Amy Adams and the National economic model

National Party finance spokesperson Amy Adams was interviewed on TVNZ’s Q&A programme on Sunday.   Amid the to-ing and fro-ing on aspects of the government’s Budget, there was an odd exchange about the underpinnings of economic growth in New Zealand.

AMY Can I just finish, though? Can I just finish? Even Treasury is saying that the GDP growth that they’re forecasting is only held up because of strong and, in fact, growing immigration numbers — something that Grant Robertson went on about for nine years in opposition. So it’s been driven by immigration, industrial law changes, foreign direct investment, new taxes. Those things will slow the economy.

CORIN Are you seriously criticising this government for relying on immigration to grow its economy when your government relied on immigration and housing?

AMY Am I going to get a chance to answer? Okay, so what I’m going to say, Corin, is that for nine years in opposition, Grant Robertson made a big deal about the fact that immigration and the net flow of migrants into New Zealand was what was holding up the economy. What I’m pointing out is that Treasury, in its own estimates in the Budget, has said it is continuing strong immigration that is going to continue to see GDP held up. We’ve always argued that you need a good inflow of skilled workers. We’ve never made any bones about that, but this is a government, again, that talked one game in opposition and is entirely going the other way in government.

CORIN Fair enough — that’s a fair point, but it’s a bit rich to criticise them for relying on immigration.

AMY I’m not criticising them for doing it; I’m saying I’m criticising them for breaking their promises about what they said. They said in the campaign they would slash immigration, and now it’s strong immigration numbers that they’re looking at, or at least, Treasury are looking at to support those figures.

If I’m reading Adams correctly she appears to be

  • criticising the government for not carrying through on what she describes as their promises to “slash migration”,
  • arguing that, on Treasury’s account, continued migration-led population growth is a key element in the GDP growth forecast over the next few years (Treasury having revised up its medium-term immigration assumptions), and
  • acknowledging that in National’s term in government, the numbers relied very heavily on large immigration inflows.

I’m mostly interested in that final point.  On my analysis of Labour’s manifesto, there was never a promise to “slash” migration, or even to take steps that would cut the net inflow for more than a year.  And those were policies put in place when Andrew Little was still leader; from her silence on the issue once she became leader it was pretty clear Jacinda Ardern didn’t really believe in those policies.  There was no change promised in the centrepiece of our immigration policy: the residence approvals target number of 45000 non-citizens per annum.    (There hasn’t yet been any sign of the modest changes Labour did promise –  some sensible, some not – although we are told they are coming.)

But what of National’s approach to economic policy.   A couple of weeks ago, the National Party leader was touting his party’s economic credentials

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

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

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

But together they were effective.

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

But, in fact, what it came down to mostly was a lot more people, and the activity that a lot more people generate.  At least Amy Adams seems to recognise that.

In the five years to the end of 2012, New Zealand’s population is estimated to have increased by 4.3 per cent, and in the five years to the end of 2017 the increase is estimated to have been 9.3 per cent.    More than all that increase resulted from changes in net migration (the natural increase was smaller in the second period than in the first).  Coping with a lot more people – especially when the increase is unexpected – generates a lot of economic activity (people need houses, schools, shops, offices etc), but not necessarily a lot more long-term economic opportunities to support the increased number of people.

Note that I deliberately used the words “not necessarily”.  At some times, and in some circumstances, migrants can help create or tap whole new opportunities, helping to lift economywide productivity, increase the outward-orientation of the economy (and the associated investment), and so on.  But it is an empirical question, that has to be reviewed in the light of experience.  Sadly, there is little or no sign that we’ve seen those sorts of gains here.

I’ve pointed out previously (perhaps ad nauseum) that total labour productivity growth in New Zealand in the last five years was only about 1.5 per cent.  Over that period, too, trade with the rest of the world (exports and imports) have been shrinking.

trade shares may 18

When National first came to office 10 years ago they recognised that sustainably successful economies tend to be ones that find more and better products and firms that successfully take on the world (in turn, enabling us to import and consume more from the rest of the world).  Perhaps unsurprisingly, foreign trade rated no mention from Amy Adams.

So we’ve had

  • little or no productivity growth in the wake of the population surge,
  • a shrinkage in the proportion of our economy traded with the rest of the world, and
  • increasingly ruinous house prices in much of the country.

Twenty years ago when people first started to worry a bit that there wasn’t much sign of New Zealand catching up again with the rest of the advanced world, one hypothesis that did the rounds for a while was that of ‘the cheque is in the mail” –  just be patient, and the gains would materialise soon.   They didn’t then, but perhaps this time is different?

One place we might look for signs of that is business investment.  But, as even the Reserve Bank Governor has been pointing out, that has been pretty muted.   Here is business investment (total gross fixed capital formation less government and residential investment spending) as a share of GDP.

bus investment may 18

That mightn’t look too bad to you –  after all, the line has been edging up over the last few years.  But even now the share of the economy devoted to business investment is lower than in every quarter from 1993 to 2008, and we’ve had much larger and more sustained total population increases this time round than in the previous couple of cycles.  More people need more capital.  It doesn’t look as if business has been planning for even better times ahead, more or less just meeting the domestic demands of the rising population itself.  (And as I illustrated on Friday, Treasury doesn’t expect any recovery in the export/import shares of GDP in the next few years.)

Consistent with that, here is a chart I’ve shown previously, using SNZ’s annual capital stock data.

cap stock growth may 18Growth in the per capita “productive” capital stock –  public and private, but excluding houses –  has been low and has been trending downwards.  I’ve also shown (orange line) a proxy for natural resources per capita: since natural resources themselves are fixed, this is just the inverse of the rate of population growth.  Per capita natural resources are falling.  That mightn’t be a problem –  it is, after all, true of every country with a growing population – if other resources were taking the place of the natural ones.  But there has been no sign –  in business investment, productivity, or the foreign trade data –  of that here.

Productivity growth here (real GDP per hour worked) in the last five years was 1.5 per cent in total.  The best-performing eight OECD economies averaged 11.3 per cent over the most recent five years (some to 2016, some to 2017).  Most of those countries are still a bit poorer and/or less productive than New Zealand –  but not all (the list includes Turkey, Slovakia, and Korea). And those gaps are now a greater deal smaller than they were even five years ago.  New Zealand GDP per capita is currently around $60000.  If we’d managed 10 per cent productivity growth over the last five years –  instead of 1.5 per cent – the economy would be around $5000 bigger per man, woman, and child.  Just think of the possibilities that would have opened up, individually and collectively.

Instead, pretty much all we had was the activity generated by a lot more people, and more working hours for those already here.  Probably inadvertently, the National Party finance spokesperson has finally acknowledged it.

Of course, the outlook under the current government is more of the same, or even worse.  The immigration policies of the two main parties are all but identical in substance (although the cyclical dimension does appear to be turning), but the new government throws into the mix the ban on oil and gas exploration, a determination to do more on water standards, and to do much more around emissions.  Perhaps each of those policies is individually worthy, but they are all likely to come at an economic cost, a cost exacerbated if policy keeps on trying to drive up the population –  in a location that hasn’t shown the (beneficial) economic fruits of such a policy for a long time now.  And should the government somehow manage an acceleration of the rate of housebuilding, that too will only squeeze out –  through higher interest and real exchange rates – more of the business opportunities that might otherwise have supported a growth in material living standards.

More people, at least in New Zealand, isn’t a path to higher productivity, and higher productivity is what aspirations for higher material living standards rely on.  More people is just a path to more activity to accommodate more people –  skewing the economy inwards again, and undermining our prospects of ever getting back towards that upper tier of advanced economies.  On this score, Amy Adams (and her leader) appear quite as blind as Grant Robertson (and his). It is only two years until the next election campaign will be getting underway: the Adams interview doesn’t suggest any sign of a rethink of policy, or even a recognition that activity is no substitute for productivity.  And the latter is sorely lacking in New Zealand.

 

A wager for the Minister of Finance to consider

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

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

and

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

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

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

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

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

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

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

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

But what of the current government?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

This is what productivity means

Presbyterian Support Northern is hosting a series of lectures on different aspects relevant to the wellbeing of children.  The first lectures were given by Australian Labor MP, and former economics professor, Andrew Leigh.  I wrote about his lectures here.

I was asked to speak on something around productivity and the wellbeing of children (thus there are huge areas highly relevant to child wellbeing that I simply don’t touch on).  This was how my talk opened.

Imagine a country in which the average age at death was only about 45, 6 per cent of children died before their first birthday, and another 1.5 per cent before they turned five.  Not many children are vaccinated.

Most kids get to primary school –  in fact it is compulsory –  but only a minority attend secondary school.  By age 15 not much more than 15 per cent of young people are still at school.   Only a handful do any post-secondary education (total university numbers are about 1 per cent of those in primary school).   Houses are typically small –  not much dedicated space for doing homework – even though families are bigger than we are used to.   Perhaps one in ten households has a telephone and despite the street lights in the central cities most people don’t have electricity at home.

Tuberculosis is a significant risk (accounting for seven per cent of all deaths).  Coal fires – the main means of heating and of fuel for cooking – mean that air quality in the cities is pretty dreadful, perhaps especially on still winter days.  Deaths from bronchitis far exceed what we now see in advanced countries. There isn’t much traffic-related pollution though – few cars, so people mostly walk or take the tram.  The biggest city is finally about to get a proper sewerage system, but most people outside the cities have nothing of the sort.      And washing clothes is done largely by hand – imagine coping with those larger families.

Maternal mortality rates have fallen a lot but are still ten times those in 2018 in advanced countries.  One in every 50 female deaths is from childbirth-related conditions –  which leaves some kids without mothers almost from the start.

Welfare assistance against the vagaries of life is patchy.  Most people don’t live long enough to be eligible for a mean-tested age pension.   Orphans aren’t in a great position either, and there is nothing systematic for those who are seriously disabled.  There is a semi-public hospital system, but most medical costs fall on individuals and families, and there just isn’t much that can be done about many conditions.

There are public holidays, and school holidays, but no annual leave entitlements.  No doubt the comfortably-off take the occasional holiday away from home, but most don’t, because most can’t (afford it). Only recently has a rail route between the two largest cities been opened –  but it takes 20 hours for cities only 400 miles apart.

I wouldn’t choose to live in that country.  Would you?

And yet my grandparents did live there –  they were all kids then.  This was New Zealand 100 years or so ago, just prior to World War One.  I took most of that data from the 1913 New Zealand Official Yearbook.

And if it all sounds pretty bleak, New Zealand was probably the wealthiest place, with best material living standards, of any country on earth.   In the decade leading up to World War One, New Zealand’s per capita income was (on average) the highest in the world (jostling with Australia and the US, with the UK a bit further behind).    The historical GDP estimates are inevitably a bit imprecise, but on statistic after statistic in that 1913 Yearbook, New Zealand showed up better than the other rich countries the compilers had data for.

The difference in material living standards between then and now is productivity –  the new ideas, new products, new ways of doing old stuff, making more from what we have.   Of other influences on material wellbeing, the terms of trade haven’t changed much taken over 100 years as a whole, and people work a shorter proportion of their lives now (whether in the market or in the home) than they did in 1913.  Then, most (who survived infancy) were in work by 14, and dead by 65.    Productivity is that enormous difference between what we enjoy today, and what my grandparent had as kids in middle-class New Zealand families on the eve of World War One.

And yet, by international standards we’ve done badly.  We’ve gone from top of class to perhaps 30th today.  It would take a two-thirds lift in average productivity for us to match today’s top-tier (a bunch of –  small and large –  northern European countries,  and the United States).

That’s bad.  On the other hand, think of the possibilities it leaves open.  We don’t need to blaze trails at the productivity frontiers: making significant inroads on the gap between us and the top-tier would make a big difference to us, and to our kids.  And economic failure tends to fall most heavily on those at the bottom, so getting a significant lift in productivity opens up possibilities for everyone, including the disadvantaged.

In this address I’m not focused on the how –  the specific policies that might make a real difference.  My focus is on highlighting the difference that could be made, and calling for our leaders –  political and bureaucratic –  to start acting as if they believe things can be better, getting in train processes that might identify what is really important for productivity here in New Zealand, and then getting on with it.  Despite occasional references in speeches, our political leaders seem to have more or less given up, focusing on other stuff.

There is a (valuable) place for redistribution and policies that address immediate needs now –  it isn’t an either/or – but just as no possible redistributive policies in 1913 could  possibly have given people today’s material living standards, so any new redistributive policies now will inevitably make much less difference than markedly lifting our productivity performace would.  I’ve banged on here about how dismal productivity growth in New Zealand has been in the last five years in particular (a total of 1.5 per cent).  The best-performing OECD countries over the most recent five years were averaging more than 2 per cent productivity growth per annum –  and all of them were countries catching up with the most productive economies, just as we once aspired to do.   If we’d managed 2 per cent productivity growth per annum in the last five years, per capita GDP would be around $5000 per head higher (per man, woman, and child) today.

Catching up to the top tier will, in a phrase from Nietzche, take a “long obedience in the same direction” –  setting a course and sticking to it.  But here is a scenario in which the top tier countries achieve 1 per cent average annual productivity growth, and we manage 2.5 per cent average annual productivity growth. Here’s what that scenario looks like:

scenario

I’ve marked the point, 15 years or so hence, where the gap would have closed by half.

Could it be done?  Well, on OECD numbers the G7 countries as a group have managed average productivity growth in the last 15 years of about 1.1 per cent per annum, and plenty of OECD countries –  each in catch-up mode (Korea, Turkey, and various eastern and central European countries) – have matched or exceeded 2.5 per cent annual productivity growth over that period as a whole.   Mine is just a scenario, but it doesn’t look like one that should be beyond New Zealand –  and unlike any of those other countries, we were the richest and most productive country in the world barely more than a century ago.

The full text of my address is here.  It includes a plug for fixing the manifest evil –  by outcome if not by intent –  that is our housing and urban land market, which systematically skews away from those at the margins, where (inter alia) our particularly disadvantaged children are typically found.

I end this way:

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

Productivity isn’t just some abstract plaything of economists. It makes a real and tangible difference, opening up whole new possibilities and options. We need, and should able to achieve, a whole lot more of it. Our kids deserve no less.

Some public opinion on immigration

Over the course of the last week, I’ve noticed a couple of interesting polls on attitudes to (some aspects of) immigration.

First was a note by Katharine Betts, for The Australian Population Research Institute, drawing on data from the 2016 Australian Election Survey.   Two of the questions asked were

A1: ‘Do you think the number of immigrants allowed into Australia nowadays should be reduced or increased?’

A2:  ‘The number of migrants allowed into Australia at the present time has: gone much too far, too far, is about right, not gone far enough, not gone nearly far enough’

And one of the very interesting aspects of the survey is that election candidates were asked the same questions as general (voter) respondents.

Recall, too, that the target level of non-citizen immigration to Australia was increased a lot about a decade ago, and is now similar to –  just a little less than – New Zealand, in per capita terms.

Here is a chart of the summary responses to that second question.

betts a2

Among all voters, more think things have gone too far than think there hasn’t been enough migration.  On the other hand, a majority favour either keeping things at the current high level or increasing immigration further  (the results are similar for the first question, the wording of which is more explicitly flow-based).

But what is most striking is the contrast in views between voters and candidates.   60 per cent of candidates favoured further increasing Australia’s rate of immigration while only 6 per cent favoured a reduction (a net 54 per cent favouring an increase).   By party, that result is massively dominated by Labor and Greens candidates, with Coalition candidates more evenly divided.    By contrast, among voters a net 17 per cent favoured a reduction, and among non-graduates a net 32 per cent favoured a reduction.

It will be interesting to see the results of any immigration questions in the New Zealand 2017 Election Survey, including the results by party.  In last year’s election, two of our now governing parties campaigned on policies intended to have the effect of reducing immigration (one half-heartedly, and one not very specifically).

The other poll results were from the UK-based CANZUK International, which has been calling for free movement between Australia, Canada, New Zealand and the UK.  In New Zealand, some pro-immigration advocates –  including ACT’s David Seymour – have been championing the cause (and I noticed these results thanks to Eric Crampton of the New Zealand Initiative).

This was the question posed in New Zealand (country names re-organised according to which country is being polled)

“At present,citizens of the European Union have the right to live and work freely in other European Union countries. Would you support or oppose similar rights for New Zealand citizens to live and work in Canada, Australia and the United Kingdom, with citizens of  Canada, Australia and the United Kingdom granted reciprocal rights to live and work in New Zealand?”

And this is their summary graphic.

CANZUK

Pretty overwhelming support in all four countries (at least as the question is worded).  Interestingly, support is strongest in New Zealand –  perhaps because New Zealanders have been the biggest beneficiaries in recent decades of freedom to go to another of these countries (Australia)?

I’ve never been quite sure what to make of the CANZUK cause. I read a lot of imperial/Commonwealth history, and ideas like this sort of free movement area among the old ‘white Dominions’ are strikingly reminiscent of calls for an imperial federation or, much later, for imperial trade preferences (which became a big thing as the UK moved away from free trade itself).  I could be a little provocative and suggest that is wasn’t entirely dissimilar to the sort of immigration policies New Zealand and Australia ran until a few decades ago, that could be  –  not entirely inaccurately –  characterised as “white Australia” or “white New Zealand” policies.  In that sense, I’ve always been a bit puzzled by Eric Crampton’s enthusiasm for this particular formulation, when he is so ready to characterise sceptics or opponents of New Zealand’s current immigration policy as “xenophobes”.   The logic of his position looks as though it should favour open borders more generally, not just among these four advanced, fairly culturally similar, countries.  And yet, for example, even as an example of Commonwealth sentiment, not even South Africa –  let alone Zimbabwe, Kenya or Namibia – appears in the CANZUK proposal.

Of course, there is a pretty straightforward answer.   Almost invariably, public opinion in almost any country is going to be more open to large scale (or at least unrestricted) migration when it involves culturally similar countries than when it involves culturally dissimilar ones. In fact, there are good arguments that, if there are gains from immigration they could be greatest from people with similar backgrounds (and of course counter-arguments to that).  Reframe the question as “would you support reciprocal work and residence rights among New Zealand, France, Belgium and Italy?”, and I suspect the support found in the CANZUK poll would drop pretty substantially –  my pick would be something no higher than 50 per cent.  Reframe it again to this time include Costa Rica, Iran, and Ecuador (let alone Bangladesh, India, and China –  three very large, quite poor, countries) and people will start looking at you oddly, and the numbers will drop rapidly towards the total ACT Party vote (less than 1 per cent from memory).

And thus my own ambivalence about the CANZUK proposition.  If I were a Canadian (of otherwise similar Anglo background to my own) I’d say yes.  The historical and sentimental ties across these four countries –  less so Canada –  mean something to me.  I’d probably even add the US into the mix.  And across Australia, Canada, and the UK incomes and productivity levels are pretty similar –  although the prediction would still presumably be that there would be an increased net flow of people from the UK to Australia (in particular) and Canada.  As it is, I’ve repeatedly noted that my economics of immigration argument doesn’t distinguish between whether the migrants come from Birmingham, Brisbane, Bangalore, Buenos Aires, or Beijing.   We’ve made life tougher (poorer, less productive) for ourselves by the repeated waves of migrants since World War Two –  in the early decades, predominantly from the UK, and in the last quarter century more evenly spread.  Even though we are now materially poorer than the UK, enough people from the UK still regard New Zealand as attractive, that free movement – the CANZUK proposition –  would probably see a big increase in the number of Brits moving here (big by our standards, not theirs).  That might be good for them –  that’s up to them –  but wouldn’t be good for us.  Perhaps the effect would be outweighed by more New Zealanders moving to the UK long-term, but I’d be surprised if that were so.

The CANZUK proposition is an interesting one, and is worth further debate.  Apart from anything else, it might tease out what people think about nationhood, identity, and some of the non-economic factors around immigration (including some of those Wilson and Fry suggest).  As I noted, at present public opinion appears to be strongly in favour, but on the specific question asked in isolation.  It would be interesting to know, if at all, how responses would change if the option was free CANZUK movement on top of existing immigration policy, or (to the extent of the new CANZUK net flow) in partial substitution for existing immigration policy.   The two might have quite different economic and social implications.

Finally, on immigration-related issues, I recorded an interview yesterday with Wallace Chapman for broadcast on tomorrow’s Sunday Morning programme on Radio New Zealand.  It was prompted by a lecture I’m giving this week for Presbyterian Support Northern in their series on different angles on responding to (child) poverty –  mine being a focus on productivity.  My focus in the lecture isn’t on specific solutions, but rather on the need to make lifting productivity a top national economic priority, since in the longer-term productivity is the only secure foundation for much higher material living standards.  I’ll put up the text of my lecture here later next week, but the interviewer was more interested in possible specific solutions and thus quite a bit of our discussion was around immigration policy issues.   Not thinking very fast on my feet that day, I forgot to respond to his suggestion that higher minimum wages might be part of the productivity answer by noting that we already have one of the highest ratios of minimum wages to median wages anywhere…….and one of the worst productivity records over many decades.  Whatever the case for some mimimum wage, raising it is not part of the overall answer to fixing our productivity failures.

 

 

Is vapid rhetoric all our leaders can offer?

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

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

and a few sentences later she added

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

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

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

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

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

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

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

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

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

and

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

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

 

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

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

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

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

E rates by age

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

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

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

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

There was lot of rhetoric

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

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

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

And then there were “the regions”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But together they were effective.

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

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

He ends

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

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

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

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

 

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In an earlier post, I pointed out

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

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

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

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

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

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

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

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

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

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

BERD by firms NZ

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

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

Economic growth within environmental limits

That was the title of a speech David Parker gave a couple of weeks ago.  Parker is, as you will recall, a man wearing many hats: Minister for the Environment, Associate Minister of Finance, Minister for Trade and Export Growth, and Attorney-General.  Since he was speaking to a seminar organised by the Resource Management Law Association, this speech looked like it might touch on all his areas of portfolio responsibility.

In passing, I’ll note that he clearly doesn’t live in Wellington.  He introduces his speech lamenting that New Zealand had just had its hottest summer on record.  Most Wellingtonians –  no matter how liberal (indeed, I recently heard an academic working on climate issues make exactly this point) – revelled in a summer that for once felt almost like those the rest of New Zealand normally enjoys.   The sea water was even enjoyably swimmable not just bracing or “refreshing”.

But the focus of his speech is on economic growth.

First he highlights some of New Zealand’s underperformance.

New Zealand has enjoyed relatively strong nominal economic growth over recent years, bolstered by strong commodity prices, population growth and tourism. More inputs, mostly people, have been added into the economy but, with population growth stripped out, per capita growth has been poor at about 1 per cent per annum.

That underperformance has been the story of decades now.   And poor as the growth in per capita real GDP has been, productivity growth –  real GDP per hour worked –  has been worse.  In one particular bad period, over the last five years or so, labour productivity growth has been close to zero (around 0.2-0.3 per cent per annum on average).

Parker is obviously aware of this, beginning his next paragraph “we also have a productivity problem”, but seems more than a little confused about the nature of the issue.

Capital has been misallocated, including into speculative asset classes such as rental housing, rather than into growing our points of comparative advantage.

But…….your government (rightly) keeps telling us that too few houses have been built, laments increases in rents etc.   If we are going to have anything like the rate of population growth we’ve run over recent decades (let alone the last few years) ideally more real resources would be devoted to house-building, not less.  Simply changing the ownership of existing houses doesn’t divert real resources from anything else, or even use material amount of real resources.

The Minister goes on

We aim to diversify our exports and markets as we move from volume to value. We want to change investment signals so more capital goes towards the productive economy rather than unproductive speculation.  Where we need immigration, it will be more targeted.

That last sentence sounds promising, even tantalising.  But it doesn’t seem consistent with the Prime Minister’s rhetoric, with Labour Party policy on immigration, or with the (in)action of the government on immigration policy to date.     Our large-scale non-citizen immigration programme runs on unchanged, complemented by the big increases in recent years in the numbers here on short-term work visas.    A reduced rate of population growth would reduce the extent to which real resources needed to be devoted to meet the –  real and legitimate –  needs of a fast-growing population.

The Minister also makes a bold claim

I am an experienced CEO and company director. I know from experience that we can achieve economic, export and productivity growth within environmental limits.

No doubt, as absolute statements, those claims are true. But surely the relevant question is “how much?”     After all, the message Labour and the Greens were running in the election campaign was that what apparent economic success there had been in recent years was built on “raping and pillaging” the environment –  water pollution, offshore oil exploration, emissions etc.   And yet, as the Minister notes, even that “economic success” didn’t add up to much: weak per capita GDP growth, almost non-existent productivity growth, no progress in closing the gaps to the rest of the advanced world.  And what of exports?

exports 2018The past 15 years have been pretty dreadful, and the last time the export share of the economy was less than it was in the March 2017 year was the year to March 1976 –  back in the days when (a) export prices had plummeted, and (b) the economy was ensnared in import protection, artifically reducing both exports and imports (our openness to the world more generally).

In the Minister’s own words

But economic management over recent years has put pressure on our social wellbeing and our environment. 

So how, we might wonder, is a greater emphasis on environmental protection going to be consistent with the economic growth, and the exports and productivity growth that David Parker says the government aspires to?

As Minister for Economic Development and for Trade and Export Growth, my priorities reflect the reality that our economic success will be underpinned by a more productive, sustainable, competitive and internationally-connected New Zealand.

It is great to see growth in the value of output from our productive sectors. The Government wants to work with them to ensure that the right conditions are in place for firms to thrive and trade, and that we maximise the value of the goods we produce, and encourage high-quality investment in New Zealand. We want our sectors and regions to realise their full potential.

Economic growth and trade helps us create a greater number of sustainable jobs with higher wages and an improved standard of living for all New Zealanders.

However, the Government is clear that economic growth cannot continue to be at the cost of the environment. This is not idealism: it is grounded in common sense. Protecting our environment safeguards our economy in the long term – our country has built its economy and reputation on our natural capital.

I’m not arguing against improving environmental standards, perhaps especially around fresh water.  Improvements in the environment are typically seen as a normal good: as we get richer we want (and typically get) more of it.  But those gains usually come at some (direct) economic cost.    Major change isn’t just wished into existence.

In some places, perhaps, these changes are easier than in others.  If the tradables sector of your economy is, in any case, in a transition  away from heavy industry to, say, financial or business services (perhaps the UK experience), you are naturally moving from industries that might otherwise tend to pollute heavily towards those that don’t.  And farming –  and land-based industries –  might be a small part of the economy anyway.

But this is New Zealand.  And in New Zealand probably 85 per cent of all our exports are natural-resource based, and total services exports (even including tourism) are no higher as a share of GDP than they were 15 or 20 year ago.  Not very many new industries seem to find it economic to both develop here, and then remain here.   We –  and the Minister –  might wish it were otherwise, but up to now it hasn’t been.  Instead, what export growth we’ve had has been in industries where the government is often –  and perhaps rightly –  concerned about the environmental side-effects.

In his speech, the Minister declares that as Minister for the Environment improving the quality of freshwater is his “number one priority”.  I might have hoped that fixing the urban planning laws was at least up there, but lets grant him his priority for now.    How does he envisage bringing about change?

In environmental matters there are only three ways to change the future – education, regulation and price. Of these the most important for water is regulation

And regulation comes at a cost, reducing the competitiveness of firms and industries that are no longer free to do as they previously did.  The best presumption then has to be that future growth in affected sectors will be less than previously, and less than it would otherwise have been.  Sometimes, regulatory and tax initiatives spark brilliant new technologies enabling industries to move to a whole new level.  But you can’t count on that.  You have to work on the assumption that regulation costs.  Those costs might be worth bearing, but you shouldn’t pretend they aren’t there.

The same will, presumably, go for including agriculture in the emissions trading system, however gradually.   Relative to the past, firms facing such a price will no longer be as competitive as they otherwise would have been.    And experts tell us that as yet there are few technologies for effectively reducing animal emissions –  other than having fewer animals.

And then, of course, there are the direct bans.  The ban on new offshore oil exploration permits hadn’t been announced when the Minister gave his speech, but it will –  by explicit design –  reduce output in the exploration sector and, over time, in the domestic production of oil and gas.    It might be –  as some of the government’s acolytes argue – “the thing to do”, “leading the way”, “this generation’s nuclear-free moment” [that one really doesn’t persuade if you thought the Lange government’s gesture was a mistake too], but it must come at an economic cost to New Zealanders.  An economy totally reliant on the ability to skilfully exploit its natural resources, consciously and deliberately chooses to leave some chunk of those –  size unknown –  untapped.

Again, over the course of the last 45 years –  the period of that exports chart –  we’ve had a lot of oil and gas development.  All else equal, our economic performance can only be set back without it – not perhaps this year, or next, but over time.  And it all adds up.

Reading through to the end of the Minister’s speech there is simply no credible story for how he, or the government, expects to be able to do all these things and still see some transformation in the outlook for per capita GDP growth, or growth in productivity or exports.  Indeed, there is nothing there to explain why the outlook won’t be worsened by the sorts of initiatives –  each perhaps worthwhile in their own terms.

It might be different if the government was willing to do something serious about immigration policy, rather than just carrying on with the bipartisan “big New Zealand” strategy.   When natural resources are a crucial part of your economy –  and everyone accepts they still are in New Zealand –  then adding ever more people, by policy initiative, to a fixed quantity of natural resource is a straightforward recipe for depleting the stock of resources per capita, and thus spreading ever more thinly the income that flows from those natural resources.

It is pretty basic stuff: Norway wouldn’t be so much richer per capita than the UK –  both producing oil and gas from the North Sea –  if Norway had 65 million people.  And if Norway decided to get out of the oil and gas business –  leaving underground a big part of their natural resource endowment –  they’d be crazy to drive up their population anyway.    But that is exactly the thrust of what the New Zealand government is doing between:

  • what is aspires to do on water,
  • its ambitious emissions targets, in a country with very high marginal abatement costs, and
  • the ban on new oil and gas exploration permits

even as it keeps on targeting more non-citizen migrants (per capita) than almost any other country on the planet, and as the export share of GDP has been under downward pressure anyway.

It is not as if there is a compelling alternative in which export industries based on other than natural resources are thriving, boosted immensely by the infusion of top-end global talent, in ways that might make us think that natural resource industries could easily be dispensed with and a rapidly rising population was putting us on a path to a more prosperoous, productive, and environmentally-friendly future.  Its been a dream, or an aspiration, of some for decades.  But there is barely a shred of evidence of anything like that happening in this most remote of locations.

It might all be a lot different if the government was willing to step aside from the “big New Zealand” mentality, or put aside for a moment fears of absurd comparisons with Donald Trump –  recall that (a) our immigration is almost all legal, and (b) residence approvals here (per capita) are three times those in the US (under Clinton/Bush/Obama).

If the government were to move to phase in a residence approvals target of 10000 to 15000 per annum (the per capita rate in the US), with supporting changes to work visa policies, we’d pretty quickly see quite a different –  and better –  economic climate.   We’d no longer have to devote so much resource (labour) to simply building to support a growing population –  houses, roads [rail if you must], schools, shops, offices.  All else equal our interest rates –  typically the highest in the advanced world –  would be quite a bit lower, and the real exchange rate could be expected to fall a long way.  I don’t think there is a mention in the whole of David Parker’s speech of the real exchange rate, but it is a key element in coping successfully with the sorts of transitions the Minister says he aspires to.   Farmers, for example, will be able to compete, even with tougher water regulations, even with the inclusion of agriculture in the ETS.  And more industries in other sector will find it remunerative to develop here, and remain based here.  We’d actually have a chance of meeting both environmental and economic objectives instead of –  as the government would see it –  having consistently failed on both counts.

Last year, I ran several posts (including this column) making the point that rapid population growth –  mostly the consequence of immigration policy –  was the single biggest factor behind the continued growth in, and high level of, carbon emissions in New Zealand over recent decades.  In other words, we had made a rod for our own back and then –  through the process of driving up the real exchange rate –  made it even more difficult and costly to abate those emissions without materially undermining our standard of living.  OIA requests established that neither MBIE nor the Ministry for the Environment had even explored the issue.

It wasn’t a popular view, but I stand by the argument.  In a country still very heavily dependent on natural resources, if you care about the environment, and about “doing our bit” on carbon emissions, it is simply crazy to keep on actively driving up the population.  Doubly so, if you think you can do so and still improve productivity, export growth, and overall economic performance.  The Productivity Commission is due to release soon its draft report on making the transition to a low emissions economy.  I hope they have been willing to recognise, and explicitly address, the integral connection to immigration policy in the specific circumstances New Zealand faces.  Not wishing to confront the connection –  an awkward one for the pro-immigration people on the left in particular –  won’t make it go away.