industry, and those who survive will have to adapt their production techniques, perhaps even lifting their own firm productivity.  But it will also considerably shrink the industry in question, when it is an internationally tradable industry, when efficient alternative technologies don’t yet exist, and when other countries aren’t adopting the intervention The Treasury proposes.  All else equal, New Zealanders would be poorer rather than richer if this bit of the Secretary’s prescription was adopted –  the government’s own commissioned economic modelling, by NZIER says as much.

Then Makhlouf moves on to “international connections”, one of the ill-defined buzzwords in this debate.

Mostly it is just empty conventional slogans

Improving the flow of people, capital, trade and ideas will help improve productivity. Strong people-to-people relationships build confidence and understanding and promote learning. They help our businesses to identify capabilities that will help them improve their productivity and ultimately compete and succeed in both domestic and global markets.

All of which would have sounded good in 1984, and yet we greatly liberalised immigration, got rid of most tariff barriers, signed up to all manner of trade agreements, and……the productivity gaps are larger than they were, and actual trade (exports and imports as a share of GDP) is smaller than it was.  The Secretary is either unaware of these basic facts, or simply chooses to ignore them.

I’m closer to the Secrerary’s position when it comes to foreign investment –  where he has to step delicately around the recent legislative choices of his masters –  but there is no sign that he has thought hard about why foreign investment here isn’t more attractive or, indeed, why not many New Zealand based firms do much foreign investment themselves.

There is a section on “markets” that I’m going to skip over.  I don’t particularly disagree with much in it, but there also isn’t much specific there, and nothing to suggest The Treasury has thought seriously about the connection to sustained New Zealand relative productivity underperformance.  Much the same goes for the section on Rules.  I’m all in favour of robust policy evaluation –  it is a shame it hasn’t been applied to Treasury advice on productivity –  and I’m sure there are real opportunities there, but again is there any evidence that things on that score are worse here than in other countries?  Perhaps, but if so he doesn’t mention it.

(The dig at the massive taxpayer subsidy to the cattle industry was interesting, and welcome

Speaking of incentives, I find the situation around the eradication of mycoplasma bovis an interesting one. Responsibility for the genesis and subsequent spread of the mycoplasma bovis outbreak sits with the cattle industry. The question is, should the taxpayer compensate those affected, or should the industry pay for the consequences of the industry’s making? We might also ask what incentives are signalled to the industry by these different options.

And yet, how different is it anywhere else? )

There was an odd section on co-operatives, as if it was a matter for governments to decide on the appropriate sort of vehicles through which business activity is undertaken, and one on public sector productivity, which was really no more than a footnote.

And then there was tax reform.  Mostly, it was in praise of the New Zealand tax system, including the –  highly questionable –  claim, that

the New Zealand tax system is much less distortionary than the tax systems of other OECD countries

That might be true, more or less, if we look only across activities in the same time period, but is demonstrably not true once we take account of intertemporal dimensions.  Not consuming your income now and delaying until later (ie saving –  particularly retirement savings) is much more heavily penalised by the tax system here than in almost any other advanced economy.  That is a distortion The Treasury has been consistently reluctant to address or (it seems) even acknowledge.

There is also no recognition of the possible connections between low rates of foreign investment, and low rates of business investment (symptoms he touches on elsewhere) and business tax regime, where (for example) our company tax rate –  a key consideration for foreign investors –  is now towards the upper end of the OECD range.

And then it was interesting to see that in a speech on productivity, the specific policy proposal that the Secretary devotes most space to (in the entire speech, not just this section) was the call for a capital gains tax.

But there is one area where we stand out as an outlier and which I think needs further attention. The current approach to the treatment of capital income – in particular, capital gains – is highly inconsistent. Some gains are already taxed but others are not. The result is therefore something of a patchwork, the results of which can be unfair, regressive and distortionary. A more consistent approach to the taxation of capital gains would increase the fairness of the tax system, and reduce distortions by levelling the playing field between different types of investments.

For these reasons, the Treasury has long believed there is a real case to extend the taxation of capital income. I recognise that this would come with its own risks, and give rise to higher compliance and administration costs. But there are interventions available to address these risks. The extent to which the impacts are realised – whether positive or negative – will depend significantly on the design of policy.

Some readers will support a capital gains tax.  I don’t particularly, partly because a real-world one (ie the sort many other countries actually have) just introduces a whole new set of distortions, but does anyone seriously believe that a capital gains tax –  whatever the case on “fairness” grounds –  is going to make any material difference to economywide productivity?  And if there is such a case, not even the Secretary to the Treasury advances it.

The Secretary, of course, has to keep on side with his masters, so we read this

I should also add that there are many things being done to address points I’ve just raised. The government has been working on education and training, welfare reform, tax reform and trade relations, to name just a few of the actions happening.

If the Secretary to the Treasury really believes that the goverment’s policy agenda –  at least as revealed to the public –  is going to make a helpful difference in reversing the decades of relative productivity decline, he must surely be the only such person.    But I guess that if he is going to speak in public, he has to say such stuff.

In the final paragraph of the speech there is material for both a brickbat and a rare bouquet.

The brickbat?

And the ‘we’ means everyone: businesses, workers and government seizing the opportunities offered by being part of, and closer to, the fastest-growing region in the world.

Which is simply nonsense of course,   New Zealand is incredibly remote from Asia, or from any other major part of the world economy.     We might be a little less far from some of Asia than we are from Europe or much of North America, but we aren’t even a little close to the major bits of Asia, let alone “part of” it (whatever that means).  When the Seceretary was at home in London he was closer to Mumbai or Bangalore or Delhi than he is in Wellington.  He was actually a little closer to Seoul or Shanghai too.

It is a fundamentally unserious “analysis”.

But there is a bouquet.   Early in his speech, the Secretary was rather downplaying the failure of New Zealand policy, and policy advisers, in observing that labour productivity is “now about 20 per cent below the OECD average”  –  an average considerably lowered by the entry to the OECD of a large group of emerging countries (especially in eastern and central Europe), all of whom throughout modern New Zealand history were considerably poorer and less productive than New Zealand.

But the Secretary ends

Recent research indicates that if New Zealand’s productivity caught up with the better-performing countries in the OECD, our incomes would be 50-60% higher.

It doesn’t take much “research” –  a quick download of an OECD table does the job.   Here is an extract of that table I did recently for a paper I’ve been writing on these issues.

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

If anything, a 50-60 per cent lift is an understatement: it would take a two-thirds lift in New Zealand productivity to match the average of this group of high-productivity countries.   And such a lift could be expected to be mirrored in commensurately higher living standards,

But it is great to see the stark magnitude of our failure –  and “failure” is the only honest word for it – as the note the Secretary ends on, even if there isn’t much sign the institution he leads has any serious answers.

And, to be entirely fair, the Governor of the Reserve Bank’s own speech last week makes the Secretary’s effort look like a fine piece of public sector analysis and communications by comparison.  I will write about the Governor’s extraordinary speech tomorrow.

 

Stakeholders, The Treasury, and economic failure

Michael Reddell New Zealand economic performance, Treasury

The Treasury runs a survey of external stakeholders every couple of years, and usually publishes the results on their website quite quickly.  Last year, the results weren’t very good, so they delayed publishing them.  In fact, it was only a few days ago, in response to an OIA request from Eric Crampton at the New Zealand Initiative, that they finally released them.

As Eric notes the results aren’t all bad, but

Among those people interacting with Treasury about its core business of economics, macroeconomics, and fiscal projection, satisfaction dropped from 70% in 2015 to 47% in 2017. The proportion of stakeholders viewing Treasury staff as well-informed dropped significantly, as did overall confidence that staff do a good job, that Treasury challenges thinking on critical issues, and that Treasury can offer insights.

Eric has been concerned for some time about The Treasury’s de-emphasis on core economics and finance skills in Treasury’s recruitment.  For example, apparently

Only four of fifteen hired by Treasury in the 2019 graduate recruitment round had at least Honours-level training in economics and finance.

And then there are specific survey results like this (the blue bits are those respondents who think Treasury is improving)

Tsy stakeholder 1

and in the same vein

tsy stakeholder 2

Not exactly positive results for an agency whose website blares at people that

“The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy”

In some ways, I’m not sure what to make of the survey results.  After all, if one goes to the demographics at the back of the survey document, in the latest survey an even larger proportion than usual of the respondents are from elsewhere in the public sector itself (the blue bars are the latest survey).

tsy stakeholder 3

Consistent with that, an even larger proportion than usual of respondents live in Wellington (58 per cent, up from 50 per cent in the previous survey).

There are, I’m sure, still plenty of individual good people in the public sector (including in The Treasury), but if in the land of the blind the one-eyed man is king, what happens when the entire kingdom is blind.  The public sector more generally is greatly diminished in its policy capabilities –  the sorts of concern Victoria University’s Simon Chapple raised last week – and it isn’t clear to me why, for example, one would trust the Ministry for the Environment (of flakey analysis of plastic bags and emissions) or the Productivity Commission (this week’s Green Party cheerleading) to recognise a good, or bad, Treasury when they saw one.   Either that, or The Treasury is now so poorly performing that even the rest of the public sector recognises it –  and this survey was taken last year, before the “wellbeing Budget” silliness, championed by Treasury, got underway.

Much as I lament the reduction in the extent to which Treasury is hiring people with strong economics and finance skills, I think that is a symptom rather than the cause of the problem.  In fact, at the upper levels of the organisation there is less of a vacuum of economics skills now than there was a few years back.  At one stage, I could spot only one person with a solid economics record in their senior management group, but now there are at least three, all of whom I’ve worked with previously.

But there is still little useful analysis or advice on turning around decades of economic underperformance.  Instead, what economics skills are being deployed seem to be being used on exercises in distractions –  focusing on all manner of aspects of “wellbeing” (recent papers on Asian and Pacific New Zealander dimensions of “wellbeing” –  are we soon going to see ones on European New Zealanders’ wellbeing, or middle-aged people’s wellbeing? ), while avoiding the elephant in the room, decades of economic failure, for which The Treasury seems to have given up thinking hard about serious answers.

In putting this post together, I noticed that the Secretary to the Treasury had actually given a speech this week about productivity.  Glancing through it – I may come back to it in detail next week – it seems about as devoid of serious analysis and answers as most of the rest of Treasury’s work during the term of Makhlouf’s stewardship.   He notes that productivity matters  –  but blind Freddy knows that –  and there are lots of conventional rhetorical tropes, but he appears to have nothing to offer the government or citizens on what might make a real and sustained difference to New Zealand’s fortunes.  He can employ all the economists graduating from our universities and it won’t much any difference unless the Secretary –  or his replacement next year –  and his senior management are really interested in digging a lot deeper, and asking uncomfortable questions about why economic policy, with the best of intentions, has done so poorly for such a long time.  He is now, perhaps, somewhat constrained by the government’s commitment to the feel-good “wellbeing Budget”, but that is no excuse –  they were led down that track by a Treasury not doing its core job well, and with nothing substantive on offer for a new government had it been interested in seriously addressing the productivity growth failure.

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.The Treasury is New Zealand’s lead advisor to the Government on e

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.

Political ructions and a better economic performance

Michael Reddell Australia, New Zealand economic performance

Years ago we in New Zealand sometimes had the gruesome spectacle of governing party coups (and the like).  There was the failed (“Colonels’ coup”) attempt to oust Muldoon in 1980, the ructions that led to Lange’s departure in 1988 and then (unelected) Palmer’s a year later, and the ousting of Jim Bolger in late 1997, and then the break-up of the governing coalition a year later.  But you have to be a certain age to remember any, let alone all, of those.

In Australia, by contrast they’ve been two a penny in the last decade.   It isn’t exactly the rate at which Italian governments used to turn over until relatively recently, or French governments in the ill-fated Fourth Republic (22 prime ministerships in 12 years) but it is quite extraordinary by Anglo country standards.  Has there ever been a time previously –  in New Zealand, the UK, Ireland, Canada, Australia – when four people in a row who successfully led their party to an election victory –  limping home in Turnbull’s and Gillard’s cases –  didn’t complete the subsequent (three years) term?  Perhaps Turnbull will, in fact, limp on, but even if he does it is hard to see to what end.

A mere three years ago, when Turnbull ousted Abbott I wrote a post about the strange phenomenon then gripping the Australian centre-right: New Zealand envy.  Here was Turnbull speaking just after his coup.

“John Key has been able to achieve very significant economic reforms in New Zealand by doing just that, by taking on and explaining complex issues and then making the case for them. And I, that is certainly something that I believe we should do and Julie and I are very keen to do that again.”

As I noted, it was very hard to think of such “very significant economic reforms”.  Moreover, as I illustrated in that post, New Zealand seemed to have drifted a bit further behind Australia economically over the previous few years.

I noticed Julia Gillard yesterday engaging in a bit of New Zealand envy, suggesting (probably tongue in cheek) that Australians might well consider moving to New Zealand.  Only, surely, if they wanted to be colder as well as poorer.  Recall that Australian incomes are far higher than those in New Zealand, the main reason why for the last 40 years so many New Zealanders (net) have gone to Australia, and so few Australians have come to New Zealand.   Even just since 1991, a net 470.000 New Zealanders have gone to Australia, and only 49000 (net) other passport holders have come to New Zealand from Australia.

And, like it or not, political instability (including ructions in successive ruling parties) doesn’t seem to have been a material factor impairing economic performance.  That was so for France and Italy after the war, and if –  as I illustrated last week –  if Australia’s economic performance hasn’t been great, given its resource bounty, it has still been better than New Zealand’s.

Here I’m going to focus on the period since the end of 2007, for two reasons.  First, it was about the time the Rudd government took office which –  although it wasn’t apparent at the time –  was the beginning of the era of Australian political instability.  And, second, because it is just prior to the recession of 2008/09.  In New Zealand, Labour was still in office for most of 2008, but comparisons from troughs of recessions are rarely very meaningful (and if Australia didn’t have a recession in the sense of a couple of negative quarters of GDP, it still had a big fall in income measures –  as commodity prices fell –  and a material rise in the unemployment rate).

First, there is an important background feature that governments don’t have any material influence over; the terms of trade.

aus nz tot

Australia’s terms of trade have been much more volatile than those of New Zealand over the last decade or so, but taken over the whole period there hasn’t been that much difference.  Both countries have benefited from the movement in world prices to about the same extent (Australia had also had a substantial lift from about 2002, not mirrored in the New Zealand numbers).

Then there are the headline national accounts comparisons: real GDP per capita.

real gdp pc aus nz

On that measure, at the end of the period there has been no change in the relative position of the two economies  (although the gap between the two lines for much of the period is lost output that is never likely to be got back).  No sign of any catch-up, although also no falling further behind either.

The terms of trade can make a material difference to economic wellbeing, and terms of trade gains are not directly reflected in the real GDP numbers (although the indirect effects – any increases in consumption or investment etc in response –  are there).   But on this occasion we don’t need to worry too much about that point because, as the first chart illustrates, over the full period both countries’ terms of trade have risen by about the same amount.

But if real GDP per capita in the two countries has grown by about the same percentage in each country over the last decade, there has been a really big difference in the composition of that growth, and not one that is positive for New Zealand in the longer term.   I have shown the labour productivity chart previously, but here it is again anyway.

aus nz rgdp phw

Some years we match Australian productivity growth, and occasionally even exceed it, but over the period since the end of 2007, labour productivity growth in Australia has exceeded that in New Zealand by about 8 percentage points.  That is a lot, especially when New Zealand was starting from so far behind.

And here is a large component of the difference.  I’ve set hours worked per head of population equal to 100 in both countries in 2007q4, and shown how that measure has changed in each country since then.

hours worked per head

It looks a lot like that old story: New Zealand (in orange) more or less manages to “keep up” (not see real GDP per capita drop further behind) simply by working more hours.  That is no sustainable route to greater national prosperity, especially when hours worked per capita are already quite high by advanced country standards.

Of course, some will probably want to claim this as some sort of New Zealand success story –  “look at all those people we have in work etc etc”.   But working more hours isn’t some “good thing” for its own sake, and the unemployment rate is the best summary measure of whether there is slack in the labour market.   If Australia’s unemployment rate had increased materially more than New Zealand’s then one probably could tell a (cyclical) New Zealand success story.  But here are the two unemployment rates.

nz aus U rates

Most people reckon Australia’s NAIRU is higher than New Zealand’s (and that is a long-term negative for Australia, and the wellbeing of Australians), but that was so before the crisis too. In fact, the gap between New Zealand and Australian unemployment rates now (around 1 per cent) is exactly the same as the gap at the end of 2007.   Just as is the case in New Zealand, most Australian residents who actually want jobs have them.  So I don’t count the increase in hours worked here as any sort of mark of success.

None of this –  higher productivity growth in Australia in particular –  should be any great surprise.  If one looks across the OECD’s Going for Growth structural indicators (for example) the two countries score about as well, or poorly (on some indicators), as each other.  But Australia has seen come on stream huge new mineral production –  a new endowment they could tap –  and we’ve had nothing comparable (to what extent that is because similar resources aren’t there, or because policy choices prevent them being utilised is a topic for another day).  But with no other new opportunities apparent to match the new minerals –  and see the shrinkage in our foreign trade shares – our structural position relative to Australia has weakened further.

I’m not going to illustrate housing markets –  in any case mostly a state matter in Australia as I understand it –  but in both countries the best that can be said is that the outcomes, for ordinary people, have been lamentable, and disgraceful.

There is an argument sometimes mounted that the earthquakes were a significant drag that Australia didn’t have to face.  In terms of the existing stock of wealth, there is some truth in that (even recognising that much of the loss was reinsured abroad).  And the rebuild process –  which peaked several years ago now –  did take resources that couldn’t be used for other things.   But (a) on official estimates we had utilised capacity (output gap and unemployment gap) for most of the time, and (b) if there really were abundant international opportunities for firms here, bidding for capital and labour resources, we might have expected to see persistent upward pressure on our interest rates relative to those in the rest of the world, and associated inflation pressures.  We’ve not seen the inflation pressures at all (any more than in Australia) and the upward pressure on our interest rates relative to the rest of world occurred only while our Reserve Bank was messing up –  driving up the OCR before having to about-face and more than fully reverse themselves.

There isn’t a choice between chronic political infighting (of the Australian sort) and improved prosperity, but if there were I reckon I’d take the prosperity.  As it is, at least relative to New Zealand, Australia looks to have had both.  If there is an understandable tendency to rather look down on the political machinations, we should at least pause to ponder (again) our own long – and continuing – relative economic decline.

And now back to watching the gruesome spectacle across the Tasman.

 

The Minister of Finance champions an economic strategy

Michael Reddell New Zealand economic performance, Productivity, Uncategorized

Longstanding readers will know that I was pretty critical of the previous government for the utter absence of any sign of a set of economic policies that might have begun to reverse the decades of relative economic decline.  Worse, they and their acolytes too often seemed to make up stories about how well things were going when the data pretty clearly pointed in the opposite direction.   I’m not sure I’d be quite as harsh as Kerry McDonald and Don Brash, who recently gave the Key-English government an overall score of 0/10, but I’d be close, especially around productivity (and also around housing).

What has become increasingly disconcerting is that the new government –  now almost a third of the way through its term –  also has no credible ideas about reversing the decline and little interest either.  They seem increasingly reduced to making stuff up as well, and trotting out the same lines again and again without any sign of a really understanding the challenge, without any sign of a compelling analytical framework, and without any reason to think that the policies they talk of will make any material (helpful) difference.

I woke this morning to the news that the Minister of Finance had an op-ed in the Herald explaining how the government was going to restore our economic fortunes.   With suitably low expectations, I tracked it down.   Even with low expectations, I was struck by how weak it was, and left wondering why the Minister and his PR team thought the article was a good idea.

The Minister begins thus

The coalition Government is helping business modernise our economy to be fit for purpose for the 21st century.

Presumably he is aware that one sixth of the 21st century has already gone?  And that his party was in government for half that time?  But let that pass: as rhetoric it might be empty, but it is probably harmless.

This means being smarter in how we work, lifting the value of what we produce and export, supporting the environment, planning for future generations and giving everyone a fair shot at success. It means making sure that all hard-working Kiwis share in the rewards of economic growth.

All of which is hard to argue with, but isn’t exactly a) specific, or (b) new.  I keep a copy of National’s 1975 election manifesto by my desk, and flicking through it –  43 years on now – I think I spotted all those points (actually, in light of Eugenie Sage’s announcement on Sunday, I also found a pledge to “discourage all forms of environmental pollution and encourage the recycling of materials.  We will place a levy on difficult-to-dispose-of products’).   Labour’s 1972 manifesto, or its 1984 one, or its 1999 one probably had them all too.

Most New Zealanders know we cannot go on relying on a volatile mix of population growth, an overheated housing market buoyed by speculation, and exporting raw commodities as our growth drivers.

Quite a bit of that was in the 1975 manifesto too.    They are old lines, each trotted out by politicians of either main party for decades as the symptoms presented.     Not always even very accurately – does anyone actually think an “overheated housing market buoyed by speculation” added to national prosperity?   And not with much sense that the speaker had any sort of robust model of the New Zealand economy.  Let alone serious policies in response: for example, if this paragraph is to be believed, the current government is apparently uneasy about rapid population growth, but continues to run the same immigration policy as both its predecessor governments for the last 20 years.

And despite all this, a few sentences later the Minister of Finance tries to assert that

the fundamentals fuelling the economy are strong

Quite which “fundamentals” he has in mind – presumably not those in the previous quote (above) –  isn’t clear.  In fact, all he offers in support of his view is

Last week, the Reserve Bank said growth will still average 3 per cent over the next three years. And Mainfreight managing director Don Braid said recently: “I think the business environment is good right now.”

A government agency whose forecasts seem to command increasing scepticism among other forecasters, and one prominent business person.  Perhaps you are persuaded.  I’m not.

But finally we get to some of the things the government is promising.  First, what the Minister presents as a key component

Our plan to become more productive is built on getting our infrastructure sorted. This year, and for the next 10 years, we will invest more than $4 billion getting roads, rail and coastal shipping humming. We are sorting out Auckland’s congestion to save the $1b loss in productivity it causes each year.

Haven’t we heard these infrastructure stories (“we are taking steps to clear the backlog”) for 15 years now?  But even if they are doing everything well in this area, look at the number in the final sentence.   $1 billion –  assuming the estimate is robust –  is a great deal of money to you and me individually, but this is an economy with an annual GDP of $280 billion.  On the Minister’s own numbers, fixing congestion would lift GDP by about 0.36 per cent.  It would be very welcome, but it is tiny relative to the scale of the economic underperformance: with no productivity growth at all for the last three years, it might take 10 similar initiatives to just reverse the further slippage (relative to other countries) in the last few years.  But this was the only hard number in the entire article.

So what else does the Minister have to offer in his economic strategy?

We are investing to improve the skills of our workforce so that workers can adapt to changing workplaces. New programmes like our Mana in Mahi/Strength in Work apprenticeship scheme will get young people off the dole and support employers with the costs of giving them an apprenticeship to help them grow their business.

As I’ve noted numerous times previously, on OECD data New Zealand workers are among the most highly-skilled in the OECD.   And where the government is spending most heavily in the broad area of skills, it seems to be in providing fee-free tertiary education –  a policy that will (a) mostly redistribute money to people (and their families) who would already undertake tertiary education, and (b) to the limited extent it encourages further participation, presumably do so mostly among those for whom tertiary education offers lower expected returns.  It doesn’t have the feel of a productivity-enhancing policy, and the government has not (that I’ve seen) offered any numbers to the contrary.   As for getting “young people off the dole”, it is (of course) a worthy objective but haven’t we seen many such initiatives in the last 50 years?

Other policies supporting small and medium enterprises to manage costs include greater access to training programmes, e-invoicing and cutting compliance costs.

There may well be some useful stuff in that list.  But surely every government in modern times has talked of cutting compliance costs?  And, in practice, haven’t most ended up increasing them overall?  The previous government liked to boast of the 500 (?) items that comprised its Business Growth Agenda, but none of it (not even all of it) began to reverse decades of underperformance.  It was symptom of the drive for action without analysis.

New Zealand was built on innovation. The best path for us to get richer as a country is to invest in new opportunities and find better ways of doing things. The coalition Government is supporting business to lift research and development investment, with $1b set aside in the Budget for R&D tax incentives.

Hard to disagree with the second sentence, but without some compelling analysis suggesting that the government and its advisers understand why firms haven’t regarded it as worth their while to spend more heavily on R&D, it is difficult to be optimistic that more subsidies are the answer.   As I noted in an earlier post on the government’s proposals in this area

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). [both of which have far far higher levels of actual business R&D]

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.

But we are only stepping up to the big stuff

Our bold goal for New Zealand to have a net zero emissions economy by 2050 is essential as we face up to climate change. This goal creates economic opportunities. The business community is alongside us, with 60 of our biggest firms forming the Climate Leaders Coalition. The $100 million Green Investment Fund and the One Billion Trees initiative are key parts of this work.

Perhaps it is “essential”.   Perhaps it even creates “economic opportunities” –  big changes in regulation and relative prices always do, for some people.   But the government’s own consultative document, and modelling commissioned for them from NZIER, suggests that once one looks at the entire economy, a serious net-zero emissions target by 2050 will result in losses of real GDP per capita of 10 to 22 per cent (relative to the baseline in which no such target is adopted by New Zealand).   No democratic government is history has ever consulted on proposals that would lead to such a dramatic fall in expected future living standards and productivity.  And, as a reminder, on the government’s own numbers, the costs would fall wildly disproportionately on the poorest New Zealanders.   And, yes, there probably will be a lot more trees planted –  many of them probably on good, easy to access and harvest, land –  but just last week the government had to announce large subsidies to get even that programme underway.  Subsidies have never been the path to improved economywide economic prosperity.  Of course, few suppose the government proposes adopting a net-zero target for economic purposes, but they should at least stop misrepresenting the analysis on the economic effects from their own consultants.

We are also committed to ensuring no one is left behind in our economy. That’s why we have put in place the Families Package and lifted the minimum wage. It is why we have a $1b annual fund for regional infrastructure and economic development opportunities.

So the regions are so “stuffed” that only an annual subsidy scheme is going to help ensure they aren’t “left behind”?    That seems to be the implication of what the Minister of Finance is saying there.   And perhaps the Minister skipped over the likely tension between the laudable desire (see above) to get young people off the dole, and the really substantial increase in the minimum wage his government is putting in place (at a time when there is little or no economywide productivity growth)?

There are challenges in the world that are outside of New Zealand’s control. That is why we are running a surplus and being prudent with our debt levels. We are also diversifying our export markets to create new opportunities for our exporters.

There is no hint of what, specifically, the Minister has in mind with his final sentence.  But there is a certain sameness to it, going back decades and decades (nice quotes –  including about the potential role of forestry –  in that 1975 manifesto I mentioned earlier).  And, actually, taken over the decades there has been a huge amount of diversification of export markets –  no single country takes more than a quarter of New Zealand firms’ exports – but it hasn’t enabled New Zealand to lift the foreign trade share of its GDP much.  In fact, over the last 35 years that share has shrunk.

As Don Brash noted in his article the other day, the previous government had fine words too

Key spoke about the need to increase the export orientation of the economy, and set a target for exports of goods and services of 40 per cent of GDP, up from 30 per cent when he came to office. Today, exports are just 27 per cent of GDP

Just no policies to make a difference.

The Minister of Finance attempts to end his article on an upbeat note

We are committed to working with business, workers and communities to build a stronger, more productive economy that delivers the quality of life that all New Zealanders deserve.

A worthy objective indeed, but there is nothing in what he told his readers that is likely to address –  and begin to reverse –  the decades and decades of underperformance.  If we take seriously the government’s own numbers around the proposed emissions goal, the relative underperformance could be even worse under this government (were it to win nine years in office) than under its two predecessors.

I presume (hope) the Minister believes what he says, but until he starts to confront the implications of charts like this he is unlikely to make any progress (except perhaps by chance)

With a real exchange rate now averaging 25 per cent higher than in the previous 15 years, in a country where productivity has dropped further behind, it shouldn’t be any surprise at all that foreign trade shares are falling, that the economy is increasingly skewed towards the non-tradables sector (where competition is often, and often of necessity) quite limited, or that firms don’t see the likely payoff to investing heavily in R&D.   These are classic symptoms of a severely unbalanced economy.  Most often they arise from misguided government choices.  In our case, the biggest single misguided choice is the grim determination –  or perhaps enthusiastic dream – to keep on rapidly driving up our population in such an isolated location where the opportunities to take on the world from here seem few –  and all the fewer with such a severely out-of-line real exchange rate.

Really successful economies  –  ones with materially stronger productivity growth than their peers –  tend to have strong, and rising, real exchange rates.  But that strength is a consequence of success, an outcome of success, a way of spreading the gains.  Driving up the real exchange rate has never been a part of successful strategy to lift the relative productivity performance of the economy.  The reformers here in the 1980s recognised the importance of a sustained lower real exchange rate as part of a successful economic transition.  It is tragic that today’s political and economic leaders seem to have almost completely lost sight of that.

We have –  and will have –  a 21st century economy.  But the question is whether it will be a struggling upper middle economy, with hazy memories of glory days long gone, or one that once again matches many of the richer countries in the advanced world, something I’m pretty sure we could do, but for a small number of people.  If the government really believes they have the answer for how they can do it with a population that they  actively drive further up every year, they surely owe it to us to lay out their reasoning, their analysis, with much more specificity than the Minister of Finance has yet done.  That might include explaining why their clever wheezes and proposed reforms will make the difference their predecessors also claim to have aspired to for decades now.

Then again, perhaps tangible achievement no longer matters.  Under the government’s wellbeing approach perhaps warm feelings will substitute for world-leading incomes?

 

 

A British visitor championing free trade and open borders

Michael Reddell Immigration, New Zealand economic performance, New Zealand Initiative

Last Thursday British journalist and economist Philippe Legrain gave a lunchtime address at Victoria University (of Wellington).   Legrain was apparently in the country mainly to talk about some work he does on refugees and employment, but this particular event (hosted by the New Zealand Initiative) was on the topic “How our open world is under threat, and why it matters”.   He is a Blairite (ie active government)  globalist (a term I don’t mean in any pejorative sense) –  favouring, it appears, as much open trade, open investment, and open migration as possible, and then some.   For anyone sufficiently interested, the Initiative has now posted a video of Legrain’s talk.

I found it a strangely unsatisfying talk on a number of counts.   Perhaps it worked for those already converted to his cause, but even then there wasn’t anything new, or any fresh arguments or evidence.   And it didn’t greatly help that despite being an obvious fan of New Zealand (or at least of the fourth Labour government) he didn’t know much about it, despite speaking to a central Wellington audience probably largely made up of policy wonks and junkies.

In his younger days, Legrain had worked as an adviser to Mike Moore in his time as head of the WTO.  There, I presume, he had picked up stories about the sheer dreadfulness of New Zealand 35 years ago, and heard tales of the subsequent reforms.  We were, he claimed, in some respects the “birthplace of globalisation”, which still – reflecting on it days later –  seems a very odd claim.  The reformers of the 1980s mostly saw the reforms as being about bringing New Zealand policy back more into line with the mainstream  of advanced country practice (even if, with a small single chamber parliament, some reforms could be pushed through in more elegant and intellectually appealing ways than some other countries managed).   Lamenting (quite rightly) the insanity of the days when New Zealand assembled television sets (and cars) here from disassembled kits, Legrain (again, fairly enough) observed that New Zealand needed to do more international trade.

But then his tale became rather more detached from reality.  We were told that New Zealand had “flourished” since the early 1980s, we were “richer, freer, more diverse, better connected”, we’d found niches in world markets (he mentioned film-making, apparently oblivious to the subsidies so generous they’d have made an early 80s sheep farmer blanch), had better economic growth, and higher living standards.  All because we’d opened to the world.

All of which would have been a good story.  It was, after all, the way things were supposed to be.   But what of the evidence?

Foreign trade for example?  Successful small economies tend to do a great deal of it, and there is no doubt that the protective structures we wrapped around the economy for 40 years or so tended to reduce both exports and imports as a share of GDP.  But here is how the export and import shares of the New Zealand economy look, for the first four years of the 1980s and for the last four years.

foreign trade

I think I am pretty safe in saying that no one involved in the reform process 30 years ago envisaged our foreign trade shares shrinking.

And what of the “richer” claim?  Well, certainly real GDP per capita and real productivity measures are higher than they were, but that is true almost everywhere (Venezuela perhaps excepted): there are common global forces, technological innovation etc, at work.    What matters, in assessing the success of New Zealand policy, is how New Zealand has done relative to the rest of the world, and in particular to the other advanced economies we’d been falling behind for several decades.   Since 1983, New Zealand’s productivity growth (real GDP per hour worked) has been in bottom quartile of the 25 countries the OECD has complete data for.  If you prefer simple GDP per capita comparisons, then despite a big sustained gain in New Zealand’s terms of trade  –  almost totally beyond our control –  we’ve fallen further behind the G7 industralised countries on that score over the same period.

It isn’t even as if things went badly worse for a few years and are now coming right: trade shares are still trending down, we’ve had almost no productivity growth in recent years, and so on.   If New Zealand really was the “birthplace” of globalisation, advocates such as Legrain should be looking to bury the evidence –  or, more to the point, think more deeply about what aspects haven’t worked well, and whether some things matter here in ways they mightn’t matter elsewhere.

He was a bit hazy on his geography too.  In (fairly) noting that trade deals between a post-Brexit Britain and New Zealand won’t make much difference for either country, he launched into the old line about New Zealand’s future being in Asia, and our great good fortune in being on the doorstep of the fastest-growing part of the world.  It probably escaped his attention but Wellington and London are each about the same distance from Shanghai, and London is much closer to Delhi or Mumbai than Wellington is.

Legrain’s misconceptions about New Zealand continued to the present.  He is a big fan of immigration –  having written a whole book about it under the heading Immigrants: Your Country Needs Them – and lamented that New Zealand was slashing its immigration numbers by a third.   I presume this was an allusion to the Labour Party’s policies in last year’s campaign, which might (on their estimates) have reduced the net inflow by about a third for one year.  But perhaps he hadn’t caught up with the fact that the government seems to be following through on very little of that, and (more importantly) that they never promised, or even suggested, any reduction in the annual target for new permanent migrants.  That target remains probably the highest, per capita, anywhere in the world.  But never mind; don’t let troublesome details get in the way of a rhetorical flourish.

Perhaps my description of Legrain as a “globalist” was best-exemplified by one of the items on his list as to how the world is going to pot.  He was, he noted, disturbed that New Zealand had a party in government whose name was “New Zealand First”.    I’m no fan of the party itself –  any more than any of our parliamentary parties –  but precisely whose interests does he suggest that governments should govern in?    He didn’t elaborate, but pursuing first and foremost the interests of your own citizens (or even residents) seems pretty basic to me.  And not very contentious among most citizens –  here or abroad.    Quite often, of course, what is good for us is good them (and vice versa)  –  free trade in goods and services is generally the prime example –  but the case for any New Zealand government action should be that it advances the interests, attitudes and values of New Zealanders.  Sometimes those decisions will be altruistic in nature –  taking in refugees for example  – reflecting the values of New Zealanders.  But most of us want our governments to respond to, and promote, the best interests of New Zealanders.  Legrain clearly doesn’t.

Now, I should make clear that I am a strong supporter of free trade in goods and services.  I’ve long argued, for example, that we should remove all our remaining tariffs unilaterally.  Legrain hates Brexit, but the fact remains that the current difficulties are mostly arising because the EU does not believe in, or practice, that sort of free trade.    I’m also a supporter of a pretty open approach to foreign investment, at least when it doesn’t involve state actors (and even Legrain noted that, thus, China should be something of an exception).   Actually we also apparently share a view that trade agreements among advanced countries –  if we must have them at all –  are not a place for things like ISDS agreements or intellectual property rules.

Where we differ quite strongly –  and this would be particularly so on New Zealand, although the point generalises –  is probably around immigration.    Because in his paean to globalisation he draws no distinction between free movement of goods, of capital, and of people.    But voters appear to, and often for good reason.  Legrain, unlike many voters, doesn’t appear to have much time for concepts of nationhood, or cultures which bind societies together.   As the child of immigrants (French and Estonian) himself, perhaps that isn’t overly surprising, but most people have a different, more localised, background.

10 years or so ago, Legrain wrote a book in praise of immigration, an excerpt from which is available on the web. In it he declares himself scandalised that a politician can win an election on the promise that “we will decide, and no one else, who comes to this country” or that people would think it “normal and reasonable” to control migration flows.  He laments the fact that migration policy is largely decided on national grounds.

It was a book written just before the 2008/09 recession, when Blairite globalists of his sort were in the ascendant –  things felt rather good, especially if you were a successful middle class person in a major financial centre like London.   He captures some of that in this extract

the debate that is at the heart of this book: should we welcome or seek to prevent the unprecedented wave of international migration that is bringing ever greater numbers of people from poor countries to rich countries like Britain, Spain and the United States? Fear of foreigners versus the dynamism of multicultural London: a microcosm of the wider debate about immigration that is raging around the world.

As if these are the only choices; the only (or best) way of framing any debate.

He didn’t actually use the word “xenophobia” there, but that is what “fear of foreigners” is: apparently the only grounds why anyone might be sceptical of large scale permanent immigration.  But however things might have looked in 2007 –  when the UK and Spanish economies were indeed booming –  the subsequent decade isn’t necessarily such an advert for Legrain’s open border approach (the UK, for example, having had almost no productivity growth at all since then).

And although Legrain continues, as he did in his lecture the other day, to champion the view that countries need migrants, he offered very little in support of such a view.   The potential for relative prices to change –  whether to attract aged care workers or strawberry pickers, or substitute technology –  never seems to enter his calculus.  You might suppose his own country would be a prime illustration of his point: if relatively open immigration really offered the large gains to recipient countries’ own nationals as Legrain claims, a country that had very little immigration for a long time, and then opened up quite a lot should be a great case study.  That was the UK experience after 1997.  And yet, a couple of decades on, where can people like Legrain find the whole-economy evidence of how Britons have benefited to any great extent (and this in a country in a very favourable geographic location, with foreign trade heavily dominated by services and other intangibles)?  If there are macroeconomic gains, they look pretty hard to find even there (and even if one simply abstracts from the house price disaster –  as Legrain does with an wave of the hand, and a simple “well just build more houses”.  Would that it were politically that easy, there or here.)

And New Zealand, of course, should be able to be his other showcase economy.  After all, we’ve had high levels of target non-citizen immigration –  much higher per capita than the US and the UK –  for a long time now.  But, beyond the handwaving and the pretty trivial (Legrain mentioned an apparent choice of Cambodian restaurants in Wellington), even the defenders of the current policy approach find it difficult to demonstrate the economic benefits to natives, and often seem left falling back on a “well, it would have been even worse otherwise” type of assertion.   Legrain’s world doesn’t seem to have much place for geography or natural resources –  perhaps not that surprisingly when you come from London – and, as already noted, he seemed oblivious to the failure to grow the trade sector of the economy, or the continued heavy dependence on natural resources, not obviously enhanced by simply bringing in lots more people to one of the most remote places on earth.

I think the New Zealand arguments are, or should be, different from those in countries nearer the centre of affairs.  But even in those countries, the advocates of relatively large-scale migration –  and actually in all European countries the numbers (per capita) are modest by New Zealand, Australian or Canadian standards –  struggle to demonstrate that citizens of recipient countries are benefiting.  Perhaps some of the middle classes do so –  cheaper nannies or strawberry pickers (the sort of complementarity story Legrain advances) –  but as I’ve noted before, to the extent this argument has force, it explicitly involves a redistribution in which poorer or less skilled natives are further disadvantaged.  If we should expect our governments to govern first and foremost in the interests of their own people, I’d argue that it is also important that governments govern with a particular eye on the interests of the most vulnerable or disadvantaged of their own people.   And there is no real evidence of the sorts of economic gains people like Legrain, or international agencies like the IMF have touted.  Of the IMF modelling, as I wrote a while ago

…the model also implies that if 20 per cent of New Zealanders moved to Australia (oh, they already have) and an equivalent number of Australians moved to New Zealand, we could soon be as wealthy as Australia is now, simply by exchanging populations.   Believe that, as they say, and you’ll believe anything.

As it is, large-scale non-citizen migration has skewed the entire structure of the New Zealand economy against producing competitively with the rest of the world (the real exchange rate has got quite out of line with the productivity performance and opportunities here).   We are reduced to living with sustained underperformance (often while our leaders pretend otherwise), with subsidies for trees (lots of them), trains, and other provincial baubles to attempt to buy off simmering discontent in parts of the country that should be doing really well.

Globalists like Legrain seem reluctant to accept that large scale immigration is mostly oversold as an economic instrument (if there are gains to natives, even in the North Atlantic countries, they appear small) or that the angst that he worries about (in lamenting Trump, Brexit etc) about it is often cultural and national in nature at least as much as it is economic.  For people like him, the world is made up of autonomous individuals, in which people of a country are united by, if anything, only a common passport and the authority of a common government.   Most voters in most countries see it as more than that –  they put a value, not just sentimental but practical, on common cultures, shared history and experiences and so on.  My own arguments about New Zealand immigration don’t really go along those lines –  I’ve repeatedly made the point that all our migrants could be from Bournemouth, Brisbane, Buffalo or Banff and the economics still wouldn’t work out well –  but people who champion an open economy, and the real gains on offer from foreign trade, risk losing that battle if they don’t wake up to the fact that people movements are different in all sorts of ways, and support for free trade has no natural or inevitable implications for a view on appropriate immigration policy.

 

The Governor and the PM

Michael Reddell New Zealand economic performance

I hadn’t been going to write any more about last week’s Monetary Policy Statement and associated comments from the Bank’s senior management, but then I heard the Prime Minister on Radio New Zealand this morning invoking the Bank in support of her story that everything is just fine in the economy and that we are in the midst of some transition or rebalancing of the economy towards one that is more productive, less driven by immigration etc etc.

The Governor was interviewed on TVNZ’s Q&A programme, broadcast on Sunday night.  He was remarkably upbeat –  in line no doubt with the rather glib claim in his press conference last Thursday that he thought the New Zealand economy was in a “wonderful spot”.    While acknowledging that economic growth had slowed –  and how could he not with even rather lagged hard data like this

gdp pc to mar 18

he claimed there was only “a very low risk” of the economy “stalling”.    The Governor didn’t attempt to define “stalling” and nor did the interviewer push him to do so.   To me, “stalling” doesn’t sound disastrous –  not the economy going off a cliff into a deep recession –  but perhaps zero or negative per capita GDP growth might qualify?  If so, the data suggest we were already there months ago and the Governor’s own forecasts don’t suggest that June quarter was any better (forecast GDP growth of 0.5 per cent, at a time when population growth is about 0.4 to 0.5 per cent per quarter).

Another dimension of “stalling” might be something around productivity growth.  There has been none –  at all –  for the last three years.   And the Governor’s forecasts suggest productivity growth will have been negative in the most recent quarter (GDP growth of 0.5 per cent, and hours worked –  average of the two measures –  up 1.2 per cent).

Of course, the Reserve Bank predicts that things turn up from here.  But that is almost par for the course.  In their August MPS last year, they predicted real GDP growth of 3.8 per cent over the four quarters to June 2018.  Now  –  with three quarters of actuals in the bag –  they reckon that growth rate will have been more like 2.2 per cent.     Perhaps they’ll be right this time –  they now reckon 3.5 per cent for the three quarters to June 2019 – but the recent track record isn’t encouraging.

Actually, even the Bank’s chief economist seems a bit uneasy.  He was quoted in an interview the other day suggesting that really people just needed to think more positively

“Animal spirits in an economy matter,” McDermott said. “It is possible to talk yourself into a recession. You can generate self-fulfilling expectations, we recognize that. The more that happens, the more we’ll try and lean against that. The economic fundamentals say it should be okay, but there’s a psychological problem that sits there.”

without seeming very confident that it would happen.

“In the September quarter we’re expecting things to be more back to normal, the fiscal policy starting to get some traction at that point, the net exports to start picking up,” McDermott said. “If we don’t hit that one, it’s like oh, have we got it wrong? That will be a real test.”

But back to the Governor.  What can he cite in support of his story?  Not very much as it happens.  He listed a lower exchange rate, world growth that is “strong”, fiscal stimulus, private consumption, and the fact that in his view “business investment should be increasing”.   A little later in the interview he went on to elaborate his investment story, asserting that with capacity constraints, demand very strong, and the labour market very tight, it was a good time to invest.  What’s more, he suggested, interest rates were low and firms “should be investing”.

It always seems a bit rich of public servants to be trying to tell businesses, with their own money on the line, what they should and shouldn’t be doing, but even setting that to one side, there isn’t very much in the Governor’s claims.

For example, the Governor knows better than to suggest that interest rates are low for some random reason unrelated to the economy.  On his own reckoning neutral interest rates have come down quite a bit, and (again on his own reckoning) the actual OCR is far below the neutral OCR because there just isn’t enough aggregate demand, or inflationary pressure, to support higher interest rates.

What about world growth?  Well, we can all read the headlines around Turkey and other emerging markets, but even putting those to one side for now, the most recent IMF numbers suggest world growth this year and next much the same as that last year (the world backdrop to New Zealand’s mediocre performance), and the IMF observes

Global growth is projected to reach 3.9 percent in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO), but the expansion is becoming less even, and risks to the outlook are mounting.

There is a probably bit more fiscal stimulus in New Zealand than there was last year, or than there might have been under previous projections, but the differences of magnitude are pretty second order (government operating surplus forecasts are about half a percentage point of GDP lower than the forecasts the Reserve Bank published a year ago).

What of business investment?

bus investment aug 18

It has been pretty subdued right through this decade.  That has also been true in a number of other advanced economies, but three things most other countries didn’t have should have been supporting business investment here: the earthquakes (commercial buildings needed replacing/repairing too, and these are gross measures), a strong terms of trade –  another thing the Governor likes to quote –  and very rapid population growth. Oh, and we had huge opportunities to catch-up with the OECD productivity leaders.  But businesses –  looking to their own bottom lines –  just haven’t seen the opportunities here.   It isn’t clear why that is about to change to any great extent.  Sure, the labour market is a bit more in balance (on the Governor’s own NAIRU estimates, not “very tight”) but on the other hand population growth is projected to slow, the global environment doesn’t look overly propitious, and there is a great deal of uncertainty about various aspects of domestic policy, and some measures which are simply hostile to business investment.

Incidentally, the Governor’s business investment forecasts don’t back his rhetoric.  Here are projections (for growth in real business investment) from the latest MPS

bus investment projection aug 18

Growth in the next few years is projected to be less than in the last few years.

Both the Prime Minister and the Governor like to talk up the fall in the exchange rate, but again it is a case of nothing much there.  The Governor knows that, and having now been in office now for almost a year, the Prime Minister should too.    Despite headline talk of a sharp fall in the exchange rate, the TWI at its current level (71.6 this morning) is less than one standard deviation below the average level for this decade to date: a decade which, notwithstanding the high terms of trade, has seen the share of exports/imports in GDP shrinking.   The TWI was lower than the current rate only three years ago.  Morever, no small part of the fall in the TWI over the last year is likely to have been because markets have become less optimistic about the (relative) performance of the New Zealand economy (see, for example, those downward revisions in even the Bank’s own growth forecasts).  The Governor talks often of some other countries moving to tighten monetary policy (although really only the US has done so to a significant extent), but his own stance is no change is likely here for some considerable time, and that a cut is as likely as an increase (the McDermott comments above suggest he thinks a cut in perhaps more likely).   Were the Governor’s rhetorical upbeatness (“wonderful spot”) etc prove to be correct, it isn’t likely that the exchange rate would remain low for long.

And, unsurprisingly when dealing with such modest exchange rate moves, the Bank’s projections don’t really back up again sort of “reorientation towards exports” story.    In the latest set of projections, the Bank expects export volume growth over the next three years of around 10.5 per cent in total (about 3.5 per cent per annum).  Over the previous three years, actual export growth was about 10.3 per cent.

And, finally, what of the Governor’s story (or that of the Prime Minister) that we in the process of transitioning away from an economy that just has more people to one based on…well…something else.   Here are the Reserve Bank’s net migration projections from the latest MPS

net migr aug 18

and here are their projections from 12 months ago

net migr aug 17

About the only difference is the scale (the top chart is annual, the bottom one quarterly).

For better or worse, the current government’s immigration policy is all-but identical to that of the previous government.  There may well be a cyclical fall-off in the overall net inflows, but they won’t be because of any change in immigration policy, but because the Australian labour market is doing better.

Asked explicitly in his TVNZ interview the other day whether he bought the government’s line about the economy being in the midst of a transition, the Governor agreed. But it wasn’t a very compelling answer.   He noted that we were moving away from a post-recession recovery phase –  but the recession itself ended 9 years ago –  and that we were moving beyond the Christchurch repair and rebuild process – which peaked several years ago.   And, as I just noted, it isn’t as if immigration policy has changed to any material extent.

So it isn’t clear what this “transition” towards some better tomorrow, that the Prime Minister keeps talking of, really consists of.    The real exchange rate remains very high, years of high terms of trade haven’t translated into a business investment boom, and the economic strategy still seems to depend largely on just bringing in lots more people, mostly not overly skilled, every year, to a land where opportunities were (a) always constrained, and (b) are in the process of being made more constrained by conscious government policy (eg oil exploration ban, net-zero carbon targets).    And for all the talk of somehow moving away from housing investment towards “more productive” investment, a key element of government policy is Kiwibuild, which is supposed to build more houses.

As for improved productivity, the Reserve Bank’s forecasts certainly assume it.  But then they always do.    Three years ago, they thought total trend productivity growth for the three years to March 2018 would be 2.1 per cent; they now think actual trend growth over those years was -0.1 per cent.  Two years ago, they forecast trend productivity growth for the three years to March 2019 would be 2.0 per cent.  They now think it will have been 0.3 per cent.  And so on.  The Bank doesn’t have a strong focus on productivity, and tends to assume some sort of return towards longer-run averages.   We must hope they are right this time, but if so it is likely to be only by chance, rather than because the Governor and his staff have any particularly strong insight on what might improve the longer-term structural performance of the New Zealand economy.

If one tries to work out the mental model the Governor is using, it seems to come down to not much more than that house price inflation has slowed, and that that in itself will put the economy in a better place.  But there is little robust foundation for such a story –  welcome as the slower house price inflation is likely to be to potential entrants to the market.  After all, it isn’t as if the household sector in aggregate has been on some sort of wild spending spree in recent years, backed by the illusory “gains” to real wealth from rising house prices.

household C

It is hard to avoid thinking that both the Prime Minister and the Governor are engaged more in spin (trying to keep spirits up) than in hard-headed economic analysis.   We should expect better, especially from the Governor, but then he still has lots of turf battles to fight, and it pays to keep onside with the political masters who will make those decisions.

And to be clear, the deep-seated problems with this economy were already there – and increasingly apparent – under the previous government.  Nothing much the current government is doing (or talking of doing) suggests that any of them are likely to fixed under the present government, and the risk remains (seems quite high) that –  even cyclical ups and downs aside –  the real underperformance just continues to worsen.

10 years ago we had a new government that talked of catching up with Australia by 2025.  Perhaps they never quite believed it, perhaps it would have been a stretch to have actually done it by then. But I don’t recall anyone –  National or Labour – 10 years ago talking up the prospect of material further widening in the productivity gaps.  But that is what happened, and now we start out even further behind.

aus nz productivity

And yet the Governor can continue to tell us we are in a “wonderful spot”.  In what alternative universe?

 

Regional differences and economic underperformance

Michael Reddell Auckland, New Zealand economic performance

I noticed Bernard Hickey drawing attention to the chart in this tweet, observing “New Zealand third worst on the list”.

I think that (the Hickey take) is almost totally the wrong way to look at things.

Here is a chart of GDP per capita by regional council area (the only subnational data there is here) for New Zealand in the year to March 2015 (ie basically the same period as the OECD chart).  GVA per worker is a different measure than GDP per capita, but they are related and the difference doesn’t particularly matter for the point I wanted to make.

regional GDP

Average GDP per capita in Taranaki is a great deal higher than the national average.   But only 115000 people lived in Taranaki in 2014/15, about 2.5 per cent of the population.   GDP per capita in Taranaki is so high, relative to the rest of the country, because of the oil/gas production (much of the benefit of which accrues to the providers of capital to develop/maintain those fields, rather than to the citizens/workers of Taranaki).

By contrast, in most of the countries in the OECD chart, the city with the highest GVA per worker (or GDP per capita) is the biggest city.   That is true of Britain, France and Poland (to take countries at the left of the chart) and of (say) Finland, Denmark, and Austria (at the right of the chart).    I’ve shown a chart making a similar point in an earlier post.

gdp pc cross EU city margins

Particularly in the smaller countries, the largest city/region makes up a large share of the total national population, which (mechanically) reduces the difference between the richest/most productive city and the average for the country as a whole.  But even in the relatively larger countries like Britain and France, the biggest city accounts for a much much larger share of the workforce than is the situation in Taranaki.

So the issue here isn’t why there is such a big gap between Taranaki and the country as a whole (or even between Taranaki and the laggards) –  oil and gas and a small population will do that – but why Auckland (far and away our biggest city/region) does so badly, and what the implications of that might be.  (And, of course, why the whole country does so poorly.)

I’ve argued that it is because, given constraints of distance etc (at least as real as ever) the global income-earning opportunities in New Zealand are mostly about natural resources (and getting better at getting more from a fixed resource).  That makes it a very different economy to those of the UK or the Netherlands (although quite similar in that respect to Australia.)   And yet policymakers –  National and Labour, Greens and New Zealand First –  just insist on pulling more and more people into Auckland (primarily) every year, where there aren’t many really high-yielding opportunities.  The natural resources aren’t there, even if they were we aren’t getting any more of them, and the process of keeping on driving up the population (in a modest savings economy) continues to skew the real exchange rate, making it harder for the more outward-oriented regions to succeed.

Meanwhile policymakers –  and National and Labour, Greens and New Zealand First are all about equally guilty –  keep on trying to do patches and quick-fixes, subsidies and similar intervention, trying to steer people to the regions (we saw another example just this week with the post-study work rights policy) without really understanding (or deliberately avoiding the implication of realising) that the problem lies with the insane (not fit for New Zealand purpose) economically damaging immigration policy they insist on pursuing.  Revise that policy along the lines I’ve advocated and (a) the regions would probably make up a larger share of the population, and (b) both the regions and Auckland would probably be materially better off economically.

(None of which means I have any sympathy with the Prime Minister welcoming the latest fall in the exchange rate –  and despite the headlines it is a fairly modest fall (and was about this level three years ago).  It is beyond nonsensical to claim (emphasis added) that

The lower New Zealand dollar is good for exporters and a sign the economy is heading in a more productive direction, says Prime Minister Jacinda Ardern.

when the exchange is falling because markets increasingly think the economy isn’t doing that well, and the prospects for OCR cuts are rising.    The delusion that cyclical falls in the exchange rate are the start of something structural and permanent has afflicted politicians and central bankers for decades –  actually I recall Adrian Orr and I trying to persuade Don Brash to the contrary in 1999/2000.  You need to change structural fundamentals to change (helpfully) the structural level of the real exchange rate.  So far, this government –  like its predecessor –  has consciously chosen to avoid doing so.)

Disconnected thoughts on the economy

Michael Reddell New Zealand economic performance, Uncategorized

I wrote a post a month or so go about some comparisons between the drop in business confidence after the previous Labour government took office at the end of 1999 and the current fall.   At the end of that post, I concluded that the current situation should probably be more concerning than the earlier episode which, intense as it was at the time, blew over fairly quickly.  Perhaps the biggest difference, I suggested, was around the exchange rate:

The current level is about 30 per cent higher than it was in 2000, and it had fallen a long way to get to those 2000 levels (and not on heightened risk concerns etc).  Those falls created a credible prospect of new business investment in the tradables sectors.  There is nothing comparable now, and we’ve probably exhausted the limits of domestic demand (especially residential investment) as a support for headline GDP growth.

The Reserve Bank’s TWI measure of the exchange rate has averaged about 74.4 this decade to date, with a standard deviation of about 3.7.   Thus, although the current TWI is now a bit lower (72.6) than it was at the time of last year’s election, in both cases the numbers were within one standard deviation of the mean.  Those sorts of fluctuations are often little more than noise.   There is nothing yet visible in the current government’s plans and policies that is likely to reverse the longer-term structural overvaluation of the exchange rate.

Another comparison I’ve seen in recent days is with early 2008.  Some of the business confidence measures are back to the sort of levels we saw in early 2008.  I saw one prominent journalist opining that “current conditions are nothing like 2008”.   No doubt true if one has in mind the final (global crisis) quarter of 2008, but in April/May 2008 –  when business confidence had weakened to similar levels to the present –  New Zealand was already in recession (so the published data tell us) but few people realised it.   Here, for example, was the Reserve Bank in June 2008, still asserting that GDP growth that year would be positive (and they weren’t alone in that view).

Another comparison relevant to making sense of business surveys (and the like) is population growth.    For better or worse (mostly worse, on my telling), the current population growth rate is still much higher –  at least twice as high – than it was in either 2000 or 2008.

popn growth aug 18

When the population is growing that rapidly, business surveys don’t mean the same thing as they would if (say) the population was flat.    A typical business survey will ask whether things are rising, falling, or much the same, and report the net of those saying higher and those saying lower.  With 2 per cent population growth, one should expect net positive responses even if per capita activity was going backwards a bit.   At present, 2 per cent annual GDP growth would be a really bad outcome.

At her post-Cabinet press conference yesterday, the Prime Minister seemed to be flailing.  She preferred, we were told, to look at real data to judge how things were going. Here is one such chart from my earlier post

gdp pc to mar 18

How have things been going on real GDP per capita? Not well, and that included late in the term of the previous government.  Perhaps there is some element of businesses slowly realising just how mediocre our economic performance has been.  Perhaps the Prime Minister –  who during the election campaign was too ready to grant that things were going well economically –  should wake up to the underperformance.

What about other real indicators?

The Prime Minister talks of our “low” unemployment rate, and yet seem conveniently oblivous to the fact that among the G7 leading advanced economies, the UK (Brexit and all), the US (Trump and all), Germany, and Japan all have unemployment rates lower than New Zealand’s.  Ours is better than it was, but it is nothing much to be proud of –  roughly one in 20 New Zealanders keen to get a job, ready to start work next week, can’t find one (and that is narrowest definition of excess labour capacity).    Labour would once, rightly, have regarded that as pretty shameful.

There has been very little growth in productivity at all for five or six years now, and last week’s labour market data (showing quite reasonable employment/hours growth, even as no one expects stellar GDP growth this quarter) suggests the trend has continued.   And for all that we are suppposed to be impressed by yet another board, this time to consult on trade agreements (chaired by a competent former diplomat who now works for the propaganda arm of MFAT/NZTE, the New Zealand China Council), the reality remains one in which exports (and imports) as a share of GDP have been shrinking not rising.  That isn’t how things go in successful economies.

exports aug 18

Business investment has been weak too, especially once one takes account of the needs of a rapidly rising population.

The Prime Minister tell us that in a speech later this week the Minister of Finance will outline how the government expects things to be turned around, with our economy becoming more productive, more outward-oriented etc.  I will, I’m sure, read the speech with interest, but there is little sign that anyone near the top of government really has a sense of what might make a useful and substantial difference to the medium-term performance of the New Zealand economy.  You will, for example, never hear them talk of a real exchange rate out of line with the relative productivity performance of the New Zealand economy, or show any understanding of how that might come about.  In practice, they seem wedded to much the same failed economic strategy as the previous government –  notably the “big New Zealand” rapid inward migration strand –  made worse, at least in prospect, by things ranging from large increases in minimum wages to aggressive headlong pursuit of net-zero emissions targets with not a decent cost-benefit analysis in sight.   Whatever the merits of, say, capital gains taxes or R&D tax credits (and I’m not persuaded of either), they simply aren’t game-changing stuff.

One of the uncertainties about New Zealand economic data is what happens to the outflow of New Zealanders (mostly to Australia).   Because the wage differentials are so large, the normal state of affairs is for the outflow to be quite large.   Those income and productivity gaps haven’t closed in recent years –  if anything they’ve widened –  and as the Australian labour market has recovered, the outflow of New Zealanders has been picking up again.  If things remain more positive across the Tasman we can expect that trend (growing outflow) to continue.  If so, it might dampen activity here a bit further, offset by the increased sales New Zealand firms can make in a better-performing Australian economy.  Then again, business confidence measures in Australia don’t seem stellar at present either (the latest manufacturing PMI number is very similar to that in New Zealand).

I try to largely avoid economic forecasting.  Mostly, it is a mug’s game (the future, beyond perhaps a couple of quarters ahead, is basically unknowable), and it is a very rare forecaster who will prove right for the right reasons (and more than randomly so).  Perhaps the economy will weaken from here –  there is a lot running against it, and not much for it – but perhaps not.    But what really disconcerts me is that lack of much sign of serious thinking of how the next serious downturn –  which will happen, it is only a matter of when – should be handled.   That sort of complacency, especially in officialdom, was never really excusable even when things seemed a bit more buoyant – after all, we pay these people (so they tell us) to take a rather longer-term view.  But it is even more worrying now.   The official view that interest rates would soon move higher again has been falsified by experience, year after year.

As a reminder, the OCR now is 1.75 per cent.  That is lower than official interest rates were in every country in the world, bar Japan, going into the last recession (our own OCR was 8.25 per cent then).  The Reserve Bank tells us that they agree the OCR probably can’t usefully be cut below about -0.75 per cent, which just isn’t that far away –  even if people have been lulled by almost a decade in which the OCR has been in a range of 1.75 per cent to 3.5 per cent.

We’ve had a new Governor now for 4.5 months, and have not had a single substantive speech from him on monetary policy (his only on-the-record speech notes have been about climate change, for which he has no responsibility at all).  And, of course, we’ve heard nothing on these issues (and threats) from the Minister of Finance or the Secretary to the Treasury.    And while there is lots of talk of how much fiscal room New Zealand supposedly has, remember that revenues will drop away quite quickly in the next recession, the NZSF will be booking big losses, and the political process will almost inevitably balk at really large, repeated, fiscal stimulus.  For those doubting that, look at the political limits to fiscal stimulus in the last US recession, or the UK, or….well, almost anywhere.

But if our officials and politicians are letting us down, the contribution of the leading market economists doesn’t seem to be any better.  I’ve read the MPS previews (for this week’s RB announcement) of three of the four main banks, and not one seems to devote any space to the “what if” questions.   They all seem to believe that we’ll get through the current confidence dip in reasonable shape, and so the real question is when the OCR will be raised.  Perhaps they will be right about that.   Perhaps too they are mainly interested in foreshadowing what the Governor might say or do this week (and he and his institution have been pretty complacent for a long time).  But what if things don’t work out fine?  What if we do find ourselves in a recession in the next 12 or 18 months?  And how best should we think about the probabilities, and about the best possible policy responses, given the uncertainties and the very real limits of the OCR instrument much beyond the current level?  It doesn’t seem to be something our leading market economists even want to address.

(My own view isn’t an unconditional forecast, but a conditional statement: if there is an OCR change in the next 12 months it will be a cut.)

There is a serious need for some hard thinking, and sober realisation, about the disappointing performance of the New Zealand economy.  It would be a shame if the current downturn in business confidence (whatever specific mix of factors, political  and otherwise, is driving it) were just used for another round of patting people on the head, and reassuring them “don’t worry, after all, we are one of the best-performing economies in the world”.  In truth, we are anything but, and nothing either of our main political parties has to offer gives any reason to expect change for the better.

 

Consumption, investment and wages (inflation) in New Zealand

Michael Reddell New Zealand economic performance, Productivity, wages

After writing yesterday’s post, I noticed another somewhat-confused article on the “low wage” question.  The author of that piece seemed to want to look at after-tax wages, without then looking at the services those taxes might deliver.   Taxes are (much) higher in France or Denmark, but so is the range of government services.

One way of looking at the material standard of living question is to look at per capita consumption, again converted using PPP exchange rates.   Just looking at private consumption –  the things you and I purchase directly –  will also skew comparisons.    Take two hypothetical countries with the same real GDP per capita.  One has much lower taxes than the other, but health and education in that country are totally private responsibilities,  whereas in the higher tax country many of those services are delivered by the government, largely free to the user at the point of use.    Private consumption in the low-tax country will be much higher than in the high-tax country, but the overall actual consumption of goods and services may not be much different  (depending on incentive effects etc, a topic for another day).

For cross-country comparisons, the way to handle these differences is to use estimate of actual individual consumption: private consumption plus the bits of government consumption spending consumed directly by households (eg health and education).  Separate again is “collective consumption” –  things like defence spending, or the cost of central government policy advice, which have no direct or immediate consumption benefit to households.

Here is the data for the OECD countries for 2016, where the average across the whole of the OECD is 100.

AIC 2016

New Zealand does a little less badly on this measure than on the various income or productivity measures.  That is consistent with the fact that our savings rates tend to be lower than those in many other OECD countries and (relative to productivity measures) to high average working hours per capita.  On this measure in all the former communist countries now in the OECD the average person still consumes much less than the average New Zealander does.  Unlike many advanced economies, we have consistently run current account deficits.   Large current account surpluses –  Netherlands for example has surpluses of around 10 per cent of GDP –  open up the possibility of rather higher future consumption.

Having dug into the data this far, I decided to have a look at investment spending per capita.  I mostly focus on investment as a share of GDP, and have repeatedly highlighted here the OECD comparisons that show business investment as a share of GDP has been relatively low in New Zealand for decades, even though we’ve had relatively rapid population growth (and thus, all else equal, needed more investment just to maintain the existing capital stock per worker).   Here is the OECD data, for total gross fixed capital formation (“investment” in national accounts terms) and ex-housing (where there are a few gaps in the data).

investment ppp

You can probably ignore the numbers for Ireland (distorted by various international tax issues) and Luxembourg (lots of investment supports workers who commute from neighbouring countries).  But however you look at it, New Zealand shows up in the middle of the pack.  That mightn’t look too bad –  and, actually, was a bit higher than I expected to find – but when considering investment one always needs to take account of population growth rates.      Average investment spending per capita might be similar to that in France, Finland, or Germany, but over the most recent five years, the populations of those countries increased by around 2 per cent, while New Zealand’s population increased by 9 per cent.  Just to keep up, all else equal, we’d have needed much more investment spending (average per capita) than in those other countries.

Over the most recent five years, only two OECD countries had faster rates of population growth than New Zealand.  One was Luxembourg –  where, as far as we can tell, things look fine (lots of investment, lots of consumption, high wages, high productivity) –  and the other was Israel.  In Israel, average investment spending (total or ex-housing) was even lower than in New Zealand.  And as I highlighted in a post a few months ago, Israel’s productivity record has been strikingly poor.

But how has Israel done by comparison?  This chart just shows the ratio of real GDP per hour worked for New Zealand and Israel relative to that of the United States (as a representative high productivity OECD economy), starting from 1981 because that is when the Israel data starts.

israel nz comparison

We’ve done badly, and they’ve done even worse.

If productivity growth is the basis for sustained growth in material living standards –  and employee compensation –  how have wages been doing recently in New Zealand?

One way of looking at the question is to compare the growth in GDP per hour worked with the growth in wages.  If we look at nominal GDP per hour worked, we capture terms of trade effects (which can boost living standards without real productivity gains) and avoid the need to choose a deflator.  From the wages side, I still like to use the SNZ analytical unadjusted labour cost index series.  Perhaps there are serious flaws in it –  if so, SNZ should tell us – but, on paper, it looks like the best wage rates series we have.

Here is the resulting chart, with everything indexed to 1 in 1998q3, when the private sector LCI analytical unadjusted series begins.

NGDP and wages

When the series is rising, wages (as measured by this series) have risen faster than the average hourly value of what is produced in New Zealand.  A chart like this says nothing about the absolute level of wages (or indeed of GDP per hour worked), but it does suggests that over the last 15 years or so, wage rates in New Zealand have been rising faster than the value of what is produced in New Zealand.  That is broadly consistent with the rebound in the labour share of total GDP over that period.  There is some noise in the data, so not much should be made of any specific shorter-term comparisons, but even over the last five years –  when there has been so much public angst about wages – it looks as though wage inflation has outstripped hourly growth in nominal GDP (even amid a strong terms of trade).    All of which is consistent with my story of a persistently (and, so I argue, unsustainably) out-of-line real exchange rate, notably over the last 15 years or so.

New Zealand is a low wage, low productivty (advanced) country.  We don’t seem to do quite as badly when it comes to consumption, but investment remains quite low (relative to the needs of rapidly growing population) and wage earners have been seeing their earnings increase faster than the (pretty poor) growth in GDP per hour worked.  None of that is a good basis for optimism about future economic prospects, unless politicians and officials finally embrace an alternative approach, under which we might see faster (per capita) capital stock growth and stronger productivity growth, in turn laying the foundations for sustainably higher earnings (and higher consumption).  Most likely, a key component of any such approach would involve finally abandoning the “big(ger) New Zealand” mythology that has (mis)guided our leaders –  and misled our people – for decades.