Puzzling over the New Zealand macro data

I have no doubt that our labour market has been tight and that core inflation has been rising (finally above the target midpoint). It won’t make that much difference in the long-run, but it is a shame the “Level 4 lockdown” didn’t come a day or two later because if it had the Reserve Bank would, appropriately enough, have raised the OCR. I also don’t have any reason to doubt that there was a lot of GDP growth in the June quarter.

But that doesn’t mean there aren’t some puzzles.

According to the official data the New Zealand economy is quite a lot bigger than it was pre-Covid, Of the two quarterly measures of real GDP, one was 5.3 per cent higher in the June quarter than it had been in the December 2019 quarter and the other was 4.3 per cent higher. Average the two and the best guess is a lift of 4.8 per cent. That’s a lot, especially for a country that has (a) had at best mediocre productivity growth in normal times, and (b) has had the borders largely closed to new migrants (and quite difficult even for returning New Zealanders) for almost all of that period.

Ah well, perhaps it is all the cyclical stimulus, with fiscal and monetary policy “finally” (as some might put it) coming to the party and giving the economy a well-overdue boost. But……according to SNZ, the unemployment rate in the June quarter was exactly the same as it had been in the December 2019 quarter, and so was the employment rate, so there was no sign that suddenly we’d been able to get hitherto-unutilised resources producing.

So where might the reported growth have come from? Statistics New Zealand does not publish an official quarterly series for labour productivity, but we can derive one ourselves. In this chart I’ve shown growth in labour productivity, using a measure in which the two measures of real GDP and the two hours measures (HLFS and QES) are all set to equal 100 at the start of the chart, and the resulting real GDP per hours worked indicator is calculated and shown.

New Zealand’s productivity growth has been mediocre for a long time – little over 10 per cent in total in almost 15 years – and yet according to this indicator, calculated entirely with official statistics, closing the border (with all its ramifications), and for that matter diverting material resources into testing, MIQ, enforcement etc) has resulted in no deterioration in productivity growth. If anything, productivity growth over the last 18 months has been a bit higher than usual (but such is the noise, and routine potential for revisions we probably should not make too much of that lift).

How can this be? In the depths of lockdowns there was some sign of “averaging up” – low productivity workers (notably in tourism and hospitality) will have been disproportionately likely to have lost jobs/hours, and even if everyone else was only as productive as ever, the economywide average would have risen. But if, as there probably was, there was something to that story 18 months ago (and perhaps right now), it can’t really have been the story in June when – as a already noted – employment and unemployment rates were right back to pre-Covid levels.

So if less than half the reported real GDP growth came from labour productivity, and none came from a reduction in the unemployment rate or increase in the employment rate, where did it come from? The only other possibility is more labour inputs. And (unusually) the HLFS and the QES happen to agree: whether hours worked (HLFS) or hours paid (QES), hours in the June quarter were about 3 per cent higher than they’d been in December 2019 (all data seasonally adjusted). And that isn’t (mainly) individuals working longer hours, as both the HLFS (people employed) and the QES (filled jobs) suggest quite a significant increase in the number of people working.

And why is that? Because SNZ tells us that the population has been growing still quite rapidly: the “working age population” for example is estimated to have been 2.5 per cent higher in June 2021 than in December 2019. The official total population is estimated to have risen by 1.9 per cent over the same period.

How come? Well, this is the story SNZ currently tells.

The orange line represents natural increase (births less deaths), which will be measured accurately. Natural increase is quite stable, and quite modest, at just over 0.5 percentage points contribution per annum. The variability – and the huge measurement uncertainty – comes with the net migration numbers.

According to SNZ we had the three biggest quarterly net migration inflows in the 30 year history of the population series in the September and December quarters of 2019 and the March quarter of 2020 (something not showing in their contemporaneous estimates). And on their reckoning, net migration has been positive throughout the entire Covid period, dipping very slightly negative for a single quarter.

Perhaps it is all true. But here, on the other hand, is the monthly series of net arrivals and departures from New Zealand (all citizenships, all purposes) since the start of last year.

As one might have expected, there were really big net outflows over the three months to April (Covid having first become a significant issue near the peak of the tourist season), but there has also been a steady outflow ever since. In the year to June, for example, a net outflow (all purposes) of 35226 people, with only a single month seeing a net inflow. (The net outflow continued in July and August). SNZ, by contrast, estimate – and it is an estimate, not a full count unlike the air traffic numbers – net migration inflow of about 5000 over that year.

You wouldn’t expect the two series to match exactly. There will have been people (New Zealanders and foreigners) going and coming who were not away for long, but in any sort of net sense those numbers must have gotten very small as the months went on – hardly any holidaymakers for example. Whatever the precise composition we know that there were few people in New Zealand in June 2021 than there had been either in June 2020 or in December 2019, even if SNZ claims that the official resident population has kept on increasing.

If so, it is a bit of a mystery where all those extra hours/jobs are, given that the employment and unemployment rates haven’t changed. One might reasonably suggest that the GDP (and hours/jobs) numbers themselves build on estimates of the population that are more than usually uncertain.

One other way of looking at things is to see how Australia is reported to have done. It helps that the ABS reckons that by the June quarter of this year, Australia’s unemployment rate was also back to pre-Covid levels. As it happens, labour productivity is also estimated to have risen quite a bit in Australia – up by 2.1 per cent over the 18 months to June 2021. Of course, Australian productivity growth has typically outstripped New Zealand’s, but it still seems surprisingly high given that their borders were also closed.

But the ABS also reckons that real GDP in Australia in the June 2021 quarter was only 1.6 per cent higher than it had been in December 2019. And before anyone mentions Victorian lockdowns, NSW Delta, or whatever…..this was June, when things were looking good across Australia and New Zealand (remember the “bubble”).

And if GDP growth was less than productivity growth then….hours worked are estimated to have fallen. by about 0.5 per cent.

So what explains the difference?

Here is the ABS version of the population growth components chart.

Again, natural increase has been low but stable, but (a) Australia doesn’t show anything like the NZ net migration spike pre-Covid (the Australian 2019 numbers looked much as they had for the previous few years), and (b) net migration since the middle of last year has been consistently negative. These data are only to March 2020, but the population number implicit in Australia’s June GDP and GDP per capita numbers is consistent with a small quarterly net inflow in the June quarter.

I don’t have answers, only questions. But recall that (a) over the 18 months from December 2019 to June 2020 Australia had much the same experience of Covid as we did, (b) in both countries, unemployment was back to pre-Covid levels in June 2020, and (c) Australia had very stringent restrictions on its nationals leaving Australia (unlike New Zealand) so it seems a little hard to believe that Australia (the much richer country) has had material net migration outflows while we have had modest inflows. The total arrivals and departures data for Australia also show big net outflows, except in the June quarter of this year.

Perhaps it is true. Perhaps too productivity growth (in both countries) really held up rather strongly through the uncertainty and disruption of Covid. Or perhaps – perhaps especially in the New Zealand case – much will just end up getting revised away. The biggest annual revisions are due over the next three months, and often they have been big indeed. There are other challenges, such as the 3 per cent levels gap between the production and expenditure measures of GDP.

On the productivity front, it would defy almost all conventional economic models if productivity growth was really no worse than usual amid closed borders, rampant uncertainty etc etc (with no discernible cyclical effects either). Those firms in today’s media sending staff abroad uncertain when they can come home clearly don’t believe travel and face to face contact don’t matter.

And then, of course, we have all the uncertainties about SNZ measurement of the latest lockdown to look forward to. As I recall last year, their estimates for last June treated school inputs and outputs as having continued largely unchanged, a story that probably won’t have rung true to most parents, and doesn’t now seemed backed by literature on loss of learning in lockdowns.

Borders

There have been a few stories in recent days about the potential implications for economic activity in the rest of the country of the temporary border between Auckland and the rest of the country. The articles seem to have focused on transition across the border, which is strange since (at least as I understand it) freight itself is largely unrestricted. The issues seem to be more about what activities (including production activities) are able to be undertaken in Auckland while it is still under the government’s Level 4 restrictions (which could be weeks yet). And, of course, the point of Level 4 is that not very much – at least that can’t be done sitting at a computer or producing/distributing food, power, water etc – is supposed to be able to be done. For good or ill (perhaps for ill last year, perhaps for good this year – given the intensified risks with Delta) New Zealand has taken a much more restrictive approach than most countries, and even than Australian states. And if a lot of New Zealand manufacturing is in Auckland that is going to have ramifications for what economic activity can be sustained in the rest of the country in Level 3 (or Level 2).

A reasonable guess – but it is a stab in the dark, since SNZ had real measurement challenges – is that the Level 4 lockdown last year coincided with a 25 per cent reduction in GDP while it lasted, and that probably remains a sensible (but perhaps lower bound) guess for the current situation. See this year’s Treasury assumptions here. For level 3, Treasury estimates that the economy as a whole would experience a reduction of GDP of 10-15 per cent for the duration of those restrictions, but there is less data to go on. Whatever the number, it is still large, perhaps $800 million per week (in GDP losses alone) if the whole country were in Level 3.

But, of course, it isn’t. And in the last year for which we have data, Auckland accounted for 38 per cent of national GDP. In a particular production process, the unavailability of even one component that happened to be manufactured in Auckland but used nationwide could quite quickly – depending on inventory levels held outside Auckland – begin to impair production in the rest of the country that could otherwise quite lawfully occur.

But it seems fairly unavoidable, at least for as long as elimination remains the goal (as no doubt it should for some months yet). The Auckland outbreak has been a serious one, has grown more quickly than those in either Victoria or New South Wales, and existing restrictions have not yet squashed it. It certainly can’t be time for freeing up more activities in Auckland, no matter the possible GDP gains there or elsewhere in the country.

But the other thing that has struck me in the last day or two is the stories about people moving across the border. Of course, freight means people (whether train drivers, truck drivers, pilots), but there are other people too. There have been those extraordinary stories of students flying out of Auckland and encountering no checks either when they purchased the ticket or when they boarded. Essential workers in Auckland who live outside the border have permission to come and go for work. (A few) politicians have been moving. And even hospital patients have been being transferred to other cities to relieve pressure on Auckland hospitals. Reports suggest some of the (few) planes out of Auckland are quite full.

And it appears that not one of those people is subject to frequent testing or any isolation restrictions. I heard on Morning Report that Ashley Bloomfield had mused aloud yesterday that some testing might be a good idea – prompting spluttering from the Managing Director of Mainfreight – to which one could only think “well, indeed, and if only there were senior officials and ministers able to bring it about, and not actively blocking it”. Eric Crampton had a nice piece on his blog yesterday highlighting the extraordinary delays of rolling out government saliva testing, and the prohibitions on the import and use (by firms, by anyone) of the rapid self-tests, which produce results in 15 minutes and could be used before each shift and/or border crossing.

Rapid antigen tests give results in about fifteen minutes. They are not likely to catch cases with low viral loads but are decent at high viral loads – the people who would wind up being infectious. Having workers run a self-test before starting shifts would add an additional layer of protection. But no rapid antigen test has been authorised for use in New Zealand. It is unclear whether MedSafe has even considered any – I have a request in with them for more information. 

This sort of thing is being done in much of the rest of the world, but not here. That is entirely on the government and their officials.

It all seems a part of the sort of issue I highlighted last week of not taking the risks sufficiently seriously (seemingly a bit indifferent to the significant economic losses, and draconian incursions of normal life/freedom, that lockdowns bring).

A matter of weeks ago we had no community Covid in New Zealand but they had community outbreaks in Australia (and Fiji and other places). The focus here was, supposedly, on keeping it out. Arrivals from some places were largely barred altogether, quarantine-free travel from Australia was suspended (so that any future arrivals had to go through MIQ), there was even the charade of a pre-departure testing requirement (a charade because (a) it didn’t apply to NSW, (b) it still allowed up to three days between testing and departure for someone to become infected, and (c) for quite a while the government wasn’t even checking that most arrivals had had tests. And fairly tight protocols were in place around crew on cargo ships docking at our ports.

Now we have a significant community outbreak in Auckland (in per capita terms still worse than that in Victoria), and none of those sorts of protections on the internal borders. The government has restricted the number of people who can cross – essential to the regime of course – but does nothing systematic or rigorous to reduce to an absolute minimum the risks associated with those who do come out of Auckland (in some cases, coming and going every day). It seems unserious and not commensurate with the magnitude of the risks (remember the costs of renewed Level 4 lockdowns). Sure there are Level 4 restrictions in place in Auckland, governing everyone while there, but….there is still community transmission occurring. And once people are out of Auckland the restrictions are much less onerous, especially if much of the rest of the country was to shift to Level 2.

My suspicion is that this is another of those things/risks that just wasn’t properly planned for – despite the government having had months of notice. If it were otherwise, how could they possibly be so cavalier about the risks of cross- (internal) border transmission?

There don’t seem to be public figures on how many people are crossing the border each day*, or how far they are ranging, but it seems certain that the numbers are more than those crossing the external border each day (averaging just over 300 a day even over the last week), and we know that MIQ isn’t foolproof (how Delta got here in the first place), and is potentially becoming less secure than it was, with the vaccination/Delta combination. As yesterday’s events showed, isolation/quarantine hotels aren’t either. And there are no testing/isolation requirements on any of these people moving each day into Covid-free rest of New Zealand.

[*UPDATE: A Stuff story says 2000 trucks a day across the southern border, plus however many – presumably a much smaller number – across the northern border from today.

FURTHER UPDATE: A Herald story states that “of the first 3059 vehicles Police stopped at five checkpoints [on the southern border] just 114 were turned away]

It seems extraordinarily negligent, and inconsistent with the stated goal of elimination for the time being, at least while keeping to an absolute minimum the risk of new draconian lockdowns in the rest of the country. We have managed the risks around goods flow through the ports over the last 18 months, but barely even seem to be trying with internal movement now – when the threat (from Delta) is much greater. It all has the feel of a race between squashing the outbreak in Auckland and the likelihood that on current policies and practices it will get through again to the rest of the country. I’m sure we all cheer for and hope for the former, but it seems quite reckless of the government simply to gamble rather than act.

Which brings me back to Eric Crampton, this time from his Newsroom column quoted in the post

The government could, today, order a couple million rapid antigen tests. They are broadly available. It could distribute those test kits to every essential workplace in Auckland and require that every essential worker be tested every day before starting work.

It could be a condition of a Level 4 modified to suit Delta.

Within about fifteen minutes, each worker’s result would be available. Infectious workers could be sent to government testing stations for confirmation. And workplace transmission would be sharply reduced.

But not just essential workers in Auckland, but everyone crossing the internal border out of Auckland. If they won’t do something like that it is hard to take their words seriously. They are again exposing us to new lockdowns, and recall that the best estimate of a Level 4 lockdown is that lost GDP alone (never recovered) is $1600 million a week, and all that disruption to the rituals of life, including in its toughest and darkest times.

Costs, benefits, etc

Any sort of serious cost-benefit analysis undertaken by officials to advise ministers and inform the public has been notably absent over the 19 months now since Covid has been an issue for New Zealand. You may hazily recall last year that neither Treasury nor the Ministry of Health ever attempted any such disciplined analysis – presumably in the spirit of the senior minister in the previous government who responded to a question I once asked about some expensive initiative he was implementing observing that a cost-benefit analysis wasn’t needed because he already knew the correct answer. There were, of course, a few outsiders who made the effort – from the sceptical side consultant and former academic Martin Lally, and also an analyst at the Productivity Commission (whose efforts seemed to rile up those who already knew the right answer). Earlier in the year when the government extended its regulatory Covid reach, I OIA’ed the Ministry of Health for any cost-benefit analysis undertaken in conjunction with this new restriction. I was quite surprised to get a very prompt response, making it clear that none had been undertaken. Only later did it become clear that the Ministry of Health itself had opposed the initiative.

Of course, for any remotely-complex issue the best cost-benefit analysis in the world won’t produce a single definitive answer that everyone agrees on. But it forces proponents of a course of action (or inaction) to identify and write down their assumptions, think in a disciplined way about how people are likely to behave, think about a wide range of costs, and so on. It should sharpen the thinking of decisionmakers and those advising them, and aid the public scrutiny of ministers and officials,

The thinking that results in this post was initially sparked by seeing a comment in an interview earlier in the week by the Reserve Bank’s deputy chief executive responsible for economics and monetary policy where he claimed that

“Lockdowns have been about delaying the timing of spending rather than taking away spending in total”

and then yesterday I noticed the government’s adviser, and eminent epidemiologist, David Skegg suggest that we might as well push on with the elimination strategy as (words to the effect of) there was no real cost to doing so.

I don’t suppose the Reserve Bank has any real input into Covid policy – and his comment was mostly in the context of output gaps and inflation outlooks perhaps a year out – but Hawkesby is a smart guy, and it was a weird comment, tending to minimise the costs of restrictions.

This chart is an illustration of what I have in mind.

covid GDP losses

Quite clearly what happened was that spending/production returned to more or less normal levels relatively quickly, but “the hole” was never filled in. Real GDP per capita was about 12 per cent lower than otherwise in the June quarter of last year, and 2 per cent lower than normal in March quarter. GDP just prior to Covid had been about $80 billion a quarter, so almost $12 billion of GDP (value-added) we would normally have expected to have occurred in the first half of last year never happened. And there is no sign it was ever made up for later (not surprisingly, since few of the people who couldn’t work at all in April would have gone on to work twice the hours in June). These are really big losses – rather swamping the most recent derided example of planned government waste, the proposed walking/cycling bridge across Waitemata harbour. And those GDP outcomes were held up – to an extent not yet clear – by really huge fiscal outlays, which represents a future burden on New Zealand taxpayers.

Note that I am not citing these numbers to get into a debate about last year’s lockdown, and in thinking about the regulatory restrictions in that period it is vital to recall that many of those losses would have happened anyway (at least given the rest of policy up to mid-March), as individuals were already beginning to take their own precautions. But that was then when – if one wanted to be charitable – one could note that the government and officials were to some extent flying blind.

My concern is more about this year. Ministers and officials now had a good basis for knowing that lockdowns (of the draconian New Zealand sort) did not come cheap. There are all sorts of costs other than the ones captured in GDP – read the heartrending example in Matthew Hooton’s column this morning – but the GDP ones are real enough. I’ve seen mentions that The Treasury is working on an assumption of 25 per cent of GDP lost under “Level 4”, so we’ll use that assumption. Applied to last quarter’s GDP that represents a loss – unlikely ever to be recovered (see above) – of $1.6 billion dollars a week. After 10 days of nationwide level 4 that is already about $2.3 billion – and on a best-case scenario there is probably the best part of another couple of billion to come. $4bn might do as a rough estimate (five cycling bridges) in economic costs alone (and preservation of basic freedoms should itself be valued highly).

Again, I cite these numbers not to question the current lockdown (callously and deliberately cruel and inhumane as parts of it are), but to highlight that officials and ministers have known the cost of this sort of scenario all year. So you’d have supposed they’d have done absolutely everything possible, including spending lots of money if necessary, to make sure it didn’t happen. After all, Parliament had appropriated lots of money in the Covid fund.

Now people might push back and say that it was only in the last few months that the enhanced threat of the Delta variant became apparent, and no doubt that is true. But our politicians and officials are entrusted – paid – with the responsibility to prepare against a wide range of contingencies (just as, say, in a defence and foreign policy context). Similarly, we heard for months public health people bemoaning the alleged “complacency” of the public, but the public aren’t charged with preparing against all such contingencies and the government (politicians and officials) is. And the idea that a more troublesome variant might arise was hardly a new one no one had ever contemplated before Delta.

The only reasonable conclusion is that this draconian lockdown – and the extreme intrusions/restrictions should be priced quite highly – was preventable and the government objectively chose not to prevent it. I don’t suppose they wished it, but – having decided firmly on elimination (and quite probably sensibly so) – with all the resources of the public sector – and the wider base of expertise beyond it – they chose not to do the things that would have made it unnecessary (whether by preventing Delta arriving in the first place, or having the population and systems in a position where much less onerous and costly restrictions might have been appropriate). And I don’t suppose anyone anywhere in the public sector stopped and did some serious cost-benefit type of thinking. Frittering away the Covid fund on wider Labour political preferences must have been so much easier and more fun for the politicians. And as for the officials, who can say, but presumably the quiet and comfortable life suited them. It wasn’t as if they did nothing ever, but that is hardly the test when faced with such a threat.

What might the government have done (and been reasonably expected to have done, not just with the benefit of hindsight)?

There is a pretty standard list by now of things that could have been put in place over months, some of which would have made a difference with certainty, some just probabilistically (but this is a game of probabilities):

  • the astonishing lack of urgency the government displayed in securing vaccines (whether that is about when orders were placed, whether anything could have accelerated Pfizer deliveries, or the choice  – pure choice – to put themselves in the hands of a single supplier),
  •  the neglect of saliva-test options (now widely used abroad, and cheap –  to individuals and governments),
  • the now-apparent failure to put in place systems to prioritise testing (and processing of test of) close contacts),
  • the clear failure to have stress-tested and war-gamed the contact tracing system to ensure that it could really cope with what was being promised.

There were, of course, small things even last week.   Knowing by then, with utter confidence, of how threatening Delta was, when a community case was discovered in Auckland first the Prime Minister and her Covid minister hightailed it out of Auckland (how could they then know whether or not they had been contacts?) but more generally people were allowed to leave Auckland –  with no isolation requirements at all –  for almost 2.5 days after the first Auckland community case was known about.  Now, sure, there would have been contacts outside Auckland anyway, but the government’s choice knowingly added to the problem (some of the Wellington cases were people who left after the initial case was known) –  the numbers, the testing, the processing, the risks (that lockdowns are now designed to contain).

And then there is the border.  They knew the border was not totally secure –  after all, there had been several breaches here over the months.   And it probably could not be made 100 per cent secure –  for every person arriving (by air, or as crew on ships) there was some chance, however individually small, of a breach.  If it wasn’t obvious to them, the Skegg report was telling them a breach was inevitable at some point.   

And yet the government did nothing to reduce to an absolute minimum the number of people arriving.  If anything, it seemed to be constantly giving in to pressures to allow more in (not even compassionate cases, but discretionary sports, business and entertainment priorities of the government).  Just a few days before this lockdown there was the extraordinary proposal to allow home isolation for some (big end of town) vaccinated people, even as the government quite openly told us that any Delta breach would be likely to have an immediate Level 4 lockdown (with attendant cost).  Perhaps there was a case at the time for allowing quarantine-free travel from Australia, but even there they were astonishingly slow –  given what they knew of the cost of lockdowns –  to close down that travel when community cases arose in one or other of the Australian states (they seemed to rely on advice from Australian officials rather than taking the pro-active precautionary approach), and then kept allowing New Zealanders to leave Australia for a time even when the QFT was finally suspended altogether (sure, there was pre-departure testing, but that was more theatre than anything, given that the test could be taken up to three days prior to departure –  and many of them weren’t checked anyway).

(Of course, in any cost-benefit analysis you would want to include the costs to the individuals left unable to travel by a tighter approach at the border at the margin. It is likely to be a small number, relative to the costs imposed on five million of us.)

Given the commitment to elimination (which I am not questioning), it is simply inexcusable that ministers and officials were not doing this sort of cost-benefit calculation/analysis, and routinely updating it in the light of new information (including about Delta). One might not a year ago have put a 100 per cent chance of a new Level 4 lockdown a year ago, but perhaps it would have been prudent even then to have planned for a 30 per cent chance, with that probability clearly rise (to near inevitable in the Skegg report) as the year went on, and planned and prepared accordingly. Perhaps by mid this year it really was too late to do anything much to fix the vaccine problem, but – knowing the likely extreme costs of a lockdown (output never recovered, really high non-economic costs too – it should have led to even more of a focused drive to do everything to stop Delta getting in, and having foolproof, tested and robust, plans to immediately contain the spread (including beyond whatever area the first case was found in), Instead, it is if the lives, fortunes and freedoms of New Zealanders are just playthings for the government and officials – “it doesn’t really matter if we didn’t do our job well, after all, we can simply keep everyone shut up for days longer”. Hundreds of millions of dollars (and equivalent) lost/wasted? Never mind, we are well practised at that. After all, look at where the Covid fund went.

None of this bears on what choices Cabinet should make today, but it has real implications for the path ahead. If the government is committed to elimination for the time being, and holds over us constantly the Damoclean sword of Level 4 lockdowns, they need to take much more seriously minimising to the utmost the risks of future breaches.

$4 billion really is a lot of money – $800 per man, woman, and child – simply gone, and that on relatively optimistic estimates (and many of the costs not dollar-valued at all).

UPDATE 28/8: This Matt Nippert piece from today’s Herald, on the dawning awareness of the Delta variant, despite drawing on authorised officials in the Prime Minister’s own office presumably keen to provide cover for the government/officialdom, really makes my point. Even though the variant (then known as the Indian variant) was first identified late last year, was ravaging India in February, there is no hint in the article that ministers or officials were planning for really bad scenarios, and taking aggressive steps to prevent them being realised, until very late in the piece. It is one thing to hope for the best, but in officials/ministers charged with crisis management – and having themselves deliberately and consciously adopted the elimination strategy – it is no basis for planning. One wonders if there is any dedicated group anywhere in the official system charged with championing alternative (bad) scenarios, with a direct line to ministers.

Should have done better

A couple of months ago the Institute of Directors approached me about doing a talk to their members in Wellington on monetary policy as it had been conducted by the Reserve Bank over recent times. Somewhat to my surprise, my name had apparently been suggested to them by Alan Bollard.

I gave the talk this morning, and although the date was set ages ago it could hardly have been more timely given the labour market data yesterday, which in a way finally marks the completion of not just the last 18 months’ of monetary policy, but in some ways the last 14 years (for the first time since the 2008/09 recession we have core inflation a little above the Bank’s target midpoint and the unemployment rate back to something that must be close to the NAIRU.

The full text of my remarks, and a few more points I didn’t have time to deliver, are here

Monetary Policy in Covid Times IoD address 5 Aug 2021

What I set out to do was to review how the Bank had done, and what monetary policy had (and hadn’t) contributed over the last 18 months or so.  While I was quite critical in places, and headed the overall talk “Should have done better”, I was also willing to defend them, noting that the surge in house prices had little predictably to do with monetary policy, and was neither sought nor desired.

I’m not going to reproduce the full text in this piece, but here are a couple of sections from towards the end

The unemployment rate is now 4 per cent and the inflation rate – the sectoral core measure the Bank tends (rightly) to focus on – is 2.2 per cent.  Those are really good outcomes – first time in 10 years that core inflation had crept above the target midpoint.  After the last recession it took 10 years to get unemployment back down, not 10 months.

But those outcomes to celebrate aren’t much credit to monetary policy, since when the MPC was setting the policy that was having an effect now they thought their policy was consistent with much worse outcomes. 

But where to from here?  The MPC has belatedly terminated the LSAP.  They really should be ending the Funding for Lending programme, which was explicitly a crisis programme, a stop-gap for when they couldn’t cut the OCR further, and which was not operated on a competitively neutral basis.   But more likely the next step is the OCR.

One possible reason for caution is that coming out of the 2008/09 recession, central banks (and markets) were too keen to start getting interest rates back to what was thought of as “normal”.  The RBNZ made that mistake twice, and quickly had to reverse themselves.  But both times there was no sign of core inflation rising and the unemployment rates were still quite high, so quite different circumstances than we have now. 

[Figures 7 and 8]IOD2

IOD1

Some will doubt whether 4.0 per cent is the lowest sustainable rate of unemployment but it is getting pretty close to the cyclical lows of the last two cycles (and some measures may have raised the NAIRU a bit).  Wage inflation is rising faster than at any time since 2008, at a time when there is no productivity growth.    But the real guide – especially amid considerable ongoing uncertainty – is core inflation itself.  If it is above 2 per cent, and no one thinks it is about to drop back, then it is time to start tightening – not necessarily aggressively (there is no harm if core inflation goes a bit higher for a while, as it is likely to do), not part of some predetermined programme, but step by step, review by review, keeping a close eye on fresh data.   They need to be tightening at least a bit faster than inflation expectations are rising (on which new data next week).  And since the world economy could be derailed again, and fiscal policy (here and abroad) may start tightening, and very long-term interest rates are still at or near multi-decade lows, be ready to stop or reverse course if the data warrant that.  The great thing about monetary policy is that when the data change, policy can be altered quickly and easily.

The same can’t be said for fiscal policy.  There are plenty of things only government spending can do.  For example, income support to those rendered unable to earn because of pandemic restrictions.  There are plenty of other programmes for which one might make a careful well-analysed and debated medium-term case for spending taxpayers’ money on.  But cyclical stabilisation policy is a quite different matter.    Many fiscal programmes are – rightly or wrongly – hard to get underway, and slow to start (many of those “shovel ready” projects), some are easy to start but hard to stop.  And almost all involve playing favourites, rewarding one group or another – with other people’s money – according to the political preferences of the particular party in power.   Fiscal announceables, once announced, are very hard to take back off the table. 

By contrast, the MPC can and does act overnight, it can reverse itself, and it coerces no one, and picks no winners. Market prices shift and people and firms make their own choices whether or not more or less spending is now prudent for them.  There has rarely been a better illustration of how much more suited monetary policy is to short-term cyclical stabilisation than the surprises of the last year.  

And an overall assessment

How then should we evaluate the MPC’s performance?

It is clear they were poorly prepared.  There is really no excuse for that. It was always only a matter of time until the next severe shock came along.

When they finally began to appreciate the severity of the Covid shock their actions were in the right direction. 

But they can’t be credited with the good outcomes we are now experiencing – inflation and unemployment – because when policy was being set last year they expected their policy to deliver much worse outcomes, and did nothing about it.  We can’t blame them for the economic uncertainty, but they should be accountable for their own official forecasts and what they did with them[1].

The overall contribution of monetary policy to how things have turned out was pretty small.  Mostly what has happened was down to private demand reorganising itself and holding up much more than expected – notably by the Bank – greatly reinforced by the really big swing into structural fiscal deficits. 

As for monetary policy, the OCR cut was modest, and the exchange rate barely moved. The Bank claimed far too much for the LSAP, which was more noise than substance, and in the process they fed a narrative (“money-printing”) that made trouble for them and the government.  If they really believe the LSAP is as potent as they’ve claimed, perhaps they could make a start on tightening by first selling ten billion of bonds back to market.

And if they accomplished little buying lots of long-term bonds at the very peak of the market in the process they have run up big losses.  They dramatically shortened the duration of the overall public sector portfolio and then rates went back up.  These are real losses – at about $3 billion currently, four times the cost of the Auckland cycling bridge, without even the sightseeing bonuses.

We can’t realistically expect policy perfection but we can and should expect authoritative, open, and insightful communications. But MPC’s communications have been poor:

  • They never published the background papers they promised.
  • They never explained their weird ‘no OCR change for a year’ pledge.
  • There has been no pro-active release of relevant papers (unlike the wider central government approach to Covid).
  • They refuse to publish proper minutes – that actually capture the genuine uncertainties and inevitable, appropriate, differences of view, and which would allow individual members to be held to account.
  • Little serious research is published, and insightful analytical perspectives are rare.
  • From not one of them have we had a single serious and thoughtful speech on how the economy and policy are evolving.

In its first major test, the best grade we could give the MPC “could try harder, needs to avoid other shiny distractions, can’t continue to count on good luck”. Oh, and just as well for them that the individuals aren’t on the hook for those huge losses.

As with so many of our public institutions now, we deserve better.

[1] Note that just under three months ago, in the May Monetary Policy Statement, the MPC unanimously concluded that “medium-term inflation and employment would likely remain below its Remit targets in the absence of prolonged monetary stimulus” going on to note that “it will take time before these conditions are met”.

Those huge losses they have incurred for the taxpayer in running the LSAP – which by their own lights would have been unnecessary if the Bank had been better prepared – have not had much attention. They should. Some are inclined to downplay them on grounds of “think of all the macro good that was done”, but as I argue there is little evidence the LSAP made any useful macroeconomic difference to anything. Others downplay them on the feeble grounds that if the bonds are held to maturity the bond portfolio itself will not realise any losses (bonds are paid out at face value). But we can already see the cash cost to the taxpayer beginning to loom rather directly. The LSAP was simply an asset swap – the Bank bought long-term fixed rate bonds, and issued in exchange variable rate settlement cash deposits, on which it pays the OCR. The strong consensus now is that the OCR is about to rise quite a lot. Even if the OCR rises by 1 per cent and settles there indefinitely, the Bank (taxpayers) will be paying out hundreds of millions a year in additional interest. Of course, it could avoid those payments by selling the bonds back to the market – which it should be doing – but that would simply crystallise the losses on the bonds themselves. The taxpayer is materially poorer for the poor policy and operational choices of the Bank – they could have focused on short-term bonds (which are the maturities that matter in New Zealand), they could have had the banking system ready for negative rates, but instead they choice the flamboyant performative signalling routine of buying huge volumes of long-term bonds at what was (reasonably predictably) close to the very peak of the market. All while accomplishing little or nothing macroeconomically.

In a couple of months we’ll see the last Annual Report from the Bank’s old-style board (to be replaced next year). The Board has spent 31 years providing public cover for management. It is hard to envisage them changing approach at this later date. They really should, but the fact that they almost certainly won’t tells you why it was such a poor governance approach (even if the government’s replacement model if something of, at best, a curate’s egg sort of improvement).

(Circumstances, data, and perspectives do change. Some, but not all, of my views have shifted over the 18 months – as I’m sure everyone else’s has. The text of another lecture on monetary policy and Covid, from last December, is here.)

Thinking about monetary policy

I’m less interested in what the Reserve Bank will be doing at next week’s OCR review, or the one after that (or the one after that) than in what they should be doing. The Bank’s MPC do few/no thoughtful speeches (or really any at all on economic developments and monetary policy), publish little research, and have something of a record at times of lurching unpredictably from one review to the next. Banks employ people who will try to wheedle morsels of information out of Reserve Bank staff and MPC members and read those tea leaves. My interest is mainly in what the Bank should be doing, both absolutely (what is first best policy) and consistent with the mandate they’ve been given by the government of the day. I used to run the line that eventually policymakers will do the right thing (and we will all grope towards knowing what that is, no matter how fervently we champion our individual views), and I guess that is probably still true if avoiding serious outright deflation or runaway inflation is the test. But my confidence has taken a bit of a knock in the last 18 months.

The Reserve Bank went into Covid manifestly ill-prepared. They’d talked up the perfectly normal tool of a negative OCR – used in a variety of advanced countries in the last cycle, regarded as effective by no less than the IMF – only to find just a month or two before the crisis hit that actually banks had technical obstacles (systems issues) that, the Bank concluded, meant they couldn’t use their preferred instrument. It was truly astonishing – not only had they had 10 years’ notice from the rest of the world, and an internal working group that had highlighted to the Governor that specific (work with banks to be ready) issue 7-8 years earlier, but they’d been publishing work and giving interviews on their thinking about the next downturn. And yet they simply hadn’t done the basic operational work to be ready. It was an extraordinary failure, on their own terms – a failure of management (Wheeler, Spencer, Orr, Bascand et al), of the MPC, and of the Board paid to hold the Bank to account on our behalf, as citizens and taxpayers.

Taxpayers? Well, yes, because one of the great things about conventional monetary policy – official short-term interest rate adjustment – is that it costs (and makes) the taxpayer nothing. A key overnight interest rate is adjusted, nothing much about the public sector balance sheet changes, and no material financial risks are assumed on behalf of the taxpayer. The private sector, subject to all the appropriate self and market disciplines, does the substantive adjustments, to spending, investing, saving etc choices. It is one of several reasons to prefer monetary policy as a stabilisation tool – at the other extreme, expansionary fiscal policy just involves writing large cheques with other people’s money.

But unable (so they judged) to take the OCR negative, and unwilling (for reasons they’ve never attempted to explain) to even take the OCR quite to zero, the Bank lurched into the Large Scale Asset Purchase programme (LSAP), in which they have been buying up huge quantities of (mostly) government bonds, heavily concentrated at the highest risk long-end of the bond market where if they affect rates at all they aren’t rates that anyone much in the private sector pays. Short-term rates (out to perhaps a couple of years) are what matter in this market, and the Bank could very easily have managed those rates without (a) many asset purchases at all (market rates respond to expectations of future monetary policy) and (b) without anywhere near as much financial risk (short-term bond prices don’t fluctuate much).

I’ve been running an argument for the last year or more that the LSAP was really little more than performative display (“see we are doing lots, really”), in substance no more than a large-scale asset swap (Bank buys back long-term bonds and issues in exchange short-term liabilities with exactly the same credit risk), in turn exposing the taxpayer to a lot of market/refinancing risk. Of course, the Bank claims otherwise – they claim significant effects on bond rates (but if so, so what) and the exchange rate – but have never provided much supporting analysis. And they have their defenders in the markets – you could read this interesting piece from the ANZ, although you may come away thinking that the ANZ bank thought LSAPs were a good idea as (financial) industry assistance. At best, if there was a case for the LSAP it had long since passed by the end of last year (by when even the Bank recognised that it could have used a negative OCR). And yet they went on – albeit staff (but not the MPC) have been reducing the scale of purchases more recently, partly because there are fewer bonds to buy.

What about that financial risk? The Reserve Bank has about $3 billion of capital, and although capital isn’t a technical constraint on a central bank – it can still run with negative equity – Governors and MPC tend to be reluctant to take on lots of risk for their own institution relative to the amount of capital the institution has. So the Bank persuaded the government to provide an indemnity, covering any losses the Bank ended up making on the LSAP programme. And now there is a line item on the Reserve Bank balance sheet representing those losses, and the claim the Bank now has on the government.

indemnity

The published data are only to 31 May, and as rates fluctuate (down and up) the market value of the losses changes (as of today probably a bit lower than 31 May), and the Bank also continues to buy bonds. But a $3 billion loss looks like a reasonable point estimate. That is about 0.8 per cent of GDP gone and most probably – since there is no reason to suppose rates are more likely to fall than to rise from here over the years ahead – not coming back. Transferred from you and me, to those lucky enough to offload their bonds to the Crown near the highest prices ever experienced. The pedestrian/cycling bridge in Auckland has been a recent benchmark for reckless public spending, but this has cost four bridges – without even the consolation of somewhere to go sightseeing on a holiday to Auckland.

It is almost certainly the most costly (to the taxpayer) Reserve Bank intervention since the devaluation crisis of 1984 – and at least in that case the Bank’s losses resulted from a refusal of the government to follow Treasury/Reserve Bank advice. It swamps the cost of the 2008 deposit guarantee scheme, which some continue to inveigh against to this day. The public sector as a whole could have locked in the long-term debt funding it needed at last year’s low rates. Instead, the MPC, the Governor and the government acted to prevent it, at great and preventable cost to the taxpayer.

Preventable? Recall, they should have been able to deploy negative rates (their preferred option) which would have cost nothing. They could have focused what purchases they did much more heavily on short-dated bonds (on which losses would have been very limited). And they could have stopped the programme eight or nine months ago, once the negative OCR tool was back on the table. (None of this requires second-guessing purely with the benefit of hindsight the Bank’s macro forecasts – this would have been sound advice on their own contemporary numbers.)

Instead, even as recently as the last Monetary Policy Statement they were on record as suggesting

The Committee agreed that the OCR is the preferred tool to respond to future economic developments in either direction.

In other words, they planned to keep on buying up bonds per the ongoing programme even if economic developments meant overall conditions needed tightening. They’d keep on running up financial risk to the taxpayer and raise the OCR at the same time.

We might hope for a rethink next week, but who knows whether it will happen – there is a often a preference for making significant moves at full MPSs – but what they should be doing is discontinuing the LSAP now (not just letting staff run down new purchases, but winding up the programme completely, and publishing plans to manage – ideally relatively aggressively – the unwinding of their huge bond position). An apology for the losses would be nice too, but instead no doubt we’ll have claims repeated about the great gains the programme has offered with – as is now customary – no attempt to a cost-benefit analysis of this or of alternative approaches.

But, expensive as it has been, no one is probably now arguing that continuing – or discontinuing – the LSAP at current purchase rates is now making any macroeconomically significant difference. So whether or not it is ended isn’t really relevant to the macroeconomic question of what to do about the emerging economic data and the inflation outlook. What should be being done about that?

On balance, I think it is now hard to make a compelling case for the status quo on monetary policy (of things that make a difference, the OCR and the Funding for Lending programme). I’m very conscious of the mistakes the Reserve Bank made in prematurely tightening in the 2010s (on two separate occasions), and the way markets here and abroad often got ahead of themselves in looking to tightenings in that decade. And there is always a risk in using as a reference point rates as they were pre-recession – recall how Graeme Wheeler in particular always used to talk about getting rates “back to normal”.

But there are some important differences this time. Take two (quite important ones): inflation and unemployment.

When Alan Bollard started raising the OCR in 2010 core inflation has been falling sharply , the unemployment rate was about 6 per cent, and the employment rate was well below pre-recession levels.

And when Graeme Wheeler started raising the OCR in 2014, talking confidently on his plans to raise it by 200 basis points, the Bank’s preferred (slow-moving) core inflation measure was around 1.2 per cent, the unemployment rate was about 5.7 per cent, and the employment was still well below (although a bit less below) pre-recession levels. Perhaps the strongest elements in his case for tightening then were the strong terms of trade and the ongoing demand effects of the Christchurch repair and rebuild process.

What about now? Well, core inflation just did not fall during last year’s recession, and the best read now is that it is about 2 per cent (the Bank’s slow-moving preferred measure is up to 1.9 per cent). As for the labour market, the latest official unemployment rate was still a bit above (4.7 per cent) where it was at the start of last year, and the employment rate was a bit below (both gaps being much smaller than in 2010 and 2014). Meanwhile the new monthly jobs indicator tells us that the number of filled jobs is now above levels at the start of last year, even as the number of people in the country has shrunk, suggesting the official unemployment rate now (early Sept quarter) is probably not much different than it had been pre-recession.

Those indicators alone – absent any good reason to think neutral interest rates have fallen a lot since the start of last year – would make a reasonably good, entirely conventional, case for getting some monetary policy tightening underway, all reinforced by stories about the high (possibly record) terms of trade, and the very large government deficit (underpinning demand). And if business confidence surveys don’t often have much pure predictive power there is certainly nothing in them to suggest it would be reckless or irresponsible to see official actions sanctioning the rise already seen in market rates. There is nothing good or bad intrinsically in lower or higher interest rates – they are simply the balancing price, reconciling all the other evident pressures in the economy.

What would be unwise would be for the Reserve Bank – or anyone else – to be uttering views about the economic outlook with any great confidence. There are more than a few big uncertainties out there, and it is always rash – as Wheeler was – for central banks to talk grandly about multi-year interest rate adjustment plans. Events have a way of overwhelming such hubris. The MPC needs to be led by the data, and for now – and given the stance of fiscal policy, which MPC has to take as given – the data probably do sensibly point in the direction of higher interest rates. It might not six months hence, but the MPC simply needs to be led by the data as it emerges.

That shouldn’t mean aggressive moves. Recall that core inflation has been below the target midpoint for a decade or more, and for the entire time (since 2012) when 2 per cent midpoint has been a formal focal point in the target document. Against that backdrop, there is no harm in core inflation going a bit beyond 2 per cent for a while – doing so might help cement in longer-term inflation expectations near 2 per cent (market price indications are still below that, although higher than they were a couple of years back). But a modest tightening now might well see core inflation rise above 2 per cent if the more inflationary/expansionist indicators are for real, while preventing it dropping below 2 per cent if they don’t. “Least regrets” was the mantra the Bank liked to chant.

That also doesn’t mean the OCR should be raised. The first step (other than the performative signalling LSAP) should be to end the Funding for Lending programme. It was an extraordinary intervention that, while second best, worked, lowering retail rates relative to the OCR. But it was a non-neutral operation – only banks had access to it – and runs against the principles of competitively neutral interventions. There isn’t that much FFL lending outstanding – $3 billion or so at the end of May – and of course those who’ve already borrowed get to keep their loans to maturity – but there is no evident need for the facility to still be in place now. For those who worry that early Reserve Bank action might drive the exchange rate higher, using the FFL rather than the OCR is (a) quite a bit less high profile, and (b) retail rather than wholesale focused. Frankly, exchange rate concerns would be better addressed with a tighter fiscal policy.

And, almost finally, if there is a case for higher interest rates now, it is entirely cyclical and says nothing at all about the fundamental strengths (or travails) of the New Zealand economy. Border closures are likely to have reduced potential output a bit, and so have a whole raft of other government interventions (some of which may also have raised the minimum sustainable unemployment rate) . But monetary policy isn’t about potential output; all it can (and should do) is influence things around potential, however good or bad potential may be. As it was in the 1970s – when potential growth slowed but interest rates needed to be raised to deal with inflation – perhaps to some extent it is now.

Should the stances of other central banks be a constraint? I don’t think so. We’ve already seen a couple of OECD central banks move to raise official interest rates this year, and if institutions like the Fed, the ECB, and the Bank of England are more cautious, well the recoveries in each of those places lag a bit behind that here. As for the RBA, they seem an odd mix – their Governor almost seems to be running some sort of 1980s cost-push wage-targeting mental model – but bear in mind that core inflation in Australia was well below their target midpoint going in to Covid, and still is today. Circumstances differ, even if end goals are fairly similar.

School holidays loom and we are heading away so no more posts here for a couple of weeks.

Public opinion on Covid policy

I noticed over the weekend that the highly-regarded Pew Research Center had released the results of public opinion surveys undertaken in a range of advanced countries on various questions around Covid and Covid policy, and that New Zealand was included among the countries surveyed. Some of the results were totally unsurprising, some interesting even if unsurprising, and for a couple of questions I wasn’t quite sure what to make of the questions or answers.

This was the first set of results reported

New Zealand (closely followed by Taiwan) was the country in which the largest share of respondents reckoned that over the full course of the coronavirus outbreak the level of restrictions on public activity were “about right”. Of the remainder of the New Zealand respondents, opinion was fairly evenly split between those who say they’d have favoured fewer restrictions and those who claimed they’d have favoured more. That split was pretty even in Australia too. But I found a few things interesting: first that for all that one’s eye is first taken to the US results – the 26 per cent favouring fewer restrictions – and one thinks of the political polarisation in the US, actually the percentage favouring fewer restrictions was very similar not just in much of continental Europe but in Singapore. I don’t know anything about Greece, but Greek respondents are the only ones where a net balance favoured fewer restrictions over the course of the outbreak.

New Zealand wasn’t in previous surveys, but Pew also reports results for 10 countries where respondents rate their own country’s handling of Covid. The public has become less satisfied, but only in Japan, Spain and (by a narrow margin) France do more people now rate the handling “bad” than “good”. For what it is worth, in the current survey New Zealand respondents give a higher “good” rating to the New Zealand government’s handling than those in other countries, except Singapore.

The next question was about national unity/division

Of course, other things have happened in the last 17 months, and the greater division reported in the US is unlikely to be mostly about Covid itself. More generally I found the range of responses across countries quite surprising, and the New Zealand specific ones surprised me too. It is easy to see that the results are loosely correlated with how bad the Covid experience has been, and perhaps there is nothing more to it than that. But had I been one of those surveyed I’d either have said “not much difference” (it is astonishing how small those numbers are almost everywhere – Japan and Taiwan are exceptions to some extent) or “more divided” (there have been lots of conflicting interests, governments have spent billions and billions of public money, restrictions (still in place) affect some not others, and so on).

As it happens, there is quite a correlation between those who think their country is more divided and those who think the economy is in a bad way (and that gap is quite wide in New Zealand too).

And what of underlying political ideology (not sure whether this is self-identified or derived from answers to other questions)?

In quite a few countries there is no statistically significant difference, but (with Greece and the US as outliers) the responses for New Zealand seem fairly consistent with those for a range of other countries (and not just an anti-government reaction because there is a mix of left and right wing governments in the countries shown).

This was the question that really puzzled me. I simply can’t work out what I’d have answered.

Our economy is doing relatively well at present, but I don’t see that as reflecting anything about the strengths of our “economic system” – more a reflection of the elimination strategy (which caused deep initial losses, and then a bounceback) and of huge and continuing macro policy support, and that is a discretionary policy intervention not a feature of our economic system. And, of course, as you know I’m deeply negative on our economic policy and performance more broadly. That said, it was somewhat interesting that Australians were a bit more optimistic on this question than New Zealanders – and that the Japanese were quite so bleak on their responses.

At least in New Zealand’s case, there is probably some hint of what is going on in these responses. Those who think there should have been fewer restrictions are a lot more likely to answer negatively on the economic recovery, suggesting that those people may be emphasising ongoing border restrictions.

And how do respondents in the various countries say their life has changed as a result of Covid?

New Zealand respondents are mostly likely to say “not too much/not at all” – although a third still answer the other way (presumably some mix of people who would have travelled, people in directly affected industries, those who had hoped to buy a house, and harried public servants in places like the Ministry of Health and DPMC). On days when New World refuses to pack my groceries I might be tempted towards answering that way too. Even in New Zealand and Australia, the young are most likely to say that there has been quite an effect on their lives.

In some countries – but not New Zealand – those who are more pessimistic on the economy are more likely to say their lives have changed.

This was the final chart in the summary report. The New Zealand responses had me spluttering with incomprehension and astonishment.

As it happens, the New Zealand results do not stand out in response to this question, but these answers – globally and for New Zealand – seem like an extreme example of recency biases. Because – with extreme interventions and restrictions – health care systems in advanced countries did not get totally overrun this time, the public is confident that responses to any future pandemic – potentially with quite different characteristics – would also be just fine.

In the New Zealand case, for example, we went into the pandemic with a small number of ICU beds (per capita). It isn’t obvious that much has changed on that front. I’d have had no hesitation in answering “no confidence” on this question, whether for New Zealand or any other advanced country I’ve read about.

Anyway, it was an interesting set of results and nice to have New Zealand included in a consistently-compiled survey. And – as was my goal – I got through the post without offering any hint of my views on what New Zealand governments should be (or have been) doing this year or this week.

Making sense of the national accounts

Doing so is more than usually challenging right now. We had the huge disruption of the draconian national lockdown last year, and some more limited sets of restrictions since then. Some of the economic aspects of that were impossible to measure accurately, although no doubt in many areas SNZ will continue to try valiantly to refine their estimates. Largely-closed borders continue and thanks to the ill-judged decision of politicians and bureaucrats to scrap departure cards a few years ago we are now flying quite blind around recent net migration estimates (SNZ use a model, but – like any model – their model struggles to cope with a dramatic regime shift). Some of the difficulties are amplified by New Zealand’s long-term underinvestment in good economic statistics – a choice of successive governments, sometimes aided and abetted by SNZ management.

New Zealand has two measures of quarterly GDP. The expenditure and production-based approaches are both trying to estimate the same thing (as will the forthcoming income measure) but data collection challenges mean that it isn’t for several years that the two series are more or less reconciled (and even then not always that well).

GDP long term

But if the two series are, eventually, more or less reconciled that isn’t much consolation now.

Here is the more recent period, this time per capita and indexed to 100 in 2016q3, the last date for which the current estimates of the two approaches are almost identical.

nz per capita

Over 4.5 years a gap of 3.7 per cent has opened up between the two series. And there is no good ex ante reason to prefer one estimate over the other.

In per capita terms – using the current SNZ official population estimate – that is the difference between 2.4 per cent and 6.2 per cent growth in real per capita GDP over the period shown. One of those numbers is not too bad, the other is pretty dire. For the Covid period – so since the last pre-Covid quarter in 2019q4 – it is the difference between a 0.9 per cent fall in real per capita GDP and a 0.7 per cent increase. I usually simply average the two approaches, so a best stab in the dark is probably that we are back to around pre-Covid levels, but really who knows.

And it is complicated by the fact that the population estimates themselves are a moveable feast. SNZ’s official estimate – using their 12/16 model-based rule. They estimate that the resident population has increased by 6500 over the year to March on account of immigration. But one of the few hard numbers we know is the number of people coming and going from New Zealand (in total, for whatever reason) and those numbers show a net outflow of 56446 people between 1 April 2020 and 31 March 2021. It is at least possible that as the 12/16 estimate converges to hard numbers (SNZ know with confidence what happened 16 months later) that we end up with a rather low contribution from net migration in the last 12 months or so?

A revision along those lines might sound like a good thing – if the resident population was smaller then given GDP average per capita real GDP was higher. But I doubt it is as simple as that because many of the components of the GDP estimates themselves will have been estimated, from sample surveys, that have behind them a view on the population. Revise down the population and it is likely that the subsequently-reported GDP estimates will also be a bit lower.

One of my favourite charts over the years has been on real GDP per hour worked. My normal approach is to use the two GDP estimate and the two estimates of hours (QES and HLFS), index all the series and simply use the average that results. Here is the chart for the last 10 years

real GDP phw June 21

The decade was mostly pretty bad, but who knows what has gone on in the last 12 months. Some of the apparent noise reflects differences in the two hours series: the HLFS estimates hours worked and the QES hours paid. Usually they are much the same thing, but not in the midst of a lockdown with a wage subsidy. But that was mostly a problem for the June and September quarters last year.

No one is going seriously argue that Covid has been good for productivity, so even if the latest estimate looks quite appealing it is unlikely to endure. Now, of course, you’ll recall the divergence in the two GDP measures, so I could show you are a chart with really big differences in the productivity estimates depending which GDP measure one uses.

Perhaps you think that the lift in productivity shown in the chart is mostly a compositional effect. When hours worked dropped it is often the lowest paid, lowest productivity hours that drop off first. But even there our two surveys report quite different things: QES hours in March were (seasonally adjusted) 1.8 per cent lower than they had been in December 2019, but HLFS hours were 1.4 per cent higher. There is, inevitably, noise in these series, but it does leave analysts somewhat at sea at present. And not even sure where the errors, and future revisions, might be. I’m pretty confident that labour productivity has not really increased by 2 per cent in the last 15-18 months, but what that means for the component estimates I don’t know.

I’ve sometimes shown comparison with Australia, especially for real GDP per hour worked.

Aus GDP 2

There is much, much less volatility than in the New Zealand estimates. Of course, it also seems unlikely that underlying productivity per (stratified) worker has stepped up through Covid, but…..hours worked in Australia are estimated to have been 3.4 per cent lower in the March quarter than in the December 2019 quarter, so there is a a somewhat plausible composition story there. In fact this is what happened in Australia in the 2008/09 recession.

aus 08

And as the labour market recovered, productivity fell back to trend.

Some of the measurement challenges are unavoidable, but it does look as if the (highly regarded) ABS is making a better fist of things than SNZ.

We can be confident that the economy is in much better heart than it was last June, but – per official statistics anyway – that really is about all. Fortunately, we have business opinion surveys because perhaps more than usually we really rest on them for anything much of a sense of where the economy is right now. And for some things that matter longer-term, notably productivity, we really are just flying blind at present, backed perhaps by basic theory that whatever good shutting borders has done for public health (a real gain) it is almost certainly at least somewhat bad for productivity.

Questions

I’m a bit puzzled as to quite what has gone on in the New Zealand economy over the last year.

Of course, to some extent Statistics New Zealand must share that puzzlement. On their two real GDP measures – and there is no particular reason to favour one rather than the other – they aren’t sure whether by the December quarter last year real GDP was a bit higher or a bit lower than it was a year earlier. One measure shows a 1.2 per cent increase, and the other a 0.9 per cent fall. I tend to average the two measure, so a best guess now might be the GDP in December 2020 was about the same as in December 2019.

two GDP measure

The difference in the New Zealand GDP measures is almost the least of my concerns. Unfortunately there is always some difference in these two measures (trying to measure the same thing) and things have been a bit more difficult than usual during 2020 (especially so in the June quarter). We’ll keep getting that history revised for several years.

In Australia, the (generally highly-regarded) ABS reconciles their two real GDP measures: according to them Australia’s real GDP in the December quarter was 1.1 per cent lower than in the December 2019 quarter. On the face of it, such a difference seems plausible. We both had closed international borders, but Australia had more intensive sustained closed internal borders, and a few more Covid restrictions in place. (As it happens, if one looks at 2020 as a whole the falls in real GDP in New Zealand and Australia were more similar, reflecting our horrendous June quarter.)

But dig a little deeper and things get more curious. I’m really interested in labour productivity, and have regularly run here charts of labour productivity growth (and lack of it). So I checked out the hours data. We have two measures in the New Zealand: the HLFS measure of (self-reported) hours worked, and the QES measure (based on sample surveys of firms) of hours paid.

According to the QES, hours paid in the December 2020 quarter were 0.3 per cent higher than in the December 2019 quarter. That didn’t sound too implausible, especially if GDP (see above) hadn’t changed much over the period as a whole.

Unfortunately, the HLFS reports an increase of 3.9 per cent in hours worked over the same period. And while there are always differences in the two measures (a) over a full year they aren’t usually anywhere near that large, and (b) there was nothing like such a difference in the first year of the 1991 and 2009/09 recessions. Oh, and if one was going to expect a difference in 2020 one might have thought hours paid would have held up better than hours worked (between government wage subsidies, employers trying to hold onto staff, and public servants (eg immigration and biosecurity staff who don’t have much to do, but who couldn’t be laid of, by government decision). And since the HLFS employment rate – reported by the same people – fell by 0.8 percentage points over the year (and the unemployment rate rose) it really doesn’t seem very likely that the hours worked really jumped by 4 per cent.

In Australia, by contrast, the employment rate also fell by 0.8 percentage points last year and hours worked fell by 3.5 per cent. Which sounds fairly plausible: some job losses and a wider group of people working fewer hours than previously.

So what does all this mean for productivity? In the ABS official series, real GDP per hour worked rose by 2.5 per cent from December 2019 to December 2020. That seems plausible, not because Covid and closed borders were good for productivity but because tourism and related sectors (including eating out) have been particularly hard-hit, and those are typical low wage/low productivity sectors. Even if no individual worker is any more productive, the temporary loss of those lower-skilled jobs/hours will have averaged up real GDP per hour worked over the whole economy. A clue that this is what is going on is that the lift in average reported productivity was much larger in the June quarter (more Covid restrictions), unwinding to some extent subsequently,

What about New Zealand? I usually report an indicator of labour productivity growth calculated by averaging the two GDP series and the two hours series. If I do that for last year, we experienced -2.1 per cent average growth in real GDP per hour worked. And I simply do not believe that. But even if I just use the QES hours paid measure, we end up with a 0.1 per cent fall in real GDP per hour worked for the year, much worse (on those estimates, which will be revised over time) than Australia.

Closed borders etc should be bad for productivity. If we had true estimates, adjusted for changes in capacity utilisation, we might expect to see a fall in both countries. But there isn’t really a credible explanation for New Zealand doing quite so much worse than Australia last year (in December on December comparisons), other than problems with the data.

But then I’m also left with doubts about the GDP numbers themselves. Partly because in putting together quarterly estimates of GDP – and they really are just estimates at this stage – Statistics New Zealand needs to have some sense of how many people are here, as something to calibrate their sample surveys with. And there are oddities there too, highlighted by comparisons with Australia.

Recall that both countries have had largely closed borders since about this time last year. In the year to December 2019, Australia’s population was estimated to have risen by 1.5 per cent, while ours was estimated to have risen by 1.9 per cent. And yet in the year to December 2020 our population is estimated to have increased by 1.7 per cent, and Australia’s by 0.7 per cent. Both countries have rates of natural increase, that don’t change much year to year, of currently about 0.5 per cent per annum.

Of course, as we know people have continued to cross the borders, but in greatly reduced numbers. In New Zealand, for example, a net 39000 more people left New Zealand from the end of December 2019 to the end of February 2021 (more than the natural increase over that period). There have been net outflows (mostly quite small now) each month since March last year (125000 outflow from March to February). And yet the SNZ estimate is that the official (resident) population measure has grown almost as rapidly in 2020 as in 2019. Now, of course, lots of holidaymakers went home/came home – they were always “resident” at home, wherever they were spending at the time. Lots of temporary dwellers went home/came home. But the rate of population increase SNZ is reporting doesn’t make very much sense. Again, especially relative to Australia, which has had a 180000 net outflow over the twelve months to February (and presumably quite similar dynamics to New Zealand – lots of people leaving and really only Australian citizens and permanent residents coming in).

Perhaps both numbers are right, perhaps one country’s is and the other’s isn’t. Both are using (what I thought were similar) model estimates. But on the face of it, the Australian change in resident population looks a lot more plausible than New Zealand’s (and I’m not even reporting here GDP per capita numbers).

It isn’t obvious that we have any really good, timely, independent checks on these New Zealand numbers. I’m not offering answers, just highlighting questions and uncertainties. Unfortunately it might be a few years yet until we have a really good steer on what went on last year (if ever re the June quarter specifically) and what the new emergent trends are, including re relative productivity performances of Australia and New Zealand.

A year on

24 January last year was the date of my first post on the coronavirus, specifically the potential for significant economic damage and disruption if it turned into something significant beyond China. At the time, there was no great prescience involved; it was simply that I follow China news reasonably closely, combined with the fact that I’d been fascinated by the economics of pandemics since I’d spent a lot of time on an earlier whole-of-government planning and preparedness exercise in the 2000s, when health authorities worried that an avian influenza would mutate into easy human-to-human transmission. For some time I’d had in the back of my mind to write a post about some of that work, about the potential scale of the near-term economic losses, and the sorts of economic interventions that might be called for.

A year on, I’m not really that interested in looking at how, for example, unconditional forecasts compared with outcomes (although as it happens I filled in my responses to the Reserve Bank’s Survey of Expectations the following day, and looking through those numbers now I must still have regarded widespread economic disruption affecting New Zealand as still being a very low probability). Rather I’m more interested in reflecting on what I’ve learned and what has surprised me, about economic behaviour and economic policy, given the way the virus itself has unfolded (the latter not being something economists had anything particular to offer on).

The thing I’ve found most surprising, given the severity of the virus, is the apparent resilience of private demand. My mental model 10 months ago was that private demand – consumption and investment – would fall quite sharply and stay quite low for a prolonged period (you can no doubt find me running that line in numerous posts through much of last year), and that that would be so whether or not a particular country was successful at keeping the virus out altogether, mostly stamping it out (eg NZ), or not. There were several reasons why that seemed plausible to me:

  • there were lost income-earning opportunities, which couldn’t be directly replaced while the pandemic persisted because –  for example –  people couldn’t travel internationally, or faced higher costs, more restrictions, and/or more uncertainty in doing so (eg I was supposed to be doing an overseas consulting trip in late Feb/early March 2020, and we cancelled not so much for fear of the virus in the other country, but from fear of having unknowable trouble/expense/disruption getting home again),
  • specifically, and for example, foreign students couldn’t come here, and although many were already here the longer the pandemic (and associated uncertainty) lasted the fewer were likely to be here (more go home, hardly any come).  Even if people were happy to study online from abroad, they wouldn’t be adding as much to demand here (food, travel, accommodation etc),
  • cross-border tourism was going to become all-but impossible, and if not impossible then that much more costly and uncertain,
  • inward immigration –  a key factor in New Zealand demand cycles –  was likely to be materially dampened for some time to come,
  • since no one knew how long the virus, and associated disruptions, would persist, private investment – the most cyclically variable part of GDP –  was likely to be particularly hard-hit.  Even allowing for some new spending on capital equipment directly associated with responding to the virus, it seemed likely that both from the demand-side and the financing side investment activity would fall away quite sharply –  perhaps especially in the sectors directly adversely affected, but more generally too.   Any disruptions to cross-border supply chains would only reinforce that
  • And even if New Zealand got more or less on top of things behind largely-closed borders, the economic losses in other countries that didn’t seemed likely to be severe.  The state of world economic activity typically matters a lot for New Zealand, including through commodity price channels. Investment, in particular, seemed likely to be hard hit.
  • more generally, uncertainty seemed likely to be a huge consideration, affecting households, firms, banks.  Pretty much everyone in fact, here or abroad.  At a household level, for example, even if a wage subsidy or similar protected your job in the narrow lockdown period, the economic environment had turned much more hostile and uncertain.  Losing a job, and finding it harder than usual to get another, was likely to affect spending and activity now.
  • (I also expected house prices to fall temporarily, perhaps by 10-20 per cent in real terms, as had happened in the previous recession, but unlike the Reserve Bank I’ve never believed that overall house price developments have much impact, one way or the other, on private consumption spending.)

And all this was reinforced by a recognition that in typical recessions we see these sorts of demand contractions, increases in unemployment, increased caution by lenders (and by investors) even when –  as usually –  interest rates are cut a long way.  And this time, interest rates hadn’t really been cut by that much at all –  in some countries almost not at all, but even in New Zealand by some fairly-modest fraction of what we normally see (75 basis points vs, for example, the 575 basis points of cuts in 2008/09).  So monetary policy would be doing something but not very much….and I thought those effects would be mutually reinforcing as the private sector recognised how little monetary policy was doing.    As just another example, serious downturns here usually see the exchange rate fall a lot, which is helpful in buffering the downturn.

There was, of course, fiscal policy. Fiscal policy also typically turns somewhat stimulatory during the worst of recessions, and we could expect more this time round – as indeed we saw, whether in countries (like NZ) with no much initial government debt, or in others with historically high debt to GDP ratios.

And yet, and yet…..if one is to believe a variety of economic indicators, the level of economic activity now doesn’t seem far from what it was a year ago. GDP is a badly lagging indicator, but on both measures real GDP in the September quarter was a bit above where it had been at the end of last year. Treasury’s activity index is partial, but more timely, and for what it is worth suggests that in December activity was about 1.5 per cent higher than a year earlier, and this in a country where there are now fewer people actually physically here (people who need to eat, need accommodation, take holidays etc) than were here last year. (Of course, there was still a lot of lost output back in March/April 2020, and most of that will never be recovered, but that isn’t my point here).

Of course, the unemployment rate has risen – although we won’t know the Dec quarter outcome for another week or so. But even if the December number is a bit higher, no one seems to expect anything dreadfully bad now – I don’t think any projections for the unemployment rate are now as bad as those in any of the past three New Zealand recessions.

It is all a bit surprising, on a number of counts.

One thing I clearly got wrong was in assuming that when New Zealanders couldn’t travel abroad – a non-trivial chunk of total spending by New Zealanders – they would mostly save, at least for a time, what they couldn’t spend abroad. As I noted last autumn, it didn’t seem that likely that a week in Whangamata in July was going to seem that attractive if you’d been hoping to holiday in Fiji, the Sunshine Coast, or more far-flung northern hemisphere places. And no one seemed likely to take up skiing when they previously holidayed in the sun in midwinter. Add in the economic uncertainty – see above – and it seemed not very likely there would be a lot of expenditure-switching towards the local economy. And yet there clearly has been. Whether people have been taking more holidays at home – especially over the summer – buying a car or a boat, eating out more, or committing to house alterations etc, the expenditure switching seems to have occurred, on a quite large scale. So much so that despite the really dramatic loss of overseas tourist spending – and some dip in foreign student spend – and the weakness in the wider world economy, overall economic activity seems to have recovered surprisingly well.

Perhaps it won’t last. Perhaps it isn’t well-measured. But for now at least it is hard to dispute the overall story. There are still, clearly, sectoral holes – pictures of near-empty carparks/bus parks in former overseas tourist hotspots – but the overall story seems surprisingly strong. Not boom times of course: unemployment is up fairly materially, but right now it has the feel of a quite-mild downturn overall. Consistent with that, and even though inflation expectations themselves have fallen, core inflation in the year to December was right where it had been in the year to December 2019 – a bit below target, still, but not falling as one might have expected (as the Reserve Bank did expect).

What explains it? Well, clearly there was more scope for expenditure-switching than I’d supposed. And that is good to know. But it can’t be anything like the whole story. After all, the wider world economy continues to materially underperform (relative to, say, expectations at the end of 2019), and uncertainty remains high (recall all those optimists about trans-Tasman bubbles back in the middle of last year, and compare that with the current situation – where even when/if Australia unilaterally reopens again to us, you’d surely be hesitant about booking when you don’t know the regulatory climate at the time you travel out, let alone what you might face coming home. No one has a good sense of when major industries – foreign tourism or export education – will return to normal, no one knows when population growth will resume, no one knows when the world economy will again be firing on all cylinders.

Of course, some will credit monetary policy. All those people talking up the “money printing” theme, and tying that into the unexpected surge in house prices. I don’t buy that story because – like the Reserve Bank – I think quantitative easing works mostly by changing interest rates and – see above – interest rates just haven’t changed by unusually large amounts. Perhaps there are some headline effects that neither the Bank nor I have paid enough heed to, but even if so such effects are unlikely to last for long. Oh, and of course the exchange rate – usually a key part of the monetary transmission mechanism – is no lower now than it was a year ago.

What about fiscal policy? There was, of course, a lot of fiscal support provided in the middle of last year, mostly in direct income support. A small amount of that is permanent (boost to household demand), notably the increases in welfare benefit levels, but by far the largest chunk was the wage subsidy. And large as that was (a) it has long since ended, and (b) it wasn’t large enough to replace all the private sector income loss (see how much GDP fell in the June quarter, even as jobs and basic household demand were supported by the wage subsidy payments. And as far I can tell there isn’t a lot of fiscal stimulus happening now (beyond what was already in the works and forecasts a year ago) – I’m sure there are some specific projects getting underway, but since little is ever really “shovel-ready” it just can’t be much relative to the scale of the wider economic challenges.

I don’t have strong conclusions, just puzzles. Why are people spending as strongly as they are, especially when we are reminded every day of our own vulnerability to new Covid outbreaks, lockdowns etc etc? It isn’t obvious that people have adequately factored in the real level of uncertainty.

Among the puzzles is that if unemployment is up and yet GDP is also flat or a bit up on a year ago, and the number of people here is a bit less than it was – that seems to suggest a boost to productivity that doesn’t make a lot of sense. When there was talk of really big job losses, people recognised that a lot of lowly-skilled people might lose their job, averaging up productivity even if no actual person was more productive, but now we are dealing with quite modest job losses. Even if GDP hasn’t fallen we’ve had material dislocations in individual sectors and those usually take time to work through. And – even with all the advances of technology – if we’d been told people couldn’t travel for a year – work and leisure travel – most would have assumed that would be a drag on productivity. Perhaps not instantly, but over time. And certainly not a boost. Business travel took place for a reason – and not the “joy” of long haul flying.

So some things don’t seem quite right. And in some cases not that sustainable. But quite what gives and when, who knows.

As for policy, my own position is that more macroeconomic policy support remains warranted. The case is simple: inflation and inflation expectations are below target and the unemployment rate is above any sort of NAIRU. I’d focus on monetary policy, which is the tool best-suited to short-term demand stimulus (as distinct from the income replacement imperative in March/April). If anything, over the last year I’ve become more wary of fiscal policy for countercyclical purposes. It gets presented as some sort of free lunch when it isn’t, and involves whichever lot holds power at the time making real resource commitments – to their own ideological biases – that are difficult to change later and which often don’t stand close scrutiny re the quality of the spending. By contrast, monetary policy attempts to mimic what real economic forces (savings, investment) would be doing to market interest rates, and involves no politician or public servant committing any real resources, or controlling anyone’s spending. Those best placed to spend more do, those more hesitant don’t, and interest rates can – or should be able to – be adjusted without limit (if central banks had done their jobs) to provide what support is needed, including drawing demand towards New Zealand (whereas fiscal policy focused on government spending) only tends to further increase the real exchange rate, and the excessively inward orientations of the New Zealand economy.

Productivity, Productivity Commission, and all that

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa.  This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone.  However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges.  I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)