The political cone of silence, with slurs

I’m furious.

Local democracy came to Island Bay this evening, and I –  an undecided voter – joined the crowd at the local candidates’ meeting, in the Rongotai electorate.   Candidates congratulated themselves on a well-fought campaign –  as the National Party’s candidate put it, not a cross word had been spoken between any of them through all the various meetings they’ve attended together.  Most of tonight’s meeting was like that.  Most.

Over the years, I’ve heard nothing to suggest that the National Party’s candidate was other than an honourable and decent man.  The Hon. Chris Finlayson is the 8th ranked Cabinet minister, minister responsible for the intelligence services, and Attorney-General.  He appoints our judges.  And as he described himself tonight, he is “the first law officer in the land”.  You’d imagine he’d be at the forefront of defending the integrity of our democratic system and its institutions.  But not based on his performance tonight.

The format of the meeting allowed questions from the floor.  Each question had to be addressed to one particular candidate, but each other candidate also had a chance to answer.  On almost all the questions, almost all the candidates took the opportunity to answer.  But not on one question.

I got up and asked a question of Chris Finlayson, explicitly noting that I was not asking him as a minister responsible for the intelligence services (where I would have expected a fob-off) but as a senior National Party figure.   My question ran roughly as follows:

“Mr Finlayson, last week one of the world’s leading newspapers, the Financial Times gave considerable prominence to a story about a New Zealand MP.  That MP had been a member of the Chinese communist party, and part of the Chinese intelligence services.  He never disclosed that past to the public when he stood for Parliament, and has never taken the opportunity to denounce the evils of the Chinese regime.  Can you comment on why it is appropriate for such a person to be in our Parliament?  And could you also comment on the new paper by Professor Anne-Marie Brady raising concerns about the extent of China’s attempts to exert political influence in New Zealand, and about the close ties of various senior National Party figures with Chinese interests?”

The question was greeted not with embarrassed silence, but with pretty vigorous applause from the floor.

Finlayson –  our Attorney-General, first law officer of the land, senior National Party minister  – got up, briefly.   His answer ran roughly as follows:

“That was a Newsroom article, timed to damage the man politically.  I’m not going to respond to any of the allegations that have been made about/against him. I think it is disgraceful that a whole class of people have been singled out for racial abuse.  As for Professor Brady, I don’t think she likes any foreigners at all.”

And as I shouted back “the claim was about one man”, our Attorney-General sat down.  He’d simply refused to answer, or even address, the question, at any level other than suggesting that anyone raising these quite serious issues was a racist or a xenophobe.  Starting, presumably, with the Asia editor of the Financial Times, Jamil Anderlini a Kuwaiti-born Italian-American New Zealander who has spent almost 20 years in China, including more than a decade reporting from Beijing (and now is based in Hong Kong) through to Professor Brady, with all the other serious media outlets and China-focused commentators overseas who have reported the concerns somewhere in-between?   It was preposterous.  Plus, one couldn’t help thinking that he knew he was on weak ground.  After all, if there was a clear, simple, authoritative and compelling explanation, presumably he’d have given it.

I hold the Attorney-General –  first law officer of the land –  to a considerably higher standard than other local candidates.   And the specific question was actually about a National Party MP, National Party selection choices, and the ties of National Party figures to Chinese business and political interests.

And, as I said, on every other question this evening, all the other candidates rushed to the microphone to have their say, on everything from apprentices to housing to guidance counsellors.  But not one of the others said a word on the Chinese government’s politicial influence seeking in New Zealand, or specifically on Jian Yang’s position.   Not the Labour candidate –  deputy mayor of Wellington, and sure to become a member of Parliament on Saturday.  Not the quite highly ranked, and apparently very able, Greens candidate.  Not the TOP candidate, or the Conservative candidate.  Strangely, not even the New Zealand First candidate, who was presumably unaware that his party had taken a stand, both on Yang, and on the more general issues Professor Brady has raised about the activities in New Zealand of the Chinese government.     Not a word, from a single one of them.  It left me wondering about what our democracy was coming to.

As it happens, there was someone in the room who knew Professor Brady; in fact, this woman had done her masters thesis under Brady’s guidance.    Noting that Finlayson had tried to claim that Professor Brady didn’t like any foreigners, she proceeded to point out that not only was Brady fluent in Mandarin, but that her husband was Chinese.    Cue to guffaws and applause, and a rather grudging apology by the Attorney-General for his specific claims about one of our leading experts on China and its international activities.

It was a shameful performance all round.  The candidates can congratulate themselves all they like on the bonhomie of the campaign, but when not one of them will even address a serious question, raising concerns themselves raised by serious international publications and respected experts –  and Brady’s paper has been linked to and report quite widely –  it rather gives the game away.   As Professor Brady put it in her paper, the fear of giving any offence to the government of the People’s Republic of China –  a brutal  and aggressive dictatorship –  seems to have been raised to a defining feature of New Zealand politics, and not just by National.

We saw it on display tonight, nowhere more so than in the despicable performance by our Attorney-General and first law officer.   How safe is our democracy, our values and freedoms, our laws, in such hands?

 

A near-complete cone of silence

I’d been planning to write a post today about the near-complete cone of silence that seems to have descended over elite New Zealand around the Jian Yang scandal.   That a former member of the Chinese intelligence service, former (perhaps present, if passive) member of the Chinese Communist Party, still in the very good graces of the Chinese authorities –  never, for example, having denounced the oppressive expansionist regime he served –  sits in New Zealand’s Parliament, nominated to again win a seat in Parliament on Saturday, is both astonishing –  at least to those like me who haven’t been close observers of such things –  and reprehensible.   That it seems not to bother anyone in, or close to, power (at least enough to do or say anything) is perhaps even more alarming.  There was a wave of stories in the first 24 hours after the Financial Times/Newsroom stories broke, and then……well, almost nothing.

There has been a lame excuse offered up:  Jane Bowron in the Dominion-Post noted that it was election time and there is lots else to write about.  And actually I more or less buy the line that there aren’t the journalistic resources to do much new digging right now.  But (a) it is election week, when we make choices about the sort of people and parties we want governing us, and (b) how hard can it be to ask, and keep on asking, political leaders of whatever stripe about this story, on the basis of what has already been published, and on what Yang has already acknowledged (years later)?     Report, again and again if necessary, that a key political figure refused to comment, but don’t simply ignore the story.

But then Newsroom this morning had another important story, putting the Yang story in the much wider context of the systematic efforts of the Chinese authorities (state and party), and drawing on a new paper by University of Canterbury politics professor, and expert on China and its ambitions, Anne-Marie Brady.   Her paper Magic Weapons: China’s political influence activities under Xi Jinping  was presented at a conference in the United States a few days ago: the conference title “The corrosion of democracy under China’s global influence”.    What makes it so compelling is that it is a detailed case study of China’s efforts in New Zealand.  It isn’t heavy analysis, but simply nugget after nugget that builds a deeply disquieting picture, and perhaps makes disturbing sense of the cone of silence around Jian Yang.   Every thinking New Zealand should read Brady’s paper.

As she notes early in the paper

New Zealand’s relationship with China is of interest, because the Chinese government regards New Zealand as an exemplar of how it would like its relations to be with other states. In 2013, China’s New Zealand ambassador described the two countries’ relationship as “a model to other Western countries”.

With, one hopes, a degree of hyperbole, she goes on to note (quoting an anonymous source)

And after Premier Li Keqiang visited New Zealand in 2017, a Chinese diplomat favourably compared New Zealand-China relations to the level of closeness China had with Albania in the early 1960s.

She goes on to outline the huge effort China puts in to attempting to manage the Chinese diaspora, whether in New Zealand or other countries.

After more than 30 years of this work, there are few overseas Chinese associations able to completely evade “guidance”—other than those affiliated with the religious group Falungong, Taiwan independence, pro-independence Tibetans and Uighurs, independent Chinese religious groups outside party-state controlled religions, and the democracy movement—and even these are subject to being infiltrated by informers and a target for united front work.

She records that these efforts have greatly intensified under Xi Jinping – as internal repression in China has as well.

Even more than his predecessors, Xi Jinping has led a massive expansion of efforts to shape foreign public opinion in order to influence the decision-making of foreign governments and societies

This includes seeking, largely successfully, to gain effective control over Chinese-language media (with exceptions as above) and encouraging political involvement of overseas Chinese.

This policy encourages overseas Chinese who are acceptable to the PRC government to become involved in politics in their host countries as candidates who, if elected, will be able to act to promote China’s interests abroad; and encourages China’s allies to build relations with non-Chinese pro-CCP government foreign political figures, to offer donations to foreign political parties, and to mobilize public opinion via Chinese language social media; so as to promote the PRC’s economic and political agenda abroad.42 Of course it is completely normal and to be encouraged that the ethnic Chinese communities in each country seek political representation; however this initiative is separate from that spontaneous and natural development.

And neutralising, or even coopting,  members of local media and academe.

Coopt foreign academics, entrepreneurs, and politicians to promote China’s perspective in the media and academia. Build up positive relations with susceptible individuals via shows of generous political hospitality in China. The explosion in numbers of all-expenses-paid quasi-scholarly and quasi-official conferences in China (and some which are held overseas) is a notable feature of the Xi era, on an unprecedented scale.

As she notes, New Zealand hasn’t been immune to that strand of influence.   In part we do it to ourselves –  there are, for example, the New Zealand government sponsored New Zealand China Council media awards.  Or sponsored trips for selected journalists to China, paid for the New Zealand China Friendship Society (didn’t the Soviets used to sponsor such bodies?).    It becomes harder to ask awkward questions when awards and sponsored travel opportunities might depend on not doing so.   I don’t suppose the New Zealand China Council  –  chaired by Don McKinnon, including the chief executive of the Ministry of Foreign Affairs and Trade – would be at all pleased by open scrutiny and debate about Jian Yang’s background, his ongoing relationship with the Chinese authorities, and his presence in our Parliament.   It might –  no doubt would –  upset China, not a country known for its tolerance of robust scrutiny and challenge.  These days, one has to wonder whether we still are, at least when it comes to China.

One of the most interesting bits of the paper is Brady’s discussion of why New Zealand interests China.    Here is some of her text

But New Zealand is of interest to China for a number of significant reasons. First of all, the New Zealand government is responsible for the defence and foreign affairs of three other territories in the South Pacific: the Cook Islands, Niue, and Tokelau—which potentially means four votes for China at international organisations. New Zealand is a claimant state in Antarctica and one of the closest access points there; China has a long-term strategic agenda in Antarctica that will require the cooperation of established Antarctic states such as New Zealand. New Zealand has cheap arable land and a sparse population and China is seeking to access foreign arable land to improve its food safety.  ……

New Zealand is also a member of the UKUSA intelligence agreement, the Five Power Defense Arrangement, and the unofficial ABCA grouping of militaries, as well as a NATO partner state. Breaking New Zealand out of these military groupings and away from its traditional partners, or at the very least, getting New Zealand to agree to stop spying on China for the Five Eyes, would be a major coup for China’s strategic goal of becoming a global great power. New Zealand’s ever closer economic, political, and military relationship with China, is seen by Beijing as an exemplar to Australia, the small island nations in the South Pacific, as well as more broadly, other Western states.

Not all of it is wholly compelling –  Tokelau isn’t independent, and the Cooks and Niue aren’t members of many international organisations. But the overall story makes a lot of sense.   If you wonder about the Antarctic bit, Brady is an expert on China’s Antarctic policies and aspirations.

On the other hand, you have to wonder quite why New Zealand governments should pay so much court to China.  Exports from New Zealand firms to China account directly for only about 5 per cent of our GDP (exports from Canadian firms to the US are, by contrast, 23 per cent of Canada’s GDP). And many of those exports –  notably dairy products and lamb –  are for relatively homogeneous products that would end up sold elsewhere, perhaps at lower prices, if somehow China restricted the ability of New Zealand firms to export.    There is, of course, the Chinese student market –  almost half the total student visas issued last year were to Chinese students –  but, as is now well-recognised the export education industry is a pretty troubled and distorted one, often as much about immigration aspirations as about the quality of the education product on offer.   So university vice-chancellors, and their colleagues in lesser institutions, might have a strong private interest in not upsetting China but it isn’t obvious that the citizenry of New Zealand share that interest, when it comes to defending our values and our system.

Brady argues that the emphasis on the China relationship appears to have greatly intensified under the current government

the current prominence afforded the China relationship has accelerated dramatically under the government that won the election in 2008, the New Zealand National Party. The National Party government (2008-), follows two main principles on China: 1. The “no surprises” policy,72 which appears to mean avoiding the New Zealand government or its officials or anyone affiliated with government activities saying or doing anything that might offend the PRC government; and 2. a long-standing emphasis on “getting the political relationship right”, which under this National government has come to mean developing extensive and intimate political links with CCP local and national leaders and their representatives and affiliated actors in New Zealand.

She provides a concrete example of this desperate desire not to offend.

This cautiousness to not rock the boat over New Zealand-China relations lay behind New Zealand’s reluctance to join the USA and Australia to criticize China’s military base building activities in the South China Sea. Following massive pressure from Australia and the US, New Zealand Prime Minister John Key (2008-2016) and other ministers made a series of muted remarks in 2015 and 2016, but it was far from what  New Zealand’s allies had hoped for, who have frequently accused the National government of being soft on China. The New Zealand National government’s reticence to speak out on this issue, despite the fact New Zealand has the fourth largest maritime territory in the world and relies on respect for international norms for the protection of its rights, is one telling example of the effectiveness of China’s soft power efforts in New Zealand in recent years.

Brady highlights concerns around a number of local Chinese politicians –  not just Yang, but also Labour’s Raymond Huo and former ACT MP (and until recently, deputy leader) Kenneth Wang.   You can read some of those concerns, and apparently serious questions, for yourself.

Through much of the rest of her article, Brady writes in some detail about the various webs of connection that help create an economic interest among many leading New Zealand figures in not rocking the boat.  As I’ve noted previously, the Chinese banks operating in New Zealand have four former senior National Party figures on their various boards (Jenny Shipley, Ruth Richardson, Don Brash and former minister Chirs Tremain).  Jenny Shipley served for a number of years on the main parent board of one of the Chinese banks (all effectively still controlled by the Party) and has a number of senior appointments on boards sponsored by the Chinese government.    Senior National figures are closely tied into companies exporting dairy products to China.

As Brady notes, for the time being the issue is mostly around National Party figures, but surely only because their party is currently in government.  It seems unlikely that the Chinese would not be similarly keen on aligning Labour figures should the government change here.   She repeats the story of the fundraising for Phil Goff’s mayoral campaign: at a charity auction in Auckland, a bidder from China paid $150000 for the Selected Works of Xi Jinping.

Brady concludes with a big picture

SELRES_424b093c-5aa4-4648-8116-11850f67a020New Zealand’s needs to face up to some of the political differences and challenges in the New Zealand-China relationship and to investigate the extent and impact of Chinese political influence activities on our democracy. This study is a preliminary one, highlighting representative concerns. New Zealand would be wise to follow Australia’s example and take seriously the issue of China’s big push to increase its political influence activities, whether it be through a Special Commission or a closeddoor investigation. It may be time to seek a re-adjustment in the relationship, one which ensures New Zealand’s interests are foremost. Like Australia, we may also need to pass new legislation which better reflects the heightened scale of foreign influence attempts in our times. New Zealand can find a way to better manage its economic and political relationship with China, and thereby, truly be an exemplar to other Western states in their relations with China.SELRES_424b093c-5aa4-4648-8116-11850f67a020

That rings true to me. But for now, my interest is in the specifics of the Yang case.   It is extraordinary that a man with such a past –  and no interest in denouncing the tyrants he worked for –  is in our Parliament, and seems likely to be in it again next week.   But more alarming is the total silence of our elites.

I can’t believe that most of them –  media, politicians, past politicians –  are really comfortable with the situation.  But if they put their personal economic interests ahead of the interests, and values, of the people of our nation, by just keeping quiet, it makes no difference that they might be a little uncomfortable.  They have, in effect, sold their own country, and its values, for a mess of potage.

The media, and the academic community (the ones who still want to get to China anyway) are just as culpable –  most of the media not even now doing their most basic job and asking the questions – but I jotted down a list of senior politicians –  past and present –  that we should be able to look to for leadership.

We could look to current and past National Party leaders.   But Key and English have led the charge to strengthen the “vassal” relationship with the Chinese (and Brady reports that Key is now working for Comcast on its projects in China), and were the National Party leaders when Yang was recruited.    What about their predecessors?   Well, Brash chairs a Chinese bank , and Shipley has multiple Chinese directorships etc.  It would be costly to speak out.  But what about Jim Bolger –  certainly willing to speak out recently about “neoliberalism”, but what about submission to China’s interests?

What about former National ministers of finance.   Well, there is English, and Ruth Richardson (various Chinese directorships) –  and Bill Birch, but he is now quite elderly.   Or former Foreign Ministers?   Well, McCully should probably be asked about Saudi sheep deals…..and led the strategy to cosy up to China.  And Don McKinnon, but then he chairs the government’s China Council.    Any of these people could speak up –  sometimes principles cost –  but, sad as it is, perhaps it is no surprise they don’t.

And normally, a week out from an election you might expect strident comment from the Opposition.  But this time? Nothing?    And if it would disrupt the “relentlessly positive” narrative, what about former eminent Labour figures –  Cullen, Moore, Palmer, Goff, Clark?  Not a word though.

What of ACT’s leader?  Is this the sort of standard he accepts in the party he depends on?  What of the leaders of the Greens or the Maori Party?   Not a word from any of them.

The pattern of silence should leave us wondering just whose interests our leaders have been serving.     There is something to be said for politicians leaving office late in life and settling quietly into a dignified retirement.   It would be quite deeply disturbing if any of them are shaping their in-office approach to (eg) China with a view to their after-office economic opportunities –  consciously or otherwise.   A submssive approach to the Chinese government and party isn’t in our interests –  even if it might be in the personal interests of some present and former politicians and some business owners.

There are other people the media could –  if they were so minded –  seek comment from.  Mai Chen, for example, chairs something called New Zealand Asian Leaders.  Surely Jian Yang-  with such a disturbing past, so much hidden from the public, and a quite disturbing alignement with Xi Jinping’s Beijing now –  can’t be the sort of Antipodean Asian leadership they envisaged?

We aren’t, of course, a 1960s Albania to China.    But what the Yang episode highlights, as one example of the more general pattern Brady draws our attention to, is that we seem to have gone some considerable way down a slippery slope and need to pull back.  Some hard questions from the media, and some honest answers from politicians, would be a start.  And perhaps some courage on behalf of at least one of those decent people who has got too close to Chinese interests –  initially with the best will in the world – to say “enough”?

Before we (well, the rest of us) vote perhaps?

UPDATE (Wednesday pm).  This Herald article is at least in start in terms of the mainstream media addressing the issues and approaching some of the people concerned.

Employment growth: simply not that spectacular

There was another post on Kiwiblog this morning, attempting to cast New Zealand’s recent economic performance in a particularly good light.   Here was the bit that really caught my eye:

this is not just exceptional job growth locally, but internationally. Here’s the percentage increase in in major OECD countries in 2016:

  1. NZ 5.7%
  2. Germany 2.9%
  3. Ireland 2.9%
  4. US 1.8%
  5. OECD 1.6%
  6. Australia 1.6%
  7. Sweden 1.5%
  8. UK 1.4%
  9. Canada 0.7%
  10. France 0.6%
  11. Finland 0.5%

Now there are at least three problems with this comparison:

  • it makes no allowance for the much more rapid rate of population growth in New Zealand than in almost any other OECD country,
  • it cherry-picks the OECD countries it compares us with (I’m not sure when Ireland and Finland became “major” OECD countries), and
  • it ignores the break in the HLFS hours worked and employment series in 2016q2.  In fairness, the author might not have been aware of the break, but serious economic analysts (including the Treasury) are.

I illustrated the break in the series in a post several months ago.

What about the rate of job growth.  Fortunately, we have two measures: the (currently hard-to-read) HLFS household survey measure of numbers of people employed, and the QES (partial) survey of employers asking how many jobs are filled.   Unsurprisingly, the trend in the two series are usually pretty similar, even if there is a fair bit of quarter to quarter volatility.

employment

Since we know there are problems in the HLFS, and the QES doesn’t look to be doing something odd, perhaps we are safest in assuming that the number of jobs has been growing at an annual rate of around 2.5 to 3 per cent.   That isn’t bad at all. But SNZ also estimates that the working age population has been growing at around 2.7 per cent per annum.  No wonder the unemployment rate is only inching down.

Now that we have 2017q2 data, so a full year on the new HLFS questions, the annual percentage growth rates of the two employment series have indeed converged again.

hlfs and qes E

In other words, one can’t take as meaningful any annual percentage growth in the HLFS employment (or hours) numbers for calendar 2016.

A better way to deal with all three issues is to look at the percentage point change in the employment to population ratio for the whole OECD group.   The most recent period for which we have full data for all countries is 2017q1.  For New Zealand, using growth in employment over the year to 2017q1 would still be distorted by the break in the series, so for New Zealand only I’ve shown the change in the employment to population ratio from 2016q2 to 2017q2.

E to popn last year

And on this – much more useful – comparison, New Zealand ends up as a middling performer, the median country.   There is no stellar New Zealand “job creating machine”, just a huge increase in working age population.     Job growth isn’t to be gainsaid, but it is productivity growth (or the absence of it) that is the key determinant of gains in medium-term living standards.  And did I mention that there had been no productivity growth, at all, for the last five years now?

(To be clear, I would not put much –  if any –  weight on a single year comparison.  After all, all labour force surveys have some sampling error.  But if people want to make sense of employment growth, in international comparison, over just the most recent year, this is really the only sensible way to do it.  As it happens, over that year, our change in the employment to population ratio was the same as that for the OECD as a whole.  It was just a bit less than that for the EU as a whole and for the euro-area –  who, of course, generally had a deeper unemployment hole to climb out of.)

Interest rates: all the fuss for 1 basis point?

I watched the TVNZ Q&A interview with the Prime Minister yesterday.  Apparently, the National Party has a widely-distributed brochure suggesting that interest rates are set to rise if the Labour Party takes office after the election.   I haven’t seen the brochure, but the Prime Minister seemed determined to defend the claim, even as he had to concede that –  of course –  he couldn’t guarantee that interest rates would not rise over the next three years if his own party was re-elected.     When pushed, his claim seemed to reduce to the proposition that interest rates were more likely to rise, and perhaps might rise more, if Labour was in office.

I know that a lot of people now have a lot of debt, and most New Zealand loans reprice pretty frequently (floating rate or short-term fix).  But no serious person will argue that interest rates are quite low at present because the economy is doing well.  Market interest rates around the advanced world (and central bank policy rates) have been very low for some years now, despite all the public and private debt, because demand (real economic demand) at any given interest rate isn’t what it was.  Population growth has slowed in most countries (not New Zealand of course), productivity growth has slowed, and there just don’t seem to be the number of profitable investment opportunities there were. Globally, higher interest rates would, most likely, result from some improvement in the medium-term health of the economy.      That would be true here as well  (with the caveat that ideally one day some government would make the sorts of policy changes that would allow the persistent gap between New Zealand and “world” interest rates to close.)

But the Prime Minister’s claims about interest rates were also odd because:

  • actual retail interest rates (those ordinary people pay and receive) have been rising over the last year, and
  • both the Reserve Bank and The Treasury have official published projections showing policy interest rates rising over the next three years.

The increases in actual interest rates over the last year havn’t been large (about 25 basis points for floating rates, and something less for deposit and business overdraft rates).  But as we’ll see, those are large changes compared to the sorts of effect the Prime Minister seemed to be talking about.

And what about the next few years, on current policies (monetary and fiscal)?  These are the projections from the latest Reserve Bank Monetary Policy Statement and from The Treasury’s PREFU.

int rate projections

The Reserve Bank doesn’t expect much of an increase in the OCR over the next three years, but it is an increase nonetheless.  The Treasury seems quite gung-ho –  by the time of the next election, they expect we’ll have seen 150 basis points of interest rate increases.   I suspect that Treasury’s numbers are too high, but both sets of projections are (a) upwards, and (b) well within the historical margins of uncertainty.    Neither agency gives enough weight, at least in what they are saying in public, to the possibility – again well within historical bands of uncertainty – of materially lower interest rates.  It seems unlikely that the Prime Minister would welcome a world in which such interest rate cuts were required.

The Prime Minister’s specific claim seemed to be that the Labour Party’s fiscal policy would result in higher interest rates than the fiscal policy adopted by the National Party.  He attempted to muddy the water with talk of what any Labour coalition parties might demand, but of course on current polling it seems likely that any National-led government would also have to face coalition party demands.  So, for now, lets just focus on actual main party plans –  National’s as per the PREFU, and Labour’s as per their published fiscal plan.

There would seem to be two plausible channels through which fiscal differences might mean different interest rates.   The first would be if Labour was to run materially lower surpluses, or even deficits.  The increased demand that would flow from those annual spending or revenue choices might, all else equal, lead the Reserve Bank to raise the OCR.  But here (as I’ve shown before) are the two surplus tracks.

labour surplus

They are all but identical, especially when one bears in mind that the Reserve Bank is typically looking a couple of years ahead in setting interest rates.   If Labour does take office, no Reserve Bank Governor –  acting or otherwise –  is going to be looking at that track, with a slight difference in 2018/19 and none beyond that –  and altering his or her interest rate projections.

The other channel is through a stock effect; the effect of a higher accumulated stock of debt.   The Minister of Finance has attempted to highlight that Labour’s plans involve around $7 billion more of net core Crown debt in 2020/21.    Sounds like a lot of money.   In fact, the difference is 2.2 per cent of GDP.  And around half that difference doesn’t show up in a true net debt series (such as that reported by the OECD) at all:  it is the additional $3 billion of contributions to the NZ Superannuation Fund.  I don’t happen to think that resuming those contributions is particularly sensible, but both main parties do –  their only difference is timing –  and if contributions to the NZSF add a bit more risk (variability) to the Crown balance sheet, they don’t make us poorer.  It is very very unlikely that raising a little more gross debt to put money in an investment fund like the NZSF will have any effect at all on New Zealand retail interest rates.

But what does the research show?   Disentangling the determinants of New Zealand interest rates isn’t easy, and I’m not aware of (m)any new studies over the last decade or so.  But a couple of prominent New Zealand economists did some interesting modelling work on the issue back in 2002, for Westpac.  Adrian Orr is now head of the NZSF –  and perhaps a contender for being the next Governor –  and Paul Conway is head of research for the Productivity Commission.     They looked at the impact of net government debt (not idiosyncratic national definitions, but drawing from international databases), and this is what they found

Table 2 shows the marginal and total impact of government debt on real bond rates. Moving from a net debt level of 10% of GDP to 20% of GDP adds only 3bps to real rates and the total contribution of debt to the risk premium is only 6.5bps.

As one might expect, the effects were quite a bit larger when debt levels were a lot higher than they are in New Zealand.

On these internationally comparable net debt measures, current net government debt in New Zealand is about 9 per cent of GDP, and on both National’s plans and Labour’s will fall from here.   Labour reduces public debt a bit less than National does over the next few years, but recall that by 2020 even on the Treasury measure of net debt the difference was 2.2 per cent of GDP.  Applying the Orr/Conway model results (that 6.5bps for 10 percentage point change in debt), and even that increase will produce only around a 1 basis point change in interest rates (with significant margins of uncertainty around those estimates).   And these are long-term government bond rates they were modelling.  Any effect on short-term retail rates –  probably zero –  would be indiscernible.

Are they other possible differences in interest rates that might show up depending on who wins the election?  These ones occurred to me:

  • both parties, but perhaps particularly Labour, look likely to have some difficulty keeping to their announced spending plans in the next few years, given baseline cost and population pressures and the recent electoral auction.  Whether that would result in smaller surpluses depends on what other offsetting actions respective governments might take (and, of course, what happens to revenue flows).
  • one reason why Labour’s net debt numbers are a bit higher than National’s is Kiwibuild.  In the Labour fiscal plan, they allow $2 billion of new and additional debt to get the Kiwibuild programme going (intending to roll that forward as new houses are built and sold).  I suspect that much of the Kiwibuild activity will displace private sector construction, but if it doesn’t –  and it actually adds to total construction activity –  that would put more pressure on available resources and –  all else equal –  increase the chances of OCR increases in the next few years.   But since both sides agree that more houses need to be built, it is hard to see how either could describe any such increase in the OCR as a bad thing –  if anything, in their own terms, it would be a mark of success.
  • Labour is talking about reducing net immigration inflows.  I’m a bit sceptical as to whether they would carrry through on that, given the evident decision to downplay the issue since Ardern took over. But if they do follow through, there would be a reasonably material reduction in overall demand and resource pressures over the next 12-18 months (especially as their proposed cuts are focused on the student sector).  All else equal, that would reduce the chances of OCR increases in the next couple of years.
  • Labour is promising Reserve Bank reforms.  Much is likely to depend on the key individuals they appoint, but –  all else equal –  their proposal to add an unemployment objective would be likely to reduce the chances of near-term OCR increases.  (In the longer-term there is a risk, that would have to be managed, that such a reform could slightly increase longer-term inflation expectations, and thus the level of nominal interest rates.)

In the end, this is fairly silly debate.  The differences in fiscal policy are small, and the track record of the two main parties over 30 years now is of pretty responsible fiscal management.  Debt levels are low and, absent a severe crisis, near-certain to remain so.

And interest rates do move around.  In well-managed countries they most often rise when economies have been doing pretty well, and they fall when something bad happens.   What will determine what happens to interest rates –  market and official –  over the next three years?  It won’t (overwhelmingly) be our choice of Prime Minister, but –  in the famous phrase of Harold MacMillan, former British Prime Minister –  “events, dear boy, events”.

And we, they (politicians) and the Reserve Bank should fear the sort of events that could yet take our interest rates quite a bit lower than they already are.

As bad as having a former KGB officer in Parliament?

When Newsroom picked up and ran my post on National MP Jian Yang, they highlighted the analogy I drew

Imagine a former KGB officer serving in the New Zealand Parliament in the 1970s, advocating the interests and views of the Soviet Union

(to which I had added “and hob-nobbing with representatives of the Soviet Embassy”.

I noticed that, in response, one prominent commentator on the right suggested that the comparison (with Yang and China) was overblown, and that today’s China was nothing like the Soviet Union of the 1970s.  I’ve reflected on that and frankly I’m at a bit of a loss to see the differences that put modern China in a better light than the 1970s Soviet Union.  Unless perhaps it is the current Chinese dictators wear better suits?

Of course, there are some significant economic differences between the two regimes.  Chinese firms trade with and invest in the wider world, while the Soviet Union traded mostly (but not solely) with other communist countries.   China allows the market considerable play in matters economic, and the Soviet Union didn’t.    So long, that is, as a notionally private company concerned doesn’t step out of line (see Richard McGregor’s excellent The Party).  And some of the key dimensions of a market economy are the rule of law, a market-led allocation of credit, and the ability to fail. On none of those does China score well.

And it isn’t as if China is some startling economic success story either.    Here is a chart from a post I ran last year on China’s continuing economic failure (relative to both the US –  as representative of a leading advanced economy –  and to other east Asian countries).

asia gdp pc cf US

China today is richer (per capita GDP) than the Soviet Union was in the 1970s, but almost every country has got a lot richer since then.  As a proportion of US (or New Zealand) GDP per capita, China’s current GDP per capita is estimated to be a bit lower today than the Soviet Union’s was in the 1970s.

Quite probably, China will close the gap to some extent over the next decade or two, even if they persist with the current credit-driven, absence of supply-side reforms, economic model.    But embedded within the system are huge misallocations of credit, and thus of real resources.   They can avoid a financial crisis, but they can’t avoid that waste.

But this isn’t primarily a post about matters economic.  A strong economy can support foreign policy ambitions, and a weak one can eventually undermine those ambitions.  So even if China were to achieve greater economic success, it shouldn’t be particularly reassuring to the rest of the world.  On checking I noticed, for example, that in 1938 German manufacturing exports were 20 per cent of the world total –  a large proportion of which will presumably have been to countries that only a year or two later were the subject of Hitler’s aggressive intentions.    There will have been plenty of people in each of those countries with a strong economic interest in making a case for Germany.

To me, there are two aspects of China –  and thus about Jian Yang’s past active service in that regime (and Party’s) cause –  that should be of concern.   There are the values the Chinese authorities apply internally, and the approach they adopt and encourage externally.   Neither should be encouraging to anyone who values the free and liberal democracy –  with all its faults –  that countries like our own built and maintained over the last few hundred years.     It is a regime that murders protestors –  what Jian Yang refers to just as “student demonstrations” –  that imprisons dissenters, that denies freedom of worship, the bans internet access to sites critical of the regime (or indeed, to services that won’t act as agents of the regime in suppressing dissent).  For decades, they forced abortions on couples who wanted more than one child.  And today they are at the forefront of using surveillance technology – much more advanced than anything the Soviet Union could use 40 years –  to keep the citizenry in check.    The obscene inequalities of wealth, flowing in the direction of the political elite and those close to them, are just another aspect of the evil.   Prada handbags and smartphones tell us nothing about the character of the regime.   (And I don’t see anything in the character of the sort of regime in this paragraph that marks it out from the Soviet Union.)

I’m not one who favours interfering in the internal governance of other countries, large or small, and no matter how unsavoury they are.     But if someone who was an active part of such a vile regime –  voluntarily a Party member –  comes to New Zealand and wants to be part of governing our country, one might reasonably expect he would (a) acknowledge his part in, and (b) denounce the evils of, the system.    As a member of the Chinese language media put it to me, the language Yang used in his maiden speech about Tianamen Square was the sort of language one would only use if one supported the brutual suppression of those demonstrations by the government and Communist Party of China –  in whose cause Jang had then been working.

But it is the foreign policy of China that should be even more disconcerting.  In the 1970s, the West and the Soviet Union and its allies were fighting the odd proxy war (eg Angola –  with Cuba on one side and South Africa on the other), and there was the invasion of Afghanistan.  I’m not about to trivialise the Soviet Union, but it was the also the era of great power detente.  Both sides were suspicious of the other –  and the risks of misinterpretations leading to nuclear conflict –  but by the 1970s few people saw the Soviet Union’s intentions as primarily expansionist or aggressive.    And the UN apart, the Soviet Union wasn’t part of most international agencies (eg IMF, World Bank, WTO/GATT).

And these days?  China remains the leading protector of North Korea.  China propounds values, and standards of international governance, through international organisations, that are inimical to those of the West.  China is an actively expansionist power –  most visibly in the South China Sea, where it has been in flagrant breach of international law.  China is a key player in cyber-espionage.  China is widely-recognised as attempting to suborn regional political leaders –  apparently successful for now in the Philippines.  And China’s strategy of attempting to exert influence in a wide range of countries through the deployment of its (current or former) citizens in other countries is pretty well-documented.   China still lays claim over a democratic state (Taiwan) and has never renounced the possibility of using force to take Taiwan.  In short, China represents a considerable threat to the sort of regional and world order that New Zealand has been a part of, and which (historically at least) its leaders were willing to champion.

(I’m not really interested in “what-aboutism”.  “Our side” does questionable things in the international sphere at times too, and as I noted the other day I’d be concerned –  albeit less so – if a former member (especially an unacknowledged one) of US intelligence services were in our Parliament.  But our values are not those of the current Chinese regime, and that regime is not content to apply its standards only in its territory.)

And then, frankly, there are two other differences: numbers and location.  The Soviet Union in the 1970s had a population similar to that of the United States, and much smaller than that of all the NATO (and associated) countries.    China –  still relatively poor in per capita income terms, as the Soviet Union was, now has (or shortly will) have the largest economy in the world.   Such a large economy buys a lot of weapons systems, and potentially a lot of clout.  And location?   The Soviet Union’s prime focus wasn’t south and east Asia. China’s is.  New Zealand is a long way from either country, but the threat to our values, and our systems, is real nonetheless –  and, compared with the 1970s, New Zealand stands more alone than it did then.

I don’t suppose China has any intention of invading New Zealand, any more than the Soviet Union did.  Something akin to vassal status will do just fine –  countries that are reluctant to stick up for what they once believed, that are reluctant to stick up for countries with similar values in east Asia, that are reluctant to call out China’s territorial expansionism or its internal abuses.  Yes, I’d say the China is at least as serious a threat to us today as the Soviet Union once way –  perhaps more so, because the threat is less well-recognised, and more insidious.  Better suits, and good hospitality.   And our own ministers –  probably of either main party –  all too eager to please.

And what of our media?  Credit goes to Newsroom (and the Financial Times) for breaking the Yian Jang story.  But what of our mainstream media?  They seem to have given the story some initial coverage, but then been keen for it to die.  I hope that is an incorrect interpretation, but a week out from an election it was striking that there was nothing at all about the story in the Dominion-Post yesterday or today, or –  as far as I could see –  in the Herald yesterday or today.  And yet this is a story about a government MP, actively recruited by senior National Party figures to in some sense “represent” the Chinese community (identity politics rule, as Stephen Franks notes), who appears to have hidden –  from the public at very least –  his active membership in the Chinese Communist Party and his service in the Chinese intelligence services, and who appears to remain close to the Chinese Embassy.   At very least, there are allegations of SIS investigations –  paralleling similar investigations around Chinese-born politicians in Canada and Australia.  And there also seem to be suggestions of incomplete, or misleading, disclosures when Yang sought New Zealand residency and/or citizenship.  It seems as though it should be a major ongoing story –  with tough questions for the Prime Minister, the National Party, John Key, the Minister of Internal Affairs, and (for that matter) the leaders of other political parties?  Does ACT regard this as acceptable in a governing party they support?  Do Labour, or the Greens?

After all, Yang appears to have more or less acknowledged his own deceptions.  There was a story on the Herald website yesterday in which he is said to be reviewing his citizenship application form.  The article ends this way

Jian Yang told the Herald on Tuesday he didn’t name the Air Force Engineering University or Luoyang People’s Liberation Army University of Foreign Languages when making the applications that led to New Zealand citizenship, which he was granted in 2004.

He instead gave the names of two Chinese universities for civilians that had “partnership” status with the military institutions where he taught intelligence agency cadets as an English lecturer.

Asked if he made a false declaration on his citizenship application, Yang said giving the name of “partnership” universities instead of the institutes he actually worked and studied at was not a false declaration and was required if he was to leave China.

But in 2004, when he was applying for New Zealand citizenship, he was living in New Zealand.  There was no obstacle to telling the truth.  Unless he counted perceived obligations to the Communist Party of China, and the military and intelligence system of China, as more important than legal obligations to complete truthfully his citizenship application form.

In truth, his citizenship doesn’t worry me overly much.  From reports I’ve seen, he seems to have been a capable academic at Auckland University.  But membership of our Parliament and, perhaps in time our executive, is a different matter.  And with two minutes research, I found the Herald profile of him from 2011 when he was first running for Parliament.    If I’d read it at the time –  and I probably did, being a junkie –  I’d have been quite impressed by the tale of triumphing over adversity and poverty, and perhaps even a little inspired (he even expresses support for some social conservative causes I put a priority on).    But that’s because of all the stuff he didn’t tell the Herald  – or voters.    Perhaps there was a clue in this line

He said the effective dictatorship in China had provided a stable platform for long-term economic policy, while a surge in international trade had improved human rights and the flow of information.

Hmmmm…….

But not a word of his membership of the Communist Party (remember only about 5 per cent of Chinese belong; it isn’t some automatic part of living in China), or of his education in a military intelligence university, or subsequent service in that intelligence system.  Not a word about it, then or since.  And not a word of criticism of this system which is inimical to the values that built and sustain this country.

As I noted the other day, perhaps he hid it from the National Party too, which would speak very poorly of their candidate vetting. Or he told them, and they didn’t care, (and perhaps even told him to keep his past quiet) which speaks even more poorly of them, their values, and their priorities.    Either way, it should be unacceptable.

So, yes, it would have been regarded as quite inconceivable in the 1970s to have had a former serving KGB officer (whatever his specific role in that establishment) as a member of the New Zealand Parliament.  If that person had grossly misrepresented their past, and continued to associate closely with the Soviet Embassy, the scandal would have been all the greater.  It should be just an unacceptable today for a former serving member of the Chinese Communist Party, and the Chinese intelligence services, having consciously misrepresented his past and never denounced the system, to be in –  and put forward again as a candidate for –  our Parliament today.

On standards in public life, and Jian Yang

My honeymoon was paid for by a week or so helping an arm of the expansionist and repressive Chinese government  (the IMF was paying, and it involved helping run a course in some obscure provincial city on liquidity management and the implementation of monetary policy).  In more recent times, I’ve also done a couple of lectures on New Zealand economic management, under the auspices of the Australia New Zealand School of Government, for groups of up-and-coming Communist Party officials –  ANZSOG had wanted Graeme Wheeler, and they got me instead.   Indeed, to my own bemusement, for a time I even held a security clearance that (I was advised) meant that if, for example, I wanted to take a holiday in China, I needed to give advance notice to, maybe even seek approval from, our intelligence agencies.

These days it is hard for many people in the public sector to avoid sullying themselves with contact with Chinese government/Party representatives.   Some of that, no doubt, is just an inevitable part of state to state diplomacy.   But when the opportunities arise, there is also the fascination with an ancient culture, and its modern manifestations, and with a country that is home to perhaps a fifth of the human race.   Perhaps it was like that for the Soviet Union in earlier decades?  Or Germany in the 1930s?  It is easy to say now, but with hindsight I now regret the (very small) assistance I provided to the Chinese government and their officials.  However amiable and intelligent individuals might be –  and there were many such in Soviet Russia and Nazi Germany –  they worked for, and advanced the cause of, a state which is the enemy of freedom, and the enemy of the values that made this country, and countries like it, what we are.   A state with an active aggressive agenda, propounding internationally an alternative authoritarian vision of governance, and brutally suppressing those who disagree with them.   A state ruled by a Party which actively connived in the murder and starvation of tens of millions of its own people.

Which is why those people (including the man himself) attempting to dismiss the concerns raised in the Financial Times/Newsroom stories about National MP Jian Yang as somehow “racist” are just playing distraction and trying to avoid the real issues, and real questions.

Would I be worried if, say, the National Party (or any other party for that matter) had made as one of its MPs someone with an equivalent background in the former ruling parties and military intelligence institutions of former authoritarian states like, say, Paraguay, Zambia, or Serbia?  Well, yes I would to some extent.   Such a background would speak of the values of the individual concerned –  and there has been no suggestion Jian Yang was forced to work for military intelligence or join the Communist Party; instead he will have been judged “reliable” to have been allowed to do so.  It would also say something about the values of a New Zealand political party which treated so lightly our own historical values and freedoms as to recruit someone like this.  Perhaps prioritising party fundraising over the values and freedoms of New Zealanders?

But in those cases, (a) the authoritarian states are now democracies, and (b) they are countries (chosen deliberately) with no particular interest in, or wish to exert influence on, New Zealand.

What about people with backgrounds in the intelligence services of the United States, the United Kingdom or (to use the example an FT columnist cites) Italy?  Frankly, I would have some concerns about the ability of someone who has ever worked in the military and intelligence establishment of another country to ever completely relinquish those loyalties and put the interests of New Zealand first.   Then again, such countries –  whatever their faults –  have been our allies over many decades.  The potential for serious conflicts of interest are much less than they are for some other regimes.

In other words, these things are points along a spectrum.    I’m not sure that former members of foreign intelligence services ever have a place in our Parliament, but those of Australia or the UK worry me less than those of the US, which worry me less than those of Singapore, Paraguay or Serbia, which worry me less than those of Russia or China.      The latter two are (a) large, and (b) aggressive powers.  Of the two, China is much more of threat in this part of the world than Russia.   But in the 1970s, the order might have been reversed.  Imagine a former KGB officer serving in the New Zealand Parliament in the 1970s, advocating the interests and view of the Soviet Union, and hob-nobbing with representatives of the Soviet Embassy.

Some people come out of the establishment of brutal aggressive authoritarian states and recant completely their former loyalties.  Their eyes have been opened to the evil that state represented, and often such people become leaders in the cause of urging people in the West to recognise the threat.  Sometimes, even, with the zeal of a convert their opposition to the state of their birth can be uncomfortable or even a little embarrassing.  And I don’t suppose that after his defection Oleg Gordievsky spent much time with the Soviet Embassy in London.

But what of Jian Yang?  I had a look yesterday at his maiden speech in Parliament, delivered in February 2012.  Maiden speeches are often an occasion for a new member to outline their personal philosophy, and the things that made them who they are, and led them to seek to enter politics.  A few are classics –  I recall being taught from Sir John Marshall’s in my first year politics course decades ago.  But what of Yang’s?

Read without knowing he’d been a member of the Communist Party (well under 10 per cent of China’s citizens are), or had been a serving participant in the intelligence establishment, it might seem inoffensive enough, although still a little surprising.       To serious champions of liberty, the Tianamen Square protests, and subsequent government massacres, stand as a continuing charge against the Chinese state and Party.  How does Yang deal with them (they disrupted his plans for graduate study abroad)?  They are nothing more than “student demonstrations”.

He can safely be mildly critical of the Cultural Revolution –  his parents were apparently sent to the countryside for “re-education” –  but never mentions the dreadful evil of the Great Famine, one of the worst man-made (Chinese government made) disasters ever.  There are boilerplate references to his support for opportunity and choice, but no attacks on the evil of the one-child policy, still in place at the time Yang gave his speech. Nothing about the lack of freedom of expression, the lack of freedom of religion, the lack of any free alternative to the Communist Party in China.      Instead, we get paeans to the “success” of the Chinese government in “lifting millions of people out of poverty”, as if the same government hadn’t driven them unnecessarily further into poverty in the first place –  and he has the gall to suggest that “reflecting on the way in which China has achieved its positive change and development gives me a firm belief that the policies of the National Party are in the best interests of New Zealand.”     And for someone with an academic background in international relations and an expressed interest in contributing on foreign affairs matters in Parliament, nothing at all about Chinese expansionism in the South China Sea, or its advocacy internationally of alternative visions of governance antithetical to liberal democracy.

It is one thing to be proud of your ethnic background –  and China has an ancient culture that once led the world –  but Yang showed absolutely no sign of having turned his back on, or a desire to call out, the evils of a repressive authoritarian party and government that has never recanted its mistakes, that has failed economically (compare Taiwan and China for example) and which represents a threat to us, and to countries (and believers in freedom) throughout east Asia.

And it wasn’t just the maiden speech.  As the Financial Times notes, since entering Parliament

He has consistently pushed for closer ties with Beijing and for international policies and positions echoing those of China’s Communist party.

In one of the FT articles on this story, there is photo of Yang posing with the Chinese defence attache at a celebration a year or two ago of the anniversary of the founding of the Chinese army.  Perhaps a Minister of Foreign Affairs more or less has to attend such functions.  Backbenchers don’t, and they certainly don’t need to be posing with military representatives of aggressive foreign governments, unless doing so speaks of their ongoing sympathies.  There is simply no sign of Yang having recanted his active involvement in the Chinese intelligence establishment –  indeed, until yesterday that inolvement was not generally known,

If, say, Russel Norman or Julie-Anne Genter (adult migrants who subsequently became NZ MPs) had been as actively involved in advancing Australian or US government causes (respectively) there would also have been considerable grounds for concern, mitigated to some extent by them not having been serving members in the intelligence regimes of the countries of their birth.

Who knows quite what the nature of Yang’s ongoing association with the Chinese authorities is.  But as the FT report notes, China has been increasingly active in placing and cultivating people in Western democracies and helping them gradually reach positions of political influence, and it reports concrete areas of concern in Canada (including from the intelligence authorities) and Australia.    Perhaps Yang doesn’t fit that bill at all, but if so his case would be a lot more convincing if he’d had a track record of being consistently and openly critical of the Chinese government and the Communist Party.  Instead, as the FT notes, in an interview recently he repeatedly requested the journalists not to include information about his intelligence background in articles about him.  You’d think it might have been an opportunity to openly criticise the authoritarian regime (being able to use the insider’s perspective he’d gained in his misguided youth) that he had turned his back on in choosing to come to New Zealand.  But apparently not.

It really is a quite extraordinary story.  On the one hand, quite remarkable that it has taken six years in Parliament for the media to look into the background of this MP –  one has to wonder why these stories weren’t being written in 2011 when the National Party first put him on the list. Perhaps there would have been more scrutiny if he’d been attempting to become a constituency MP?

But more concerning is the seeming indifference of the National Party to Mr Yang’s background.  He was/is (we are told) a very effective fundraiser for the National Party, and politics isn’t cheap.  Once upon a time the National Party could be counted on for a fairly hardline on defence and security. But these days, if this story is illustrative, do they just no longer care, so long as they can maintain a cosy relationship with the Chinese establishment and host visits from Chinese leaders and Chinese warships?  It is easy to downplay geopolitics when one is as physically remote as New Zealand.  But the issues and threats to us, and to like-minded countries, are real nonetheless.

On a similar note, shouldn’t it be somewhat concerning that the largest donor to the National Party is an entity called the Inner Mongolian Rider Horse Industry (NZ) Ltd.  I suppose we should be grateful the donation was made in a way that it was disclosed, but this is a company which has a small New Zealand operation, subsidiary of quite a large Chinese parent owned by a Chinese billionaire.

I have no way of knowing if the National Party is worse on such matters than the Labour Party would be (or for that matter, New Zealand First, which now has a prominent candidate Shane Jones of Bill Liu citizenship shame.)  But Jian Yang is a member of the National Party, and the National Party has now led the government for nine years.  For now, the hard questions seem to need to be asked of them.   If they didn’t know Yang’s background before recruiting him, that was slipshod or deliberately indifferent, and if they did know but just didn’t care –  and stuck him on the Foreign Affairs committee nonetheless – it risks looking like just another form of depraved indifference, whether through blindness to the threat China poses to things we (and people like us, from Taiwan, from Canada, from the UK or wherever) have held dear, or just a focus on keeping the donor money and votes flowing in.

I’m no New Zealand First fan, but the slogan on their campaign billboards “Had enough?” sums it up for me.  After the housing disaster, the economic failures (and worse, the near lies about them), and episode after episode that speaks of the degradation of standards of public life in New Zealand, for me it is just another nail in the coffin.  More nails than timber now.

 

 

Who will build the houses?

One of the Prime Minister’s campaign lines has been “who will build the houses?” if immigration numbers are cut back.   It is a curious line of argument, for a variety of reasons.

But it takes on a particular air of unreality when used –  as I heard in a debate last week –  to attack the Labour Party.    After all, Labour is campaigning on a policy that will (a) leave the current 45000 per annum residence approvals target unchanged, and (b) reduce students visa numbers quite substantially (resulting in a one-year reduction in the net PLT migration inflow).  On their own numbers, the changes they are proposing won’t make that much difference to the number of work visas issued, and where those numbers do change, the intention is to focus reductions at the lower-end of the skill spectrum.  (Their document is here, and my post on it is here.)   For what it is worth, Labour even proposes a Kiwibuild visa, designed to ensure that any reductions in work visa numbers don’t interrupt a flow of construction workers.

The student aspect aside (and even that isn’t part of the 100 day plan, although it isn’t that long until the new academic year starts), one might reasonably doubt whether Labour is serious at all about reducing ongoing immigration pressures.   Their policy, if implemented, won’t materially alter the net inflow over time. And I heard this morning an extended interview with Jacinda Ardern on Radio New Zealand in which she declared that she would have no problem at all with a net 70000 migration inflow per annum if only the houses were there, and actively endorsed some recent strongly pro-immigration comments made by Helen Clark.    Labour, like National, is still a “big New Zealand” party –  despite the economic damage that strategy has been doing over decades (remember how bad our productivity record has been) and will continue to do (ever more people and a heightened priority on improving water quality and meeting climate change targets is a recipe for severely undermining our productivity prospects.)

But this post isn’t about Labour’s proposals, but about (a) what has actually been happening over the last few years in the construction sector and related migrant inflows, and (b) more briefly, how the economy might adjust if there was to be a sustained material cut to target levels of non-citizen immigration.

In his weekly column in last Friday’s Herald, Brian Fallow touched on some of the first of those topics.  He went to the latest annual MBIE Migration Trends and Outlook publication (for the year to June 2016 –   MBIE could you please make data easily accessible on a more timely basis), looked at the data on who had been granted Essential Skills work visas in recent years, and concluded thus:

The conclusion has to be that the impact of net migration flows on the housing market and the construction industry is overwhelmingly on the demand, not the supply, side.

There has been a big increase in construction activity in New Zealand in the last few years.  Some of that is driven by the Christchurch repair and rebuild process, but increasingly the key influence has been the unexpectedly rapid growth in the population.  Each of those people needs a roof over their head.

And so employment in the construction sector has increased rapidly.    Here is the data from the HLFS, showing the percentage increase in people employed from calendar 2013 to calendar 2016 for each of the sectors employing more than 100000 people.

HLFS by sector

The construction sector has had by far the biggest increase in employment over the last three years.  Around 56000 more people were employed in construction in 2016 (on average) than in 2013 (the current total number of people employed in the sector is around 240000).

What contribution has non-citizen immigration (the bits our policy controls) made to this employment?

As Brian Fallow noted, on MBIE’s own numbers, this is how many Essential Skills visas were granted for construction trades and construction labouring roles in the year to June 2016.

And a startlingly low proportion – 7 per cent, or 2233 to be precise – were classified as construction trades workers like carpenters, plumbers, plasterers, tilers and painters. If you include scaffolders and builders’ labourers, the proportion rises to nearly 10 per cent.

And here are the corresponding figures for the previous couple of years.

Essential skills visas granted
2013/14 2014/15 2015/16
Construction trades workers 2090 2123 2233
Construction and mining labourers 399 546 831
Construction sub-total  2489  2669  

3064

 

Total 26502 28548 31766
Construction as % of total 9.4 9.3 9.6

Those might look like quite large numbers but:

  • at last report, construction jobs made up 9.3 per cent of all employment (and yet in this really rapidly growing sector only around that share of Essential Skills visas –  suggesting that immigration was hardly easing sector-specific pressures), and
  • as Brian Fallow also pointed out, most of these Essential Skills visas were being granted to people who were already in New Zealand (eg renewals).  Of 31766 Essential Skills visas granted in the year to 2016, only 8334 (or 26 per cent) were new workers (the proportions are similar in the earlier years).
  • people arriving and taking up first-time work visas need to be offset against people leaving.    In the three years I’m looking at here, MBIE tells us that the total stock of people here on essential skills visas increased by only 10062.   If the patterns were similar for construction jobs as for other roles, construction would account for about 1000 of that increase.

Of course, some people will have moved from work visas and obtained residence visas.  Based on the 2015/16 residence visa approvals numbers, that might have been around 450 people working in construction roles per annum.  Over three years, perhaps as much as 1500 people.

In other words, in a construction sector where total employment has increased by 56000 in three years, perhaps only 2500 (or less than 5 per cent) of that increase will have been met by the immigration of non-citizens.

So in that sense the answer to the Prime Minister’s question is easy.  Who will build the houses if immigration is cut back?  The same people who always overwhelmingly have, people who were already here.

But perhaps more importantly, if immigration were to be sharply cut back, the number of people needing accommodation would fall.  At one extreme, if the population is growing by 100000 per annum (as it has in the last couple of years), that suggests a “need” for around another 35000 houses each year (on top of the small number that would need replacing each year with a static population).  With net non-citizen migration at present in excess of 70000, the non-citizen immigrant flows alone create a “need” for perhaps 23000 additional houses each year.     Even if we go back to Brian Fallow’s original numbers of gross approvals of Essentials Skills visas, 3000 construction workers cannot build 23000 houses a year.   So the way immigration policy is actually being conducted it is exacerbating pressure on the construction industry, not relieving it.  That additional pressure is substantial.

(It needn’t be that way of course.  In the short-term immigration will almost always in increase economywide demand more than it increases supply.  But composition of the immigrants afffects where the pressures are most felt.  At the extreme, if all the migrants were builders (and related occupations), they’d probably just about keep up with the additional demand for housing (building, in effect, to house themselves).  Then the demand pressures would show up more severely in other sectors.    But when there is a big increase in the population, and hence in construction activity, immigration policy certainly isn’t relieving construction sector constraints when only around 10 per cent work visas are going to construction workers, when almost a quarter of the new jobs are in construction.)

So what would happen if, say, the 45000 residence approvals target was cut to, say, the 10000 to 15000 per annum I’ve been advocating (still, in per capita terms, around the rate of permanent approvals in the United States), and issuance of work visas was also tightened up, so that the stock of people on temporary work visas was no longer growing?

Overall, growth in domestic demand would weaken, and with it the pressure on domestic resources.  The notion that the short-run demand effects of immigration outweigh the supply effects shouldn’t really be controversial.  It has been that way in New Zealand for many decades.  But, given the huge scale of the pressures that new people put on the construction sector (not just houses, but roads, schools, offices, shops etc), and the fact that immigration policy as actually run has not seen us bring in many construction workers (10 per cent of the visas, when 25 per cent of the new jobs have been in construction), such a policy change would greatly ease resource pressures in the construction sector specifically.  In some other sectors it is quite conceivable that resource pressures could increase (one could think of export-oriented sectors such as tourism or dairying) if such an immigration policy change was made.  But on the construction side of things –  one of the most politically and economically pressing areas of our economy – the gains (the relief of pressure) would be substantial and almost immediate.  Not only would construction sector resource pressure ease, but land prices could also be expected to fall back to some extent (due to a reduction in expected future demand).

More generally, across the economy one would expect to see  interest rates falling (both market interest rates and the OCR) and with them the real exchange rate.    A lower real exchange rate would help secure the overdue resource-switching towards the tradable sectors. It would also provide the additional margin that would enable employers in those sectors to bid up wages to the extent required to attract existing residents to take up jobs in those sectors.    Plenty of people would be freed up from the construction sector –  a country with a modestly growing population wouldn’t have 10 per cent of total employment in construction –  and they’d be looking for jobs elsewhere.  Most of them would be long-term residents or citizens –  something we know with a high degree of confidence because the government’s own data tell us not many visas have been issued in recent years to people in construction, whether skilled workers or labourers.

But I guess the Labour Party can’t really use these arguments to push back against the Prime Minister because they aren’t actually planning a material and sustained reduction in non-citizen immigration at all.  That’s a shame.

(And if you wonder why all this discussion has used visa numbers up to June 2016, that is because MBIE only release more recent numbers in massive (600000 line) unwieldly spreadsheets.  It is possible that patterns in the last year have been a little different, but it seems unlikely –  given the similarity in each of the previous three years.  But debate would be better-informed, and more timely, if MBIE would make  timely data available in more readily accessible formats, as happens for almost all other important economic data released by Statistics New Zealand, the Reserve Bank or whoever.)

 

 

Housing failure set to continue

I’ve long been sceptical that any government is likely to fix the housing market problems any decade soon.   Some of that was specific New Zealand points: National seemed to be doing almost nothing, Labour had done almost nothing when it was in government, and Labour seemed likely to rely on the anti-development Greens if and when it formed another government.    But most of the scepticism was – and is –  rather more overarching: no one has been able to show me a case study anywhere in the world where intense land use restrictions had once badly messed up a housing market, and where those controls had then been successfully unwound and housing made affordable again.   In principle, there was no reason why New Zealand should not have been first.  But the ages of pathbreaking New Zealand reforms  –  whether the 1890s or the 1980s –  seem well behind us at present.

It wasn’t a weekend that led my to revise my opinion.    In yesterday’s Sunday Star-Times Rob Stock had a piece reporting widespread scepticism about the claims that both Labour and National are making.  He began with both leaders’ reluctance to even call for lower house prices.  No one much seemed persuaded by the idea that nominal house prices might hold flat and incomes rise steadily to reduce price to income ratios.  On paper it could be a plausible story, but even if so it is a solution for the next generation not the current one.   And the article also reported a great deal of scepticism about the apparent Labour aspiration to introduce a lot more lower-priced homes without having much impact on the prices of existing dwellings.    The people Stock quoted seemed a bit more optimistic that –  despite the disavowals – Labour’s plans might actually lower house prices.   Fundamentally improve the land supply situation and perhaps that might be realistic.  Without that, government-sponsored builds seem likely to substantially displace private sector builds.

But then there were the policy cues.  Yesterday morning, National announced that, if re-elected, it would increase the subsidies offered to first-home buyers.  First-home buyer grants, in a supply-constrained market, are a policy so daft that I’m not aware of any serious analyst, from any side of the political/economic debate, who thinks they are a good idea (and Treasury and the Reserve Bank have opposed them).  New Zealand was mercifully free of such subsidies for most of its history –  and policy people used to look across the Tasman, slightly disdainfully, at the grants there.   First home buyer grants are, largely, an expensive way of getting house prices a bit higher than they otherwise would be.  And here that outcome is even more likely given the announced increases in accommodation supplement payments next year.   Renters will be able to pay a bit more (so investors can afford to pay a bit more), and potential first home buyers would now also be able to pay a bit more –  perhaps especially in provincial areas where the grant goes a bit further.  Since the policy is well-foreshadowed, most of the effects will have been compounded into prices before the first young couple can get their increased grant.  And, as so often, the winners will be the people selling out of the market –  those who already have.  It is the sort of policy that gets adopted when governments have given up on  believing that they might actually fix the underlying problems –  and/or given up believing that they can convince voters that they might.    Subsidies to home buyers –  rather than fixing the underlying problem –  is like some throwback to the early 1980s (actually the last time we had such direct first-home buyer subsidies).

The messages from the other side of politics weren’t much more encouraging.  The leader of the Opposition yesterday announced her plans for the first 100 days of a Labour government.  Housing appears on the list, but the three most specific items are

  • Pass the Healthy Homes Guarantee Bill, requiring all rentals to be warm and dry
  • Ban overseas speculators from buying existing houses
  • Issue an instruction to Housing New Zealand to stop the state house sell-off

Whatever you make of the Healthy Homes Guarantee Bill, it won’t improve the affordability of housing (if anything, rather than contrary for renters).  And stopping the sell-off of state houses might (or might not) make some sense, but again it won’t alter, by one iota, the affordability of housing in New Zealand.   And, in fairness, both are probably being done for other reasons.  And so the one specific thing they’ll pledge to pass by Christmas actually designed to improve housing affordability is the proposed ban on non-resident foreigners buying existing housing.  Consistent with this, on Labour’s website, the very first thing one comes to under housing policy is

Crack down on speculators


Ban foreign speculators from buying existing homes

Reasonable people can differ on the specifics of this (and other “anti-speculation” measures –  the extension of the bright-line test for investment properties, and ring-fencing).   To me, it has the much the same feel as that around first-home buyer grants –  it is the sort of policy one adopts when one has given up on dealing with the underlying problems.    Blaming “speculators”, for the symptoms of a rigged and dysfunctional market, is a distraction strategy from way back for politicians here and abroad.

Banning non-resident foreign purchases of existing houses isn’t the worst policy imaginable –  and any adverse impact on New Zealanders is likely to be small to non-existent – but as a flagship policy for a possible new government it is hardly one that suggests a serious focus on fixing the underlying long-term problems.  Sure, it is probably quite easy legislation to draft  (though no doubt MFAT officials will be turning their minds to the issue of how to reconcile the proposed ban with, eg, the New Zealand-Korea “free trade” agreement) and comprehensively fixing the planning system isn’t.  But after years in opposition, and with policies around land supply that look promising on paper, if they were really serious about far-reaching reform in this area, one might have hoped they’d have found something specific to have done in the first 100 days –  a stake in the ground, an earnest of a serious commitment to free-up land supply later in a first term.   But when the previous leader never mentioned the issue, the current leader never does, and when there is nothing in the 100 day action plan, I’ll stick with my scepticism for the time being.

Bloodless economists probably aren’t supposed to do disgust, but that pretty much summed up my reaction to the weekend story that, less than a year out of office, John Key had sold his Parnell property, at what is apparently a very substantial profit, to enable him and his wife to downsize.    No doubt it is mostly about “time of life” thing –  kids off their hands etc –  and I’m not suggesting that the National Party’s failure to do anything much about fixing the housing market problems for nine years was mostly about personal enrichment.     But this was a leader whose approach to the increasingly severe housing disaster was to glibly call it a “quality problem” or some sort of “sign of success”.  As I put it 18 months ago

In a speech to an Auckland business audience yesterday –  there is a report here, and also video footage –  the Prime Minister repeated his breezy claims that Auckland’s “challenges” around housing and transport are “a quality problem”, and a “sign of success”, and that both the city and the country are doing “incredibly well”.

Perhaps that is how it appears when you are already wealthy, live in a large house in a prime inner suburb, and have a taxpayer-provided chauffeur at your constant disposal.  Neither housing nor traffic problems must impinge terribly much.

And so, having moved on from public life, Key now extracts what is reported to be several million dollars of profits which are really just monopoly rents.  Keep the land supply market dysfunctional, boost the population considerably, allow house prices to be driven up to an extent that an ever-larger proportion of the young and the poor can’t afford to buy, and then simply take your own profits.   It is, in effect, money taken at the expense of the poor of Auckland –  not because any of them could afford Parnell, but because most of the increase in Parnell land prices is a reflection of the same common factor that has driven prices high across Auckland.  It is easy to be indifferent to a problem when you yourself benefit – even just passively –  from that continuing indifference.    The record, the policies, National is campaigning on today, including around housing and land, are more or less exactly the same as those of the first eight years of a National government, under John Key –  who has now cashed-out millions of dollars personally, made from his government’s refusal to fix the housing market.

Putting disgust aside and returning to the numbers, one often hears the current Prime Minister talking of 10000 houses a year now being built in Auckland, as if somehow this is the answer to the past policy failure.    It is often complemented by references to bureaucrats’ claims that tens of thousands of new houses are in the pipeline – I think I’ve even heard references to some multiples of Hamilton being built in the next few years.    (I’m not sure why we should be impressed by that figure, when New Zealand’s population is currently growing by as much as Hamilton every two years).

Of course, as Core Logic has pointed out, the actual increase in the housing stock is much less than the number of new dwellings being consented (many new builds require the demolition of existing houses), but even just focusing on building permits, is there any sign that the number of permits being granted in Auckland is getting ahead of the population growth?

The chart below uses official data.  It shows the number of building permits being granted in Auckland each (June) year relative to the (SNZ) estimated increased in the population over that same year.  Comparisons that look just at consents per capita are meaningless –  it is increases in the population that (are the biggest factor that) increase the need for accommodation.    The data are only annual, but for the year to June, so the actual building consents numbers are almost right up to date.    The population estimates for individual areas for June 2017 won’t be out until later next month.  But Auckland’s population is estimated by SNZ to have increased by 2.82 per cent in the year to June 2015 and by 2.83 per cent in the year to June 2016, and there has been no material change in net migration inflows over the most recent year.  So I’ve assumed a population increase in Auckland of another 2.82 per cent in the year to June 2017.   It is a rough estimate, but it would be surprising if the SNZ estimate next month was materially different.

building permits per person increase

So, yes, in annual terms, the number of building permits for new dwellings per person increase in the population has increased, but not by much.  But in the last two years, the rate of consenting has still been lower than in any year in the first decade of the data series.    It is unspectacular at best.  Sure, there is a lot of building going on right now, but then there are huge (government-abetted) increases in the population which don’t yet show any sign of abating.

And if there is a lot of house-building activity going on at present, there are straws in the wind suggesting there will be less in future.  At a national level we’ve already seen some of that already in the building work put in place data released last week.  But here is a chart of Auckland new dwelling permits.  The data are noisy from month to month, so here I’ve taken the annual growth rate in the three-monthly total (eg May to July 2017 over May to July 2016) and shown the data for (a) the total number of new dwellings consented, and (b) for the total floor area of those consented new dwellings.

building permits 2

Both annual growth rates are now (a) well below where they were, and (b) actually are negative.  In other words, in annual terms the volume of new housing being consented in Auckland is dropping.  And there is no sign that the rate of population increase is.

Views will differ on whether these numbers reflect capacity constraints or the limits of effective demand at the prevailing (extremely high) prices.  My own bias tends towards the latter story –  and Rodney Dickens at SRA has done some analysis taking the same view.  But whichever story you think is more convincing, the numbers don’t suggest any near-term lift in the overall supply of houses relative to the increase in the population.  Taken together with the lack of much land-use regulation reform, it all provides little reason to think that housing affordability in our largest city is likely to improve much, or for long, on anything like current policies.  Meanwhile, the system will remain skewed to those who have, and against those who have not, and we can only expect yet more ad hoc measures –  whether from the elected government or outfits like the Reserve Bank –  to paper over the symptoms of housing market failure.

 

Thoughts prompted by Joyce vs Robertson

If Steven Joyce had simply noted that the Labour Party appears to have made so many specific policy promises that if they were to form the next government it would be very hard to deliver on those specific policy commitments, meet ongoing increases in the cost of normal government activities, and yet at the same time meet the specific spending, surplus, and debt numbers they’ve outlined in their fiscal plan, a useful and constructive exchange might well have followed.  My summary stance: I think that looks like a reasonable conclusion.  How much it matters probably depends largely on how much weight you put on the importance of those surplus and debt numbers.

I didn’t read the Labour fiscal plan when it was released.  The specific policy promises had already been announced and in an MMP era, in particular, documents of this sort always seem like not much more than opening offers going into potential negotiations around the formation, and conduct, of a new government.    They also involve a degree of ritual obeisance to the belief that economic forecasts have much value; a ritual belief that while entirely conventional leaves me cold (whether opposition parties or government agencies are doing it).

None of us knows what the terms of trade will do over the next few years, or net migration, or the myriad of other things here and abroad that will affect the economic and fiscal outlook.  Even the rate of inflation will affect how large the operating allowance should sensibly be each year (since it is nominal –  and cost pressures will be different if the Reserve Bank delivers inflation at 1.2% than if it delivers 2.2% inflation).   Of course, we want specific promises to be costed, and on a multi-year basis.  But this debate hasn’t been about specific policy costings.  And beyond that, the amount of information in these documents is really quite limited.   Among other things, Labour’s numbers use exactly the same GDP track as in the PREFU, but presumably they expect their wider economic policy measures to make some difference to that (eg somewhat less immigration  –  at least in the first year –  and perhaps appointing a Reserve Bank Governor who might generate a bit less unemployment and a bit more inflation –  two measures deliberately used here because they have offsetting effects on nominal GDP).

But, for now, lets play the game.

Labour has laid out their numbers in a series of summary tables.  They have explicitly identified numbers for each of their (revenue and expenditure) major policy initiatives, and made explicit summary provision for the cost of a group of less expensive policies.  And they identified how much (or little) still unallocated money they would plan to have available.   The resulting operating surplus numbers are almost identical to those in PREFU, but where they do take on a bit more debt –  to fund NZSF contributions and the Kiwibuild programme – they also allow for additional financing costs.

And then they had BERL go through the numbers.    People on the right are inclined to scoff at BERL and note that they are ideologically inclined to the left.  No doubt.  But all they’ve done on this occasion is a fairly narrow technical exercise.  They haven’t taken a view on the merits of any specific policy promises or even (as far I can see) on the line item costings Labour uses.  And they haven’t taken a view on the ability of a Labour-led government to control spending more broadly.   They’ve taken the Labour numbers, and the PREFU economic assumptions and spending/revenue baselines, and checked that when Labour’s spending and revenue assumptions are added into that mix that the bottom line numbers are

consistent with their stated Budget Responsibility Rules and, in particular

  • The OBEGAL remains in surplus throughout the period to 2022
  • Net Core Crown debt is reduced to 20% of GDP by June 2022
  • Core Crown expenses remain comfortably under 30% throughout the period to 2022.

An economics consultancy with a right wing orientation would have happily signed off on the same conclusion.  The numbers add up, on the material they were given.  In that sense, there is no $11.7 billion “fiscal hole” and the opening claim by Steven Joyce on Monday was simply wrong.   Arguably, irresponsibly so from a serving Minister of Finance.

But where there is more of an issue is that Labour’s spending plans on the things they are promising mean that to meet these surplus and debt objectives, on these macro numbers, there is very little new money left over in the next few years.     That might not sound like a problem –  after all, why do they need much “new money” in the next few years when the things they want to do are already specifically identified and included in the allocated money in the Labour fiscal plan.      The answer to that reflects the specifics of how the fiscal numbers are laid out, and how fiscal management is done.   Government departments do not get routine adjustments to their future spending allowances to cope with, say, the rising demands for a rising population, or the increased costs from ongoing inflation (recall that the target is 2 per cent inflation annually).   Rather, they are given a number to manage to, and only when the pips really start squeaking might a discretionary adjustment to the department’s baseline spending be made.  Any such discretionary adjustments comes from the “operating allowance” –  which thus isn’t just available for new policies.

You can see in the PREFU numbers.   Health spending rose around $600 million last year, and is budgeted to rise by around $700 million this year (2017/18).  And then….

$m
2017/18 16432
2018/19 16449
2019/20 16481
2020/21 16396

No one expects health spending to remain constant in nominal terms for the next three fiscal years.  But there will need to be conscious decisions made in each successive Budget to allocate some of the operating allowance to health –  some presumably to cover new policies, and much to cover cost increases (wages, drugs, property etc, and more people), all offset by whatever productivity gains the sector can generate.

And here is why I think there are questions about Labour’s numbers.  By 2021, they expect to be spending $2361 million more on health than is reflected in these PREFU numbers.     About 10 per cent of that increase is described as “Paying back National’s underfunding” and the rest is labelled as “Delivering a Modern Health System”.

This is how they describe their first term health policies

Reverse National’s health cuts and begin the process of making up for the years of underfunding that have occurred. This extra funding will allow us to invest in mental health services, reduce the cost of going to the doctor, carry out more operations, provide the latest medicines, invest in Māori health initiatives including supporting Whānau Ora, and start the rebuild of Dunedin Hospital.

That sounds like an intention to deliver materially more health outputs/outcomes (ie volume gains, or reduced prices to users).

In response to Steven Joyce’s attack, Grant Robertson is reported as having told several journalists that Labour’s health (and education) numbers include allowances for increased costs (eg rising population and inflation  –  and inflation in the PREFU is forecast to pick up) as well as the costs of the new initiatives.   Perhaps, and if so perhaps a pardonable effort to put a favourable gloss on the proposed health (and education) spends –  ie sell as new initiatives what are in significant part really just keeping with cost and population pressures.  I say “pardonable” because governments do it all the time.

In this chart, I’ve shown core Crown health expenditure as a share of GDP since 2000, and including Labour’s plans for the next three budgets.  (Labour show total Crown numbers, but I’ve taken their policy initiative numbers –  ie changes from PREFU –  and applied them to the core Crown data, which Treasury has a readily accessible time series for.  The differences between core and total Crown in this sector are small.)

Labour health

In other words, on these numbers health as a share of GDP over the next three years would be less than it was for most of the current government’s term, and virtually identical to what it was in Labour’s last full year in government, 2007/08.    Some of the peaks a few years ago were understandable –  the economy was weak, and recessions don’t reduce health spending demands.  But even so, we know that there are strong pressures for the health share of GDP to increase, as a result of improving technology (more options) and an ageing population.  Treasury’s “historical spending patterns” analysis in their Long-term Fiscal Statement last year had health spending rising from 6.2 per cent of GDP in 2015 to 6.8 per cent in 2030.

Without seeing more detail than Labour has released there really only seem to be two possible interpretations.  Either Labour hasn’t allowed for the ongoing (ie from here) population and cost increases in their health sector spending numbers, or there must be much less in the way of increases in health outputs than the documents seem to want to have us believe (eg “reversing years of underfunding”).  One has potential fiscal implications.  The other perhaps political ones.    Glancing through Labour’s health policy, which seems quite specific, I’m more inclined to the former possibility (ie not allowing for population and cost pressures), but I’d be happy to shown otherwise.

Eyeballing that chart –  and as someone with no expertise in health –  it would look more reasonable to expect that health spending might be more like 6.5 per cent of GDP by the end of the decade, in a climate where a party is promising more stuff not less, and with no strategy to (say) shift more of the burden back onto upper income citizens.

One could do much the same exercise for education.  Labour has seven line items in its “new investments” table.  Most of them are very specific (including increased student allowances and the transitions towards zero-fees tertiary education).     There is a general (large) item labelled “Delivering a Modern Education System” but in the manifesto there are a lot of things that look like they are covered by that.    There isn’t any suggestion that general inflation and population cost increases are included, but perhaps they are.  But again, here is the chart of education spending as a share of GDP, including Labour’s numbers for the next three years.

labour education.png

I’m not altogether sure what some of those earlier spikes were (perhaps something to do with interest-free student loans), but again what is striking is that Labour’s plans appear to involve spending slightly less on education as a share of GDP than when they were last in government.  And that more or less flat track from here doesn’t suggest a party responding to this stuff

National has chosen to undermine quality as a cost-saving measure. After nine years of being under resourced and overstretched, our education sector is under immense pressure and the quality of education is suffering. The result is a narrowing of the curriculum, more burnt out teachers, and falling tertiary education participation.

and at the same time committing to flagship policies around things like student allowances and fee-free tertiary study.

Again, it begins to look as though Labour has included in its education numbers the ongoing multi-year costs of its own new policies, but not the ongoing cost increases resulting from wage and price inflation and population increases.  Again, I’d happily be shown otherwise.

Of course, there is some unallocated spending in Labour’s numbers, but the amounts are very small for the next few years, and some of these sectors are very large.  And although population growth pressures are forecast to ease a little in the next few years, inflation is forecast to pick up and settle around the middle of the target range, so there are likely to be increased general cost pressures (including, for example, wage pressures if as Labour state in the fiscal plan document “by the end of our first term, we expect to see unemployment in New Zealand among the lowest in the OECD, from the current position of 13th”).

How much does it matter?  After all, we don’t know many specifics on the policy initiatives National (and/or its support partners) might fund in the next term, and there was the strong suggestion the other night of a new “families package” in 2020 (which would come from any operating allowance).  Quite probably the next few years will be tough, in budget terms, for whoever forms the government.  After all, the terms of trade isn’t expected to increase further, and inflation is.  And there is a sense that in a number of areas of government spending things have been run a bit too tight in recent years.      On the other hand, Labour participated in this ritual exercise and it looks as though they may have implied rather more fiscal degrees of freedom than were actually there, if –  critical point –  they happened to want to produce a surplus track very like National’s.    Gilding the lily isn’t unknown from either side of politics of course.

But perhaps the bigger question one might reasonably put to both sides is why the focus on (almost identical) rising surpluses?   These are the numbers.

labour surplusWhen net core Crown debt is already as low as 9.2 per cent of GDP –  not on the measure Treasury, the government and Labour all prefer, but the simple straightforward metric –  what is the economic case for material operating surpluses at all?   With the output gap around zero and unemployment above the NAIRU, it is not as if the economy is overheating (the other usual case for running surpluses).   Even just a balanced budget would slowly further lower the debt to GDP ratios.   One could mount quite a reasonable argument for somewhat lower taxes (if you were a party of the right) or somewhat higher targeted spending (if you were a party of the left, campaigning on structural underfunding of various key government spending areas).

Labour is promising to spend (and tax –  thus the surpluses are the same) more than National.  But their commitment (rule 4) was to keep core Crown expenditure “around 30% of GDP”, not “comfortably below 30 per cent”.

labour spending

28.5 per cent is quite a lot lower than 30 per cent (almost $5 billion in 2020/21 – not cumulatively, as GDP is forecast to to be about $323 billion). And 30 per cent wasn’t described as a ceiling. And in the last two years of the previous Labour government, core Crown spending was 30.6 per cent of GDP (06/07) and 30 per cent of GDP (07/08).

It is a curious spectacle to see a party campaigning on serious structural underfunding of various public services and yet proposing to cut government spending as a share of GDP.  It would be difficult to achieve –  given the various specific policy promises –  but you have to wonder, at least a little, why one would set out to try.     We simply aren’t in some highly-indebted extremely vulnerable place.

Finally, the affair of the last 48 hours has revived arguments for some sort of offiical costings unit to be set up, as Labour and Greens have called for (in their Budget Responsibility Rules) and people like the New Zealand Initiative have also apparently favoured.  I’m much more sceptical of such proposals, and covered some of the reasons in earlier posts (when the Greens first made a play of this issue last year, and when the Labour/Greens rules were announced).   I support the idea of a Fiscal Council –  as Labour/Greens have proposed, and as past external reviewers have suggested  –  although would favour something more macroeconomic focused (ie advice and review functions on monetary policy as well as fiscal policy), but I don’t think the case for a costing unit has been made.

As I noted in one of those earlier posts

On balance, I still think there is a role for something like a (macro oriented) fiscal council in New Zealand, perhaps subsumed within the sort of macroeconomic or monetary and economic council I suggested here (but perhaps that just reflects my macro background).   And there is probably a role for better-resourcing select committees.  But when it comes to political party proposals, if (and I don’t think the case is open and shut by any means) we are going to spend more public money on the process, I would probably prefer to provide a higher level of funding to parliamentary parties, to enable them to commission any independent evaluations or expertise they found useful, and then have the parties fight it out in the court of public opinion.  The big choices societies face mostly aren’t technocratic in nature, and I’m not sure that the differences between whether individual proposals are properly costed or not is that important in the scheme of things (and perhaps less so than previously under MMP, where all promises are provisional, given that absolute parliamentary majorities are very rare).  If there are serious doubts about the costings, let the politicians (and the experts each can marshall) contest the matter.

And this particular dispute wasn’t even about the details of the costings of individual policy proposals.  It seems to have been more or less sorted out through the cut and thrust of political debate and expert commentary.  That feels to me like the way I’d want the system –  competing political parties, open democracy – to work.  No non-partisan experts can reasonably decree that one set of spending plans is or isn’t feasible or appropriate –  much of that is inevitably about politics.     There are gaps in our debate –  it was notable in the last couple of days that no academics were quoted, even though for example, Victoria University likes to hold itself out as policy-focused, and they even have a professorial chair in public finance –  but it isn’t clear that spending more taxpayers’ money to cost political party proposals (according to the particular model of that particular group of technocrats) is a high priority use for scarce fiscal resources.

(I noticed a couple of journalists last night describing me as “dryish right” and thus happy to fling mud at Labour.  I’d probably accept “dryish right” broadly speaking, but I’m sufficiently disillusioned with the total failure of this government to deal with housing, and the failures (and, what are in effect, lies) around productivity growth that I’d be more than keen to see a serious credible alternative.  As it happens, Labour’s policies around monetary policy and the Reserve Bank –  issues of some importance to me, even if not of wide general interest – seem to be heading the right direction.  I’m more sceptical as to whether they have more of an effective economic strategy than the government does.  Which is by way of saying that I like to think I’m an equal opportunity sceptic –  who doesn’t usually vote on economic issues anyway –  and if some of this post does identify some challenges for Labour, it isn’t because I’m champing at the bit to see Mr Joyce succeed.)

 

Unpicking Steven Joyce’s press release

As I noted yesterday afternoon, Steven Joyce had put out a press release on productivity.  The press release was a mix of policy-based digs at the Labour Party (which weren’t of any particular interest to me) and some statistical claims, some of which seemed more or less reasonable and others not.   My post yesterday afternoon briefly responded to some of those points.

The press release made these claims

On one of the key measures of productivity, GDP per hours worked, New Zealand’s productivity has lifted nearly 10 per cent since National came into office. That’s a faster rate than the UK, Canada, the US, the EU, the G7 and the average across the whole OECD.

“The last time Labour was in office, it was the reverse. Our productivity growth was 5.5 per cent over eight years and much slower than all those other economies.

I wasn’t quite sure where the Minister had got his numbers from, but was going to just let the matter lie.  After all, the point that people like me have been making for some time, and which the Labour Party had picked up on, was that there has been no productivity growth in New Zealand for the last five years or so.  And over the longer run of history, everyone knows our performance has been relatively poor, although for some sub-periods we’ve done better than others –  at times more or less matching the growth rates of other advanced economies.    And since no one thinks that economies suddenly change, for better or worse, immediately on changes of government –  and in recent decades, the policy changes from one government to another hadn’t been large anyway –  I wasn’t overly interested in the narrow partisan point as to whether average productivity growth had been better under this government or its predecessor.

But I couldn’t help myself.   And a story by Bernard Hickey alerted me to the fact that the Minister had used these numbers, or ones very like them, in answer to a parliamentary question a few weeks ago.    With less rounding, the Minister then said that “another measure used by the OECD is GDP per hour worked, which has increased 9.6 percent since 2008”.    The answer to the PQ suggested Treasury had probably supplied the numbers, so I was curious as to whether I could work out what had been done.

The most likely source was OECD data, which are only reported on an annual basis.   So I found the OECD’s table showing the level of real GDP per hour worked, in real (“constant price”) national currency terms.    And, sure enough, on that measure the OECD reports real GDP per hour worked having increased by 9.6 per cent from 2008 to 2016.   For quite a few countries (about a third of the total) the OECD doesn’t yet have full year 2016 data for this variable.   So the Minister’s observations about how New Zealand has done relative to other countries seem to use comparisons between 2008 and 2015.

And here is a chart of that data.

joyce 1

I wouldn’t put much weight on the Irish number (which goes off the chart, having to do with tax-related anomalies in their national accounts), but on this particular OECD-reported measure, over this particular period, only 10 OECD countries did better than New Zealand.  Hence Mr Joyce’s claims.

But there are some pretty serious problems with the comparison (even setting aside the fact that it is now mid-late 2017).  There is an old line about OECD data –  you trust (or at least use) every country’s data except your own.  Typically, that is because you know the pitfalls in your own country’s data and not always the pitfalls in data from other countries.   But here the problem is a bit different.  Specifically, the OECD’s data for productivity growth in New Zealand doesn’t bear much relationship to the New Zealand data itself.   From memory, when I’ve tried to do these comparisons before I’ve just replaced the OECD New Zealand data with SNZ data.     The OECD don’t have data of their own, and they must do some transformations of the data they get from here, but not ones that are readily open to scrutiny.

As I’ve explained previously, when I do charts of New Zealand productivity performance over recent years I average the expenditure and production measure of GDP, and divide by HLFS hours worked (corrected for the series break last year).    But I remembered last night that the OECD prefers to focus on the expenditure measure of GDP.  Many New Zealand analysts focus on the production measure  (which, a long time ago, was less volatile).  And although I use the HLFS, there is also a QES measure of hours.   That gives one quite a range of ways to calculate GDP per hour worked, even on an annual basis.

Percentage growth
2008 to 2015 2008 to 2016
Expenditure GDP/HLFS hours 8 7.6
Expenditure GDP/QES hours 4.8 5.3
Production GDP/HLFS hours 5.6 4.8
Production GDP/QES hours 2.4 2.5
Expenditure GDP/average of the two hours series 6.4 6.5
Production GDP/average of the two hours series 4 3.7
Average of the GDP measures/HLFS hours 6.7 6.2
Average of the GDP measures/QES hours 3.6 3.9
Average GDP measures/Average hours measures 5.2 5.1
Average of all these measures 5.2 5.1

Replacing the OECD’s questionable New Zealand numbers in the chart above with our own data –  highest, lowest, and average from this table –  makes the chart look like this.

joyce 2

On none of these measures did we quite match the performance of the median OECD country over this period.    It is fair to note that over the first half of the period –  2008 to 2012 – we did match, or even modestly exceed, the productivity growth of the typical OECD country.

But here’s the thing: across those nine possible New Zealand annual measures (see table above), not one has shown any growth in productivity at all over the (most recent) four complete years from 2012 to 2016.  The estimates are tightly bunched –  between a cumulative fall of 0.6 per cent, and a cumulative fall of 1.2 per cent.    All those numbers are prone to revisions, mainly as the GDP numbers themselves are revised, but for now they simply reinforce the point I and others have been making for some time: there seems to have been no productivity growth at all in New Zealand for some years now.

But what about the comparisons the Minister of Finance was making with productivity growth performance during the term of the previous government?   He asserted that

The last time Labour was in office, it was the reverse. Our productivity growth was 5.5 per cent over eight years and much slower than all those other economies.

So I went to the same OECD spreadsheet he seemed to have taken his productivity growth number from in talking about the current government’s term.   On that OECD measure, productivity had grown by 10.6 per cent over the whole period 1999 to 2008, or by 7.4 per cent over the eight years the Minister appears to focus on (2000 to 2008).

But what did the New Zealand data itself show?  I went back to the nine different measures (see above).  For the full period 1999 to 2008, across the nine measures there was a range from 7.3 per cent to 13.0 per cent growth in real GDP per hour worked.  The average of those measures was a 10.2 per cent increase.   I couldn’t quite replicate the 5.5 per cent number the Minister quotes for 2000 to 2008, but on one of the nine measures productivty growth in that period had been 5.8 per cent  (close enough I guess).

And how did other advanced countries do over the term of the previous New Zealand government?  Between 1999 and 2008 the median OECD country had productivity growth of 15.7 per cent.   So, as the Minister pointed out, productivity growth lagged that in other advanced countries during the term of the previous government.

The data go back far enough to also look at the experience under the 1990 to 1999 National government.  As ever, a reminder that comparisons between the experience in different terms of office have little or no economic meaning.  But, for what it is worth, here are the summary results.  Because the OECD doesn’t have annual data for quite a few countries past 2015.  I haven’t included numbers for the median OECD country for the last two lines.

Total growth in real GDP per hour
Range of NZ measures Average of measures Median OECD country
National 90 to 99 10.7 to 13.4 12 19.5
Labour 99 to 08 7.3 to 13.0 10.2 15.7
National 08 to 15 2.4 to 8.0 5.2 7.0
National 08 to 16 2.5 to 7.6 5.1
Last four years -1.2 to -0.6 -0.9

I’ll leave you to draw your own conclusion.  My overarching one remains that for 70 years or so our productivity growth has underperformed that of other advanced countries, and there has been no extended period in that time, under any government, when any progress has been made in closing the large (levels) gaps that have opened up between productivty here and that in much of the rest of the advanced world.

To facilitate the cross-country comparisons all the numbers and charts in this post so far have used annual data only.

For shorter-term, and more timely, analysis, one can use quarterly seasonally adjusted data  (that is what I usually do when, for example, I’ve shown the chart of how productivity growth performances in New Zealand and Australia have diverged in recent years).   I usually use just one of the measures (average of the GDP measures divided by HLFS hours).  But again there are nine potential measures, as per the first table above.   This chart shows the average growth rate across those measures in each of the periods shown.

quarterly

There are no direct comparisons possible to a big group of other advanced countries.  But in each of these four periods productivity growth, on this summary measure, has been less than that in Australia.

In this chart, I’ve shown all nine measures indexed to 2007q4.  That doesn’t align neatly with political terms, but I find it a more useful dating for economic analysis, starting just prior to the start of the recession (here and abroad).

real GDP phw qtrly

You can see that there is quite a big difference in what the various measures show for productivity growth over the first few years (and in particular from around 2010 to 2012 –  by 2012 the lines are a fair way apart).  There are some puzzles for people to work through about just how New Zealand did during that period,   But, again, there isn’t much difference in the growth rates (or lack) of them over the last five years.  That is even more stark if we look just at the last five years, indexing each of the series to 100 in 2012q1 (and noting the compressed scale of the chart).

real GDP phw 2012q1 base

Not one of the measures shows any material productivity growth over the last five years taken together.  And although there are some divergences in the last couple of years –  while we wait for SNZ to revise, and increasingly reconcile, the two GDP measures –  there isn’t any sign of the trend changing even in that very recent period.

Global productivity growth has been pretty weak since around 2005 –  ie before the recession and (domestically) the change of government.   But having no productivity growth at all here for five years now doesn’t look to be just an international phenomenon.  In fact, from the same table the Minister quoted from, productivity growth in the median OECD country in the last four years appears to have been around 0.8 to 0.9 per cent per annum.

So as I suggested yesterday when the Prime Minister claims that “productivity in New Zealand has been growing pretty well”,  a response along the lines of “yeah right”  seems quite appropriate.  The last five years look particularly bad.

 

(Non-economist readers might well be surprised, or disillusioned, by the wide range of possible estimates of productivity growth in some particular periods.   Unfortunately that is the way things are.  Measurement is a real challenge, not helped in New Zealand by persistent underfunding of official statistics.)