I’ve been struck again over the last few days by the determination of our “elites” –  whether from the left-liberal end of the spectrum, or the (rather smaller) libertarian end – not to actually engage with the data on New Zealand’s experience of large scale immigration.

In their amusing tongue-in-cheek simplified retelling of English history, 1066 and all that, Sellars and Yeatman had most things classified as “a good thing” or “not a good thing”.

There seems to be a world view, straddling National, Labour and the Greens, and ACT as well, that in some sense “immigration is a ‘good thing'” and that is really all that needs to be said on the matter.  Much the same goes for the media.  The plebs just need to get with the programme –  perhaps having it explained to them again, slowly and clearly this time, that immigration is a “good thing”.   Any skepticism is too often deemed to reveal more about the character of the sceptic, than the merits of the economic case.

There is a respectable theoretical argument (at least within the narrow confines of economics) to be made for an open borders policy.  But the fact that no political party I’m aware of –  here or abroad –  actually argues for such a policy is probably quite telling.  Within the EU, there is a particularly respectable case for open borders –  the EU-enthusiasts see the countries of Europe as being on a transition to a political union.  Only brutal authoritarian countries –  think China – want to control migration of citizens within their own country.  But, as it happens, most Brits didn’t want to be part of an EU political union, preferring to govern themselves.  Polls suggest citizens in most other EU countries also don’t want such a union.

Even without political union, there can be a reasonable case for an easy flow of people across borders.  New Zealand and Australia are two different countries, and that doesn’t seem likely to change.  And yet there have never been direct immigration restrictions on people moving among the various colonies (pre 1901) or between the Commonwealth of Australia and New Zealand (since then).    In practical terms, the barriers to moving – especially from New Zealand to Australia –  have been getting higher in the last few decades, as Australian welfare provisions etc and citizenship have become progressively less readily available to New Zealanders.  On my reckoning, New Zealanders have gained considerably from this ability to move to Australia, especially as the large income and productivity gaps have opened up in the last 50 years.  Some New Zealanders relocated and took direct advantage of the higher incomes and better opportunities abroad.  The rest of us benefited –  at least in principle –  because the departures from this land of (apparently) diminished opportunities eased the pressure on living standards here.   Whether Australians have benefited from the easy flow of people across the Tasman is more arguable.  There are reasonable arguments (and, thus, models) for small gains, small losses, and not much difference at all.

Even within the context of a system of immigration controls, there can be a variety of motives for allowing immigration.  There is the humanitarian perspective that governs refugee policy.  We don’t take refugees because it is good for us, but because it is good for them –  people whose homelands have become impossibly difficult.  If the refugee intake ends up benefiting us economically that is a bonus, but it isn’t –  or shouldn’t be –  what drives us.   And, of course, we allow New Zealanders who marry abroad to bring their spouse home, and to become a New Zealander.  Again, there isn’t an economic motivation behind those provisions.    And some countries have real problems controlling their borders, and get stuck with people they never intended to allow in.

But we do control our borders and the bulk of New Zealand’s non-citizen immigration programme has an economic focus.  MBIE, and the government, have described the immigration programme as a “critical economic enabler” for New Zealand –  a phrase which sounds sillier, and emptier, each time I write it, but which is at least honest.  We take migrants   –  lots of them (three times the per capita inflow in the US) – on the hypothesis that doing so will help New Zealanders economically over the medium to long-term.  We certainly needed “critical economic enablers”, so poor has our economic performance been over the post World War Two decades.  And there are plausible hypotheses for how immigration can help, at least in the abstract.

But several decades on, surely the advocates, administrators, and cheer leaders of the programme should be able to point to economic gains for New Zealanders? It doesn’t seem an unreasonable request, given the economics-based case made for the programme.   The presence of a wider range of ethnic restaurants, or the success of the All Blacks, are all very interesting –  although, to be honest, I hadn’t seen too many new English restaurants (the UK is still the source of more new residents than any other country)  – but that isn’t the case that has been made.  New Zealanders are supposed to have been made better off economically by large scale immigration.  And if there is evidence of those gains, the champions of the programme are strangely reluctant to cite it.

And so we have Liam Dann in the Herald this morning

Australians have been panicking about immigrants and to some extent their loss has been our gain.

Migration-driven GDP growth through a period of commodity price downturn has been a timely break for our economy.

….

There are risks that high immigration disenfranchises those at the bottom of the social ladder.

We need to ensure we have social policy to protect people from losing out and turning their anger towards migrants. We need to remember the current surge is not driven just by the more highly visible arrivals of different culture and ethnicity.

It is being driven by New Zealand passport holders.

History tells us this wave will not last. And that when it passes it will have left this country richer and stronger.

It is a strange argument.  After all, had the economy of our largest trading partner been doing better, presumably that would have helped our economy not hurt it.  And if demand had been weak here –  as actually it has been –  we could have had lower interest rates and a lower exchange rate, the latter in particular would likely to have been helpful.

And then, apparently confusing the variability in the NZ citizen immigration with the baseline large inflow of non-citizen migrants, he worries about people at the bottom “losing out”.  But this appears to be only about perceptions because he knows that when the current immigration surge ends “it will have left this country richer and stronger”.    That is, certainly, the logic behind the immigration programme.  But where is the evidence?  There is no sign that the income or productivity gaps between New Zealand and Australia are closing.  They haven’t closed after the previous waves of immigration either.  It seems to be based on little more than a wish  – and that same underlying belief that somehow high immigration is a “good thing”.

The Prime Minister on Q&A yesterday was no better.   Corin Dann put to the Prime Minister the case recently made by leading businessman (and economist) Kerry McDonald that high rates of immigration to New Zealand are quite damaging.  The Prime Minister responded that he “didn’t think the evidence bears that out”.   But he offered no evidence at all.   He mentioned wage increases in New Zealand, but when the interviewer pointed out that there was still a very large gap to Australia, all the Prime Minister could offer was the defensive “well, we’ve trying to close that gap for a long time” (really?) and “most New Zealanders would say we are making some progress”.  If the numbers supported his case, presumably he’d have quoted them.  They just don’t.  As I illustrated on Saturday, the gaps to Australia have just continued to widen –  not by large amounts in any one years, but little by little.  There is still a net outflow of New Zealanders to Australia, and if it isn’t as large as it was that seems to be mostly because the Australian labour market is tougher than it was, rather than that New Zealand is doing well.  (Again, as I illustrated on Saturday, both New Zealand and Australia have relatively high unemployment rates at present, and the gap in our favour is no larger than it was on average over the last couple of decades).

The Prime Minister was challenged on political spin in the interview, and he acknowledged that both governments and oppositions do it.  It was certainly on display in the answers on immigration.  The Prime Minister likes strong immigration because it is a “vote of confidence in New Zealand”.  Which might sound good for the first five seconds, until one remembers that for New Zealanders not leaving it is mostly that Australia isn’t doing that well either right now, and for those coming from emerging countries, New Zealand is richer than, say, India, China or the Philippines.  None of that tells one anything about whether New Zealanders are gaining from the large scale programme.  Similarly, the PM fell back on the “house prices are a quality problem” type of argument –  suggesting that Auckland was no different than cities around the advanced world with population pressures.  Perhaps he could check out Atlanta and Houston some time.

In a serious interview, on a major issue, the Prime Minister was simply unable to offer any evidence –  or even good arguments –  for how New Zealanders were actually benefiting from the immigration programme that he continues to run (the same programme his predecessors ran).  It should be a clue that there just aren’t such benefits.  With all the resources of the state at his disposal, including state-funded research programmes for advocates of the current policy, and he can’t articulate the benefits for New Zealanders.  Something seems wrong.

This week’s Listener –  house journal for the left-liberal establishment – had a lot of advocacy material on (the perils and woes of) Brexit –  epitomized perhaps in the column of the Otago university professor who concluded

Enough is enough. The British Government must halt its plans to proceed with Brexit and organize a second legally binding referendum to determine Britain’s future relations with the EU.

Vote again –  and again –  until the people deliver the approved answer.

Political columnist Jane Clifton dealt with immigration issue.  She observed

But the bitterest Brexit realisation is the damage that ensues when governments fail to “sell” immigration.  That’s the most urgent lesson for our MPs to swat up, because anti-immigrant sentiment is seldom far from the surface here. A sizeable bloc of British voterdom simply does not believe that immigrants enrich their country and stoke economic growth and job opportunities. And who can blame them, since in many long-term depressed areas, there’s precious little evidence of it.

Here, immigrants are increasingly copping referred anxiety about Auckland’s growing pains. Rather than document and illustrate the benefits of migration, the Government simply refuses to engage on any other level than to call the anxious xenophobic or racist

I’m not sure that last phrase is correct.  So far, to the extent there has been a discussion, it has mostly been free of that sort of thing.  [UPDATE: That was before I saw these comments from the Minister of Immigration.]   But the more general point holds.  The government simply does not, and perhaps cannot, illustrate the benefits of the programme for New Zealanders as a whole.  The alternative approach seems to be instead to whistle to keep spirits up, and attempt to spin the problems into a story of some sort of success.  If there really is now a robust case to be made for current policy, it should be beneath our government to rely on such feeble assertions.   Clifton herself, of course, seems unable to recognise the possibility that there may not be such benefits to New Zealanders –  that it might just be an economic experiment that has failed.

These days, we have serious figures from the centre-right, such as Don Brash and Kerry McDonald, arguing that our immigration policy is flawed, and probably damaging to the fortunes of New Zealanders, but our media and political elites remain enthralled with an “immigration is a good thing” mentality, unwilling or unable to engage with the specifics of New Zealand’s circumstances, location, and general ongoing economic underperformance.

And it carries across to housing policy.  In the last week, there have been a couple of serious contributions to the debate as to “what should be done” about housing, from, Eric Crampton and Arthur Grimes (and here). I agree with a fair amount of Crampton’s piece, and disagree with a fair amount of Grimes’s –  which is notable for wanting to ride roughshod over the rights and interests or existing residents.  But where they unite –  from the left-liberal end of the spectrum and the libertarian end –  is in avoiding any serious discussion about the high baseline target rate of immigration.  Now, I’ve always argued that as a first best we should try to sort of our housing supply issues –  Atlanta and Houston have –  and ideally have a separate conversation about immigration (since my arguments about the damage immigration policy seems to be doing are not at all reliant on house price stories).  And if there were any evidence that rapid inward migration was in fact boosting the fortunes of New Zealanders as a whole that might be a particularly robust case.  But…..there is none, or certainly none that the advocates have advanced.  Instead, we know that Auckland’s GDP per capita has been falling relative to that in the rest of the country for 15 years (as far back as the data go) and the margin by which GDP per capita in Auckland exceeds that in the rest of the country is now very low by international standards.  And if there is no sign that rapid immigration-driven population growth is helping lift New Zealanders’ income, while the political difficulties of fixing housing supply remain large, the  case for cutting back the target inflow is strong.  Doing so would immediately ease house price pressures  –  and without riding roughshod over property rights through use of compulsory acquisition powers that the government and economists now seem to favour –  and at worst not harm our medium-term income prospects.

As a reminder, the OECD produced new data only last week suggesting that the skill levels of adults in New Zealand are among the very highest anywhere (and that, as in most advanced countries, the skill levels of the average immigrant are a bit lower than those of the native-born.  To the extent we’ve managed to grow our exports –  the foundation of long-term prosperity  –  it has mostly been in natural resource based industries (complemented by the heavily subsidized film industry and the subsidized export education industry) where numbers of people just don’t help much, if at all.  There is no compelling economic case –  and recall it is economics that supposedly drives our immigration policy –  for using policy to deliver lots more people to New Zealand.  The Prime Minister, the leader of the Opposition, the Greens leaders all seem to disagree, as do the media establishment, but none of them can offer a clear simple straightforward data-driven explanation for why.

I’m not sure if there is a risk of a serious social/political backlash of the sort senior lawyer and former ACT MP Stephen Franks talks of.  But I certainly hope there is an economic backlash before too long. The alternative is, most likely, that our long slow relative decline continues –  and any other decent policies we adopt, and the skills and capabilities that our people possess, are constantly battling up hill, in face of an ideology (no doubt mostly well-intentioned) convinced that “immigration is a ‘good thing’ for New Zealand”.  In economic terms it doesn’t seem to have been so for a long time.

In a Listener article a few weeks ago, my former colleague (and New Zealand historian) Matthew Wright was writing about the early pre-1769 history of New Zealand.  One line in particular caught my eye:

New Zealand was the last large habitable land mass on Earth reached by humanity. The long journey of our species from Africa’s Rift Valley into the wider world ended, it seems, on the Wairau Bar.

New Zealand has produced pretty good living standards, at such great distance, for a small number of people.  In the halcyon days  –  when our relative performance was at its best –  we had a quarter the population we now have.  New Zealanders saw something going wrong decades ago and started leaving in large numbers –  in outflows that, as a share of the population, are really large by past international standards –  and haven’t yet seen fit to reverse that judgements.  Distance isn’t dead, but our government’s immigration policy –  in thrall to the ideology –  seems to assume that wishing it so can make it so.  We need to be much more cautious, and evidence/experience driven, in continuing to pursue an economic case for an ever-larger population

Earlier this week the OECD released Skills Matter, a 160 page report on the results of a programme of surveys of adult skills in OECD (and a handful of other) countries.  As usual with OECD reports, it is full of fascinating charts.  Here is how they describe the programme:

In the wake of the technological revolution that began in the last decades of the 20th century, labour market demand for information-processing and other high-level cognitive and interpersonal skills is growing substantially. The Survey of Adult Skills, a product of the OECD Programme for the International Assessment of Adult Competencies (PIAAC), was designed to provide insights into the availability of some of these key skills in society and how they are used at work and at home. The first survey of its kind, it directly measures proficiency in several information-processing skills – namely literacy, numeracy and problem solving in technology-rich environments.

It is worth emphasizing that the survey involves attempting to directly assess skill levels, not formal qualifications.

The first such survey was done a few years ago, but this is the first round to include all OECD countries and, in particular, the first to include New Zealand.   They even provide a 20 page country note on New Zealand.

The bottom line for New Zealand?  The news is good.

Here is how our adults scored on literacy.

And numeracy

And on “Problem-solving in technology-rich environments”

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand.    Perhaps there is something very wrong with the way the survey is done, and it is badly mis-measuring things, but those aren’t usually the OECD’s vices.  For the time being, I think we can take it as reasonably solid data.  And the broad sweep of the cross-country results makes some sort of rough sense: typically the poorer countries are to the left of the charts (relatively less highly-skilled).

But if the skill levels of our adults are so high, on average, by international standards (and, as it happens,  we have quite a high rate of tertiary qualifications as well), it should perhaps raise questions again about the size and nature of our immigration programme.

After all, as I noted, the poorer and lower productivity countries are generally to the left of these charts. But New Zealand is one of the less well-performing OECD countries on that score.  Here is real GDP per hour worked for OECD countries in 2014.

And when the OECD lines up the skills scores against the productivity data one of the largest gaps (lagging productivity) is for New Zealand   The cross-country scatter plots don’t show a tight relationship by any means, but they do tend to suggest that the skills and talents of our people aren’t what holds New Zealand back.

And yet we aim to grant 45000 to 50000 new residence approvals each year (a scale three times the size of US and UK programmes, per capita), supposedly with a focus on skilled migrants.  What is the logic?  And where is the evidence that this is the right place to focus in tackling New Zealand’s long-term economic underperformance?  Reinforcing those doubts, we know that other data show the incremental returns to tertiary education –  a different thing from skills, but one hopes not wholly unrelated –  are also among the lowest in the OECD.

A reasonable person might instead look at the data and suspect that, for whatever reason, the economic opportunities in New Zealand just aren’t that good.  Perhaps that is about location and distance, and a seeming inability to break out of a dependence on (a fixed supply of) natural resources or to increase productivity in those natural resource sectors rapidly enough.  But whatever the underlying reason, the opportunities haven’t been found here –  our export share of GDP has been static for decades, per capita tradables sector production hasn’t changed for 15 years, and a huge number of New Zealanders have kept on leaving for better opportunities abroad (mostly in –  on these measures –  slightly less skilled Australia).

One might have severe doubts about the logic of using policy to actively pursue bringing in lots more people  –  it might be no more sensible here than it would be in Wales, or Scotland, or Nebraska, or Newfoundland, or Tasmania (who’ve been spared the depradations of Think Big bureaucrats and politicians with immigration as a lever).  Perhaps it would be a little less worrying if the new arrivals were typically very highly-skilled people –  but recall that the highly-skilled people we already have aren’t succeeding in generating high returns (high productivity) here now.

But in fact, our immigrants aren’t that highly-skilled at all.  At the frivolous end of the spectrum, we were giving a small number of Essential Skills work visas to shelf stackers and kitchen hands.  More seriously, among those gaining residence visas in the skilled migrant category, the top four occupations in the last year for which we have official data were

But it isn’t just a matter of occupational lists.

As it happens, the OECD report looks directly at the skills level of immigrant populations.  There are a few countries where immigrant population skill level match those of native born populations.  Perhaps that isn’t too surprising where most migrants come from countries with very similar cultural or linguistic backgrounds.  Among subsets of migrants, one could think of the flow among NZ/Australia/Ireland/UK, or between Chile and Argentina, or between the Czech Republic and Slovakia.  At the other extreme, some countries now face the challenges of very large skills gaps between migrants and native-born (most of the Nordic countries are now in this situation).  New Zealand doesn’t do too badly on this count – after all, we have control on who comes in, we have a notional skills focus, and the UK remains the largest single source of residence approvals. But there is a clear skills gap between immigrants and native-born New Zealanders.  Importing people doesn’t look as though it has been a means of raising skill levels here, or in most other countries.  In general that shouldn’t be surprising –  successful countries solve their own problems, and when they succeed they might share their bounty with newcomers. But a different sort of people is very rarely the answer to serious economic challenges.

On paper, there is some evidence suggesting that migrants to New Zealand have higher formal qualifications than the average New Zealander.  Nonetheless, as Julie Fry reported in her Treasury working paper a couple of years ago

Evidence suggests that immigrants are, on average, more qualified than the

New Zealand-born.  However, they also face language and adjustment barriers, at times including discrimination, which on average take 10-20 years to overcome.  In common with overseas patterns, recent New Zealand immigrants have poorer outcomes than others in the labour market, although those outcomes improve over time.   Immigrants who are from culturally similar source countries (such as Australia and the United Kingdom) adjust more quickly.   On average, migrants from Asia take longer to adjust, and migrants from the Pacific Islands never reach parity with the New Zealand-born, reflecting the fact that they enter mainly on family reunification grounds and non-skills-based quotas.

As everyone knows, our current population growth rate is extraordinarily high at present.  We only have an official census every five years or so, but SNZ produces quarterly population estimates using births and deaths data and information on migration flows.  Here is the estimated annual growth rate of New Zealand’s population for the full period since the official estimates begin in 1991.

By international standards, New Zealand’s population growth rate is highly variable.  Most of the short-term variability in the series is not about discretionary New Zealand policy choices.  The (large) target for the number of residence approvals has been the same for 15 years or more, and most of the shorter-term variability is a reflection of fluctuations in the net number of New Zealanders leaving –  in turn, much influenced by perceived prospects in Australia.  Incomes are higher there, but that isn’t much use if one can’t get and keep a job, given that most New Zealand migrants to Australia are not eligible for most elements of the Australian welfare safety net.  But New Zealand policy choices do make some difference –  for example, allowing foreign students to work while they are here, appears to have materially increased the number of those living here.

As I illustrated yesterday, productivity growth in New Zealand in recent years has been almost non-existent.  To restate the obvious, it isn’t some fundamental reassessment of New Zealand’s fortunes and productivity prospects that seems to be boosting our population.

But some of the other trends in the data are interesting too.  For example, here is a chart of per capita growth in real consumption.  I’ve shown two lines –  one for private consumption, and one for total consumption (ie including government consumption).

Private consumption growth per capita – the red line –  was averaging around 4 per cent annum over 2002 to 2005, the last huge population surge.  Those growth rates hadn’t been much lower in the mid 1990s.  In the last year, private consumption per capita has grown by only 0.6 per cent.   And remember that when the population is growing fast, one might reasonably expected recorded consumption to be growing even faster –  after all, those new people all need tables and chairs, washing machines, fridges and other consumer durables (that might actually be used over many years, but are measured as consumption at the point of purchase).

And for all the talk of “wealth effects” from rising house prices –  even though higher house prices only redistribute wealth, they don’t make New Zealanders as a whole better off –  there isn’t much sign of it here.  I’ve run previously the chart of (nominal) consumption as a share of GDP, which has been largely stable for 30 years, despite the repeated surges upwards in the level of house prices.

What about investment?  Over a long period of time, New Zealand has tended to devote a surprisingly small share of its GDP to investment, even though our population growth rate has been well above average, and larger populations need a larger stock of capital.   Among the IMF “advanced economies”, the median country devoted 23.6 per cent of GDP to investment over the period 1980 to 2015.  By contrast, New Zealand devoted 22.7 per cent of GDP to investment –  even though our population increased by around 50 per cent over that period, and the median advanced country’s population increased by around 30 per cent.     When the population surges, a country typically needs to see quite a lot more investment taking place if growth in per capita living standards is to keep pace with that in countries with slower growing populations.

Right at the moment, total investment as a share of GDP in New Zealand is a bit larger than in the typical advanced economy.  But in the last year, our population has increased by 2 per cent, and the median advanced economy has had population growth of around 0.5 per cent.  And our investment numbers are boosted by the Christchurch rebuild and repair process, replacing capacity destroyed by a natural disaster.     To maintain the ratios of capital to output typical of a modern successful economy (around 3:1), in the face of such large population growth differentials, one might have hoped to see investment as a share of GDP here perhaps  4 percentage points higher than in other advanced economies.  The actual margin is less than 2 percentage points, and even that margin includes the substantial rebuild spending.

What about our own national accounts data?

Here is non-housing investment spending as a share of GDP.  Even though population growth is now exceeding even that in the early 2000s, the non-housing investment share of GDP has recovered very little since the recession.  When we finally  get the annual capital stock data, we are likely to see very growth in the non-housing per capita capital stock at all.  When even entirely orthodox bodies such as the Productivity Commission produce modelling results in which immigration comes at a modest cost to the recipient country, while the sending country gains a little –  and that was the modelling (of the trans-Tasman flow) that the Australian and New Zealand Productivity Commissions jointly reported a couple of years ago –  the mechanism in the model is typically through a sluggish adjustment of the capital stock.    Ours just has not kept up with the rapid growth in our population.  Some of that is probably about government infrastructure, but mostly it will be because firms have not found sufficiently attractive investment opportunities.

And much of that must be about the unattractiveness/uneconomic nature of expanding exports rapidly from New Zealand. Here is the chart of exports to GDP.

I wouldn’t focus too much on the 2000 spike –  it was the outcome of a rare combination of events in which our commodity prices were quite high, and our exchange rate was very low –  the latter as much about events in the US as here.  But with very few exceptions, countries –  and especially small countries –  don’t prosper  –  and catch up with the best in the world – if their firms can’t find ways to profitably sell more, better, and more valuable stuff in competition with international producers.  Despite our booming (subsidized) export education sector, and our booming tourism sector, exports as a share of GDP last quarter were largely unchanged from a level first reached 25 years earlier.  Yes, there is some variability in the series, but the peaks haven’t been getting any higher for a long time now.  And this is the series that government policy is supposedly set to get to around 40 per cent…….

The outcomes shouldn’t really be very surprising.  The highest real interest rates in the OECD, a real exchange rate that has never sustainably adjusted to reflect our economic decline, and the perils of a location that make it difficult anyway to build internationally competitive firms relying on anything other than location-specific natural resources.  And yet our policymakers for some reason think that even more people is part of solving the problem.  If anything, it looks to have been make things worse –  making it harder to overcome our natural disadvantages.  Our per capita capital stock adjusts at best sluggishly, and the  per capita stock of natural capital just keeps falling (ie no more natural resources are being made).

Just to illustrate quite how unusual what is going on with our population is, in international terms, here is a chart I ran a few weeks ago showing annual population growth rates back to the 1950s, for New Zealand, the world (ie mostly the emerging/developing/poorer bits), and what the UN terms the “more developed regions”.

Population growth rates have been tailing off for decades, in advanced countries and in the world as whole.  But this year, New Zealand’s population growth rate (see very first chart) will be similar to those we saw in the 1950s.    Our productivity performance was already tailing off then, but at least we still had among the highest material living standards anywhere.  Quite why our politicians and their advisers think that such rapid population growth –  policy-induced population growth –  relative to the rest of the advanced world makes sense now, when our people are already so much poorer than most of those in the rest of the advanced world –  is one of the questions we really deserve a serious and considered answer to.

I was going to write about the Reserve Bank’s forthcoming Monetary Policy Statement, but discussion around immigration policy continues in the media, so I thought the topic might be worth one more post.

There are all sorts of different numbers tossed around when immigration and net migration are debated.  Different numbers are relevant for different purposes, and things aren’t greatly helped by the fact that MBIE does not release regular monthly numbers on visa approvals, and so the month to month discussion is often dominated by SNZ’s permanent and long-term (PLT) migration numbers.

The centerpiece of our medium-term immigration policy is the residence approvals target: 45000 to 50000 people per annum.  That target hasn’t been changed for a long time –  it was the previous government’s target and the current government’s.  It is a large number by international standards: as I noted yesterday, in per capita terms it is around three times the number of green cards the US issues each year.  Actual approvals fluctuate a little from year to year –  I showed the chart in yesterday’s post –  but not very much, and the rules and points are tweaked a bit over time to keep near the target.  Debates about the medium-term implications of immigration, whether for population or economic performance, should really concentrate on the appropriate target level (and composition) of residence approvals.   It is important to appreciate that these days the bulk of people getting a residence approval are already in New Zealand (around 70 per cent) –  having arrived on, for example, a student or (temporary) work visa.  In most cases, granting a residence approval changes the legal status of the individual, and does not involve a new border crossing.

But, as I noted, the PLT numbers dominate the headlines.  PLT numbers (which importantly include New Zealand citizens –  not a matter of immigration policy) are only estimates.  We know exactly how many people come across our border (in and out) each month, but the split between permanent and long-term on the one hand, and short-term on the other, relies entirely on the self-reported intentions of those filling in the arrivals and departure cards.  Plans change.  As I’ve highlighted previously, Statistics New Zealand themselves have done useful work showing that at times the reported PLT numbers have been quite substantially different from the actual numbers who have come or gone for more than 12 months (I discussed this work here .  It is a great shame that SNZ is not adequately funded to produce these refined estimates on a regular basis.

Using the PLT data, one can look at either total arrivals or the net flow.

Here is total (self-reported) PLT arrivals by visa type for the last decade or so (the period SNZ provides the data for).

Among other things, this chart illustrates my point above about residence visas.  About 43000 residence approvals were granted in the last year, but when people crossed the border to enter New Zealand only around 14000 arrived in the country already holding residence visas.  In granting residence approvals, policy now puts a high weight on people already having a job and being established in New Zealand, so most people who get residence approvals come first on student or work visas.  Even over this decade, one can see the rising share of these temporary visas.  Of course, not all these people stay permanently (or would want to).

And it is also worth highlighting the “not applicable” category, which captures New Zealand and Australian citizens who don’t need a visa to come and live here.  Over these 11 years, that number has fluctuated between 28000 and 36000 per annum –  not huge variation.  There is much more variation in the departures of New Zealand citizens: over the same period that total has fluctuated between 34000 and 62000 per annum.

Total PLT arrivals probably could probably be managed, more or less, with a policy target.  But it wouldn’t be very sensible to do so.  If our universities really do offer a great tertiary education there is no obvious reason why we’d want to put a policy cap on the numbers coming.  It is just another export industry.  The policy focus should be on the number, and composition, of the people (non New Zealanders) we allow to live here permanently.

What about net PLT flows?  They fluctuate enormously.  Here is the chart of annual flows since 1921.

Bear in mind (a) that the population is much bigger now than it was in earlier decades, and (b) that SNZ work suggesting that self-reported PLT flows don’t always accurate represent true permanent and long-term inflows. Importantly, using that analysis, the 2002/03 boom at peak was larger, as a share of population, than the current net inflow.

The average PLT inflow over the last 25 years has been just under 15000 –  a large outflow of New Zealand citizens, and a much larger inflow of non New Zealand citizens.  Perhaps this is the sort of number Winston Peters has in mind when talking about a target inflow of 7000 to 15000?

The net PLT flow cannot be managed by policy at least over short to medium-term horizons.  Cutting the residence approvals target, as I have proposed, would markedly reduced the average net inflow over time, but the cycles in net PLT would probably be about as large as ever –  just cycling around a lower mean.    Much of the variation is the change in the number of New Zealanders leaving (see above).  As I noted yesterday, when politicians talk of short-term caps or (as I heard Andrew Little call for this morning) “more agile” management of the system, it isn’t likely to be a recipe for more stability in PLT flows, but a risk of creating more (pro-cyclical) instability.   Forecasters of the net PLT flow 12 to 18 months ahead have a shocking track record.

Export education services have been flavour of the month in this debate for a while now, and I heard Steven Joyce on the radio this morning talking about how any serious cutback to immigration could put tens of thousands of jobs at risk in the export education sector.

To the extent that people are coming to study in New Zealand for the quality of educational products New Zealand firms and institutions have to offer, the Minister’s comments are almost entirely wrong.  People choose to study at Harvard or Stanford or Oxford because they are top-notch universities.

But that doesn’t look like the New Zealand story.  Here is a chart of student visas by the type of institution the student is studying at.  Unfortunately MBIE provides this data only back to 2005/06.

All the growth in recent years has been in the polytech and private training establishment sectors.  I’m sure there are some excellent institutions in that sector, offering really high quality educational services rivalling the best in the world.  But one might also suspect that the stories of people using study here mostly as a way of being better positioned to get a residence visa, financed by the recent change of policy allowing students and partners to undertake a lot of paid work while they are here, has more than an element of truth to it.  If so, it isn’t that our export education industry is hugely competitive and successful, it is just another case of “export incentives” at work.  We dish out cash to the film industry, and in this industry a leg up on the residence approvals process is the subsidy.  Subsidised export industries certainly get a benefit themselves, and perhaps that benefits the people working for them.  They rarely benefit New Zealand in the long haul.  We should have learned that lessons decades ago.

Again, if our education sector was attracting real top-notch people, and encouraging them to apply for residence, there might be a net gain for New Zealand (lifting the average quality of the people we decide to let stay).  But as Treasury has noted, we aren’t doing that well at attracting really highly-skilled people.  The recent Fry and Glass book reported that we are doing less well on that score than either Australia or Canada.  And, as a reminder, these were the top five occupations for the skilled migrants last year.

Those five occupations alone made up 25 per cent of the skilled migration approvals.  And skilled migrant approvals made up only around 60 per cent of the total residence approvals –  others, presumably, were not even reaching that standard.

If we were to look at changing our target level of residence approvals there are some significant questions to address.

One is how fast to make any change.  I’ve argued for pulling the target down from 45000 to 50000 per annum to 10000 to 15000 per annum, but haven’t taken a strong view on a transition path.  The housing market stresses, and long-term productivity underperformance, are sufficiently serious that there is probably a reasonably case for making the change in one step.  I wouldn’t favour a very gradual adjustment –  say, pulling the target down 5000 a year –  partly because it would be too hard to distinguish the effects of the policy change from all the other stuff going on. A middle ground might be to, say, halve the residence approvals target for five years, with a full review of the costs and benefits of that approach to be undertaken at the end of the period.

The other key question is what the composition of a lower approvals target might be.

Here is a chart showing the breakdown of residence approvals, using MBIE data.

It would be very easy to simply squeeze out skilled migrants (and their spouses and children).  Personally, I think that if we are serious about immigration serving an economic role we would need to think hard about some of the other categories.  For example, in the most recent year, around 10 per cent of residence approvals went to parents (presumably generally quite elderly) of people now living here, with a few hundred additional approvals for adult children and siblings.  There is little or no prospect of economic gain to New Zealand from this migration –  and no obvious humanitarian case either –  and a pretty good chance that (unlike most skilled migration) the net fiscal cost of these migrants will be quite substantial.

We also approved residence for 1500 people under two Pacific Island access categories.  These are presumably people who would not have qualified as skilled migrants.  Perhaps one can accommodate those sorts of numbers within a 45000 to 50000 annual target, for historical or foreign policy reasons.  Much harder questions would have to be asked if we brought our overall immigration numbers more into line with international practice.

I don’t have a particular view on appropriate refugee numbers.  If anything, at present, there is a push to increase that quota at present.  That is a legitimate choice for a country to make, but most probably to do so would further reduce the chances of the immigration programme making a meaningful economic contribution to New Zealanders.  Then again,  I read the evidence as suggesting that immigration mostly benefits the migrant, and that countries are fooling themselves if they treat large scale immigration as (as MBIE does) some sort of “economic lever” to lift medium term domestic economic performance.

There is a lot of talk about how disruptive a cut in the immigration (residence approvals) target could be. No doubt that is true for firms and sectors that are focused on meeting the needs of a rapidly rising population – be it builders or whatever (furniture and carpet shops). But a lot of that argument is built on the fallacy the immigration eases overall labour shortages. If anything, it exacerbates them: the short-term demand effects of immigration outweigh the supply effects.

Let’s say, as a deliberately extreme example, that my preferred policy – cutting the residence approvals target to 10000 to 15000 per annum was adopted tomorrow. What might we see over the following few years?

I noted yesterday that we would see house and urban land prices a lot lower, especially in places that have experienced considerable population pressure in recent years.

We’d also see a lot less building activity – across all types of construction. We’ve seen this before – when net migration was very low in the late 1970s and early 1980s the construction share of GDP was much lower than it had been before or since. Quite possibly, the PTE component of the export education industry would take a hit.

But all of these pressures would be recognised in the Reserve Bank’s economic forecasts, and monetary policy would adjust to take account of the weaker demand pressures. In fact, markets would be likely to adjust even before the Bank, so long as the policy change was well-signalled and treated as credible. Real interest rates would fall, and so would the real exchange rate. Our exchange rate stays high only because New Zealand pretty consistently offers a yield premium over those on offer in other currencies. We’d see a classic case of resource-switching. The cost of capital to firms developing businesses here would be lower, and the lower real exchange rate would be particularly attractive to firms looking at opening, or expanding, in the tradables sector. Recall, that per capita sector production has not increased for 15 years. This policy change would help reverse that shocking record. It seems likely that regions outside Auckland – in many cases, much more export focused, would get a particularly substantial boost.

What about the labour market? As I’ve already noted, high levels of immigration don’t ease overall labour market pressures, they exacerbate them in the short term. So, all else equal, a lower rate of residence approvals (not simply offset with more work visas approvals) would ease labour market pressures to some extent (offset, of course, by the easier monetary policy). Perhaps some sectors might still find it difficult to get the right people. That is what the price mechanism is supposed to deal with: higher wage rates for particular skills or sectors will, over time, draw people into those occupations. There is a price at which New Zealanders will be aged care workers or dairy hands. For firms in the non-tradables sectors, that higher price might be difficult to absorb. In a sense that is part of the point: reorienting the economy towards the tradables sectors puts pressure back on the non-tradables sectors. For firms in the tradables sectors, the lower exchange rate provides a margin that can accommodate any wage pressures that might develop in individual sectors. But I’d be surprised if those pressures were large or systematic: after all, many of the people who have been employed in sectors responding to the rapidly rising population have to find some other place to work.

Over five years, I’d expect we’d start to see material gains for New Zealanders as a whole. More affordable house prices, a larger share of the economy selling to the rest of the world, reduced pressure on unskilled New Zealanders, and so on. Successful economies typically succeed by finding ways of selling more and better stuff to the rest of the world. We’ve failed on that count (in per capita terms) for decades, but we can turn it around. I’d expect that five years after such a policy was adopted we’d have started to see our productivity performance markedly improving relative to those in other advanced countries. If global productivity performance was still weak, ours might still not be all that we’d like, but we’d almost certainly be doing less badly than our peers. The gaps between productivity levels in New Zealand and those abroad are so large that it will take decades to reverse them. But as we do, we might even find ourselves in the position the Irish finally found themselves in last decade – the huge diaspora finally started to come home.