Poor answer, poor economic performance

I don’t generally watch or listen to Parliament’s question time. But my teenage son has finished school for the year and, being a nascent political junkie, turns on the TV each afternoon to watch the jousting.

I was doing something else yesterday afternoon when this exchange caught my ear

Hon Paul Goldsmith: Isn’t the most relevant current economic indicator the fact that New Zealand has the highest terms of trade in recent modern history and we’re still growing very slowly and running a deficit?

Hon GRANT ROBERTSON: We can all pick our most relevant economic indicator, but the one I want to leave with the member is this: we, as a country, are growing faster than the UK, Australia, Canada, Japan, and the eurozone. No country with which we trade or compare ourselves is growing how they were two or three years ago. We are ahead of the pack and we’re doing well as a country.

Hon Paul Goldsmith: Which of the countries he listed in the answer to my previous question are we growing faster than, on a per-person basis?

Hon GRANT ROBERTSON: On a per-person basis, I don’t have the information the member asked for, but what I can tell the member is this: when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward. On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

That “34th in the OECD” I knew to be wrong.    There are only 36 OECD countries and without even checking the others everyone knows Chile, Portugal, and Mexico are poorer than we are.  I had a very quick look at some data and put it in this tweet.

I checked the IMF numbers because –  with so many more members and countries in their data –  being 34th sounded about right.  Perhaps the Minister had his IMF and OECD confused: it certainly looked like a first for any Minister of Finance to be boasting that New Zealand was 34th (or 32nd) on anything in the OECD.

But out of curiosity I decided to take a closer look.  There are, after all, both constant price and current prices GDP per capita measures, each converted at respective PPP exchange rates.   And you’d have to be pretty sceptical of putting much weight on movements over just a year or two, give both measurement and conversion challenges.

The IMF numbers go back to 1980.  Here is how our rank looks on these two measures and across time (2019 being an estimate/forecast).

GDP per capita, PPP, New Zealand rank
Constant price Current price
2019 35 35
2018 34 34
2017 34 34
2012 37 37
2007 40 40
2000 34 35
1990 31 31
1980 29 29

On these measures we were indeed 34th in 2017 –  looks like that was what the Minister might have had in mind.  But, if anything, there is a little slippage in the last couple of years.    Over the longer run of data, there has been some improvement in our rank since 2007 –  back then subsequently crisis-hit places like Greece, Italy, and Puerto Rico had got ahead of us (and Equatorial Guinea too) –  but we are in much the same position we were in 2000.  The significant worsening in our ranking occurred in the 80s and 90s, and there has been no consistent improvement since.

But our more usual comparators –  the comparison the Minister claimed to be making –  is with the OECD countries.

GDP per capita, PPP, New Zealand ranking
Current prices Constant prices
2018 20 21
2017 20 20
2016 20 19
2012 20 20
2007 21 22
2000 22 21
1990 20 21
1980 20 17
1970 11 12

It is mostly a pretty similar story.   People most often focus on the constant price numbers.  Again, if anything there has been a little slippage in the last year or two, but on these numbers our ranking is broadly where it was as long ago as 1990, and the real drop down the rankings occurred in the 1970s and 1980s  (and no doubt earlier if the consistent data went back further).    Those long in the tooth will recall that in 1990 we were about half way through the extensive reform programme –  itself implemented in response to the deterioration in New Zealand’s economic performance –  that was going to be lift us back up the OECD rankings.  Shame about that.

But what about productivity?  It wasn’t what Paul Goldsmith was asking, but it is the foundation of all sustained improvements in material living standards.   Here is the OECD data for GDP per hour worked

GDP per hour worked, PPP, New Zealand ranking
Current prices Constant prices
2018 27 26
2017 24 25
2016 22 23
2012 22 21
2007 23 23
2000 22 21
1990 21 20
1980 19 17
1970 15 15

(I mostly refer to the constant price series, in all such international comparison on this blog this is “real GDP per hour worked”).

If I were a Minister of Finance I wouldn’t be boasting anything here.  Then again, if I were the Finance spokesperson for the other party that governed New Zealand for large chunks of this half-century I’d probably keep quiet too.

The data are what they are, for now.   That said, I don’t want to make much just yet of the apparent sharp fall in our ranking over the last couple of years (and even if it is for real, it isn’t yet this government’s fault any more than that of its predecessor –  it is 2018 data and policy, or the lack of it, works with a lag).    It both looks too bad to be true and we know that there are significant revisions being published tomorrow by SNZ which are expected to raise productivity growth a bit over the last few years.  In the grand scheme of things, the differences are unlikely to be very large but a levels shift of 2 per cent –  which might happen –  would be enough (just) to lift us from 26th to 24th on the constant price measure.

On the data as they stand today, here are the 10 OECD countries with the next highest productivity and 10 (all the rest) with the next lowest.

OECD real GDP phw 2018

Three former communist countries are now ahead of us, as is Turkey, and the Czech Republic and Poland have had recent productivity growth records that mean they will almost certainly go past us in the next couple of years (even with New Zealand data revisions).

So, to revert to where this all started, what about the Minister’s claims

We are ahead of the pack and we’re doing well as a country.

No

when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward.

No.  Hasn’t happened so far, and no sign things are about to improve.

And there was that final puzzling claim

On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

I have no idea what he has in mind, but whatever he had in mind perhaps the Minister should keep in mind the old mantra that if a number sounds too good to be true it probably is.

Sure in cyclical terms the economy isn’t in a dreadful state.  But in any longer-term sense we are underperforming, have underperformed for decades, there is no sign of any structural improvement underway now, and neither main party shows any sign of serious policy thinking that might finally –  decades after those promises from both major parties –  make a difference for New Zealanders.   As things stand –  and by reference to that final chart –  if we just keep on doing policy as we have it isn’t inconceivable that in 2030 we could have the third lowest labour productivity in the entire OECD.   Convergence with Uruguay may still happen.

 

UPDATE: In the House this afternoon the Minister made clear that he had been talking about annual growth in real GDP per capita.  Per the OECD data –  as it stands today, before significant SNZ revisions to be published tomorrow – New Zealand’s growth rate did rise from 34th (of 36) in the OECD to 32nd (the latter for calendar 2018).  It seems very odd to boast about having the 5th worst per capita GDP growth among the OECD countries (and quite clarifying given the rhetoric the PM and Minister often use claiming New Zealand’s growth record is materially better than that of advanced countries we typically compare ourselves too).  Clearly –  given that this was an off-the-cuff response to a supplementary question – they’ve known the dismal (on official data) per capita picture all along.

 

Labour share of income

I’m out of town today so just a short post.

I’ve written various posts over the years looking at the labour share of income and how that has changed over time in New Zealand, and how what has gone on in New Zealand compares with other OECD countries (eg here).  My story –  just using the official data –  has been a relatively positive one, if labour shares actually tell one much (one can envisage an alternative set of outcomes in which productivity growth has been much faster, the labour share of national income was lower, but most people were still better off than in the actual underwhelming economy we’ve lived in).

We don’t have these data quarterly, so the annual national accounts release a few weeks ago gave us the once a year update.   Here is total (economywide) compensation of employees as a share of three measures of the size of the economy.

labour share 2019.png

(The indirect tax and production subsidies adjustment is because, say, raising GST raises nominal GDP/GNI/NNI, but doesn’t generate any more production/value in the economy to share around.)

The picture no longer seems quite so encouraging.  When I first did charts of this sort three years or so ago, I focused on the share of GDP.  There had been an increase in the labour share and things now seemed to be holding steady.  For example

COE

But with subsequent revisions to the data to 2016, and the new provisional data for the more recent period there has been some slippage even in the labour share of (adjusted) GDP.    But GDP isn’t a good measure of effective income available to New Zealanders.   It includes depreciation, which is simply about maintaining the existing capital stock.  And includes the portion of the economy’s production that accrues to foreigners (mostly interest and profits).

It seems to me that the ratio of compensation of employees to net national income (NNI), adjusted for indirect taxes and production subsidies, is probably the most sensible whole-economy measure.  And on that measure there had been a pretty substantial increase in the labour share of New Zealanders’ net income in the 00s, but quite an unwinding again this decade.

I’ve previously shown charts illustrating that New Zealand wage rates appear to have been rising faster in New Zealand than nominal GDP per hour worked (the best quarterly proxy for the economy’s overall “ability to pay”). I argued that that was consistent with –  another way of expressing – the idea of a high, fundamentally overvalued, real exchange rate.   Since the quarterly GDP series is being substantially revised late next week, there is no point updating that chart right now.  But it will be interesting to have another look –  including at the annual version using, eg, the NNI data –  when the GDP data have been released.  Most likely, those data will show a bit more productivity growth in the last few years, but the “a bit more” is likely to pale in comparison with the extent of the productivity underperformance over decades.

Fix that –  which might involve the government, Opposition, and official agencies taking the problem seriously –  and most New Zealanders would be materially better off, whatever the aggregate labour share.

Investment, capital, and all that

The annual national accounts data were released last week.  For at least some of the variables –  nominal ones –  these data offer the longest official national accounts time series we have in New Zealand, in many cases going back to (the year to March) 1972.  By contrast, the quarterly national accounts data go back only to the late 1980s.  One day, when SNZ and official statistics are properly funded, it would be a worthwhile project to take consistent historical series back several more decades.  Doing so would help us make better sense of our economic history.

I was playing around with various series, and nominal ratios, from the national accounts data.   This post presents a few of the resulting charts, on investment as a share of GDP and also on the capital stock relative to GDP.

First, investment.

There has been a fair amount of residential building activity going on this decade.  Almost certainly not enough (and nothing like the volume of new building relative to population growth that we had in the early 1970s for example) –  although the bigger issue is probably land, and the affordability of housing.  But what about some other components?

When it was campaigning in 2017, Labour talked a lot about government underinvestment in all sorts of things.  As recently as last week, the Prime Minister was talking up government “investment” in all sorts of things.  But here is national accounts investment (GFCF) by general government (central and local) as a share of GDP.

gen govt GFCF to  mar 19.png

The latest data are only for the year to March 2019, and I guess it takes a while for new governments to get things going.  But, so far, we aren’t seeing much sign of movement (and do notice how much smaller government investment spending is relative even to the early-mid 70s when population was also growing very rapidly).

What about business investment?   SNZ don’t release a series for this –  but they could, and it is frustrating that they don’t –  so this chart uses a series derived by subtracting from total investment general government and residential investment spending.  It is a proxy, but a pretty common one.

bus investment to marc 19

Business investment as a share of GDP has been edging up, but it is still miles below the average for, say, 1993 to 2008, a period when, for example, population growth averaged quite a lot lower than it is now.  All else equal, more rapid population growth should tend to be associated with higher rates of business investment (more people need more machines, offices, computers, or whatever).    The Governor often tries to talk up business investment, as if the only relevant factor was the interest rates, without ever apparently taking time to think about why business investment here is so subdued.

Within the aggregate numbers, there are the odd glimmers that might encourage some. The government is very keen on encouraging more R&D, and has recently brought in new subsidies to try to encourage firms to do more (again, without stopping to think hard about why more R&D investment wasn’t attractive to private profit-maximising firms).  Here is (the total) research and development component of GFCF, expressed as a share of GDP.

R&D to march 19

That tick up is before the new subsidies were put in place.

What about the (net, ie after depreciation) capital stock?  I showed this chart a few days ago, components that might be expected to show some of the “digital transformation” were it happening apace.

cap stock 19

It was rather less encouraging, especially in the last few years.

What about general government and business capital stocks?

cap stock components

On this proxy measure of the (net) business capital stock, it has been falling as a share of GDP for the last 25+ years, and is still lower than it was in the late 1970s.  Now, there is an argument that in advanced economies production is becoming less intensive in physical capital, and to the extent that is so one might expect to see a trend decline.  But I doubt this is something to take much comfort from when thinking about New Zealand because (a) we don’t have the Google, Facebooks or the like, and (b) these measures don’t include farmland (although SNZ includes it in their sectoral productivity measures/models), which is still very important to the New Zealand economy.  The stock of farmland isn’t changing, while the population (and GDP are), and the stock of farmland would be quite material relative to other business capital.

The point is not, of course, to whip businesses.  The questions are really for analysts, economists, and then policymakers, to think hard about why it is that firms –  actual or potential –  have not regarded it as worth their while to invest more heavily in New Zealand in recent decades.  It isn’t clear that any of the relevant government agencies, let alone their ministers, have a compelling story to make sense of what we observe (of private firms going about their business, pursuing oppportunities where they find them).

I’m pretty sure the answer involves some mix of these symptoms, policy instruments, unchanged constraint etc

  • remoteness
  • the real exchange rate, and
  • rapid population growth, most of which is now accounted for by policy choices

On the latter, this chart shows cumulative population growth rates over five years.

popn grwoth 5 years

It takes a while for the capital stock to adjust to growth (especially unexpected) growth in population, which is why I’ve shown the (also smoother) five year totals.

Faced with this record, defenders of the New Zealand economic model –  including cheerleaders like the Prime Minister and the Governor, but it is also much the same model as the previous government had –  should really have been expecting to see investment rates at near-record highs at present.  It isn’t even true of government investment –  and government is directly responsible for such population-based capex as schools, roads, and hospitals –  but it isn’t true of private business either.

The model simply isn’t delivering.

(I’m away for the rest of the week, so no more posts until Monday.)

Championing social democracy not productivity

Not unlike the OECD, our Productivity Commission tends to lean left.  Not usually in some overtly partisan sense, but in a bias towards government solutions, a disinclination to focus on government failures as much as “market failures”, and a mentality that is often reluctant to look behind symptoms (which government action can sometimes paper over) to look at deeper causes and influences.

Sometimes the cheerleading for the left becomes more overt.   There was a streak of that evident in their climate change report a year or two back, but it seems particularly evident in their latest draft report out this morning.    Reflecting the change of government, the political complexion of key personnel of the Commission, the Commissioners –  while each individually capable –  appears to have shifted leftwards.

The Productivity Commission’s inquiries are into topics selected by the government of the day.  The current Minister of Finance has been keen on his “future of work” theme for years, dating back at least to when he became Labour’s Finance spokesman.  Now that he is Minister of Finance he is able to get the taxpayer to cover work in this area.  Here are the terms of reference for the current inquiry into “Technology disruption and the future of work”.

Apparently prompted by the government, the Commission appears to have begun releasing draft reports in stages.    This seems a useful step forward: potential readers or submitters might be faced with a series of 100 page drafts, not the single 500 page behemoths that the Commission often used to produce.  The draft report released last night (“Employment, labour markets and income”) is the second of five as part of this inquiry.

What it boils down to, amid various reasonable insights, is a push for a much bigger welfare state, allegedly in the cause of lifting average New Zealand productivity (and sustainable wages), without a shred of evidence or careful considered analysis connecting one to the other.    It is the sort of thing you might expect a political party to come out with –  the Labour Party conference, for example, is meeting shortly –  but not so much independent bureaucrats supposedly focused on productivity.

This, from the Commission’s press release, is the gist of what they are about.

flexicurity 1.png

I heard Sweet on the radio this morning playing up the contrast –  beloved of people championing flexicurity-  between “job security” and “income security”, claiming that New Zealand has the former (“a bad thing”) but not the latter.

The mental model that appears to be driving the Productivity Commission in this draft report is one in which we have an excessively rigid labour market, with people (and society) reluctant to face job change, and that this in turn is a big part of the reason why business investment has been low, and productivity growth has fallen far behind.  There is little or evidence adduced to support these claims, let alone the next leap that if only people were given more money more readily when they lost their jobs we’d be well on the way to solving our productivity failings.

Here is the Commission’s summary of the good and the bad, as they see it, of New Zealand’s labour markets (from p21 of their report)

flexicurity 2.png

It isn’t obvious that low labour productivity is particularly a labour market issue, but setting that to one side for now, I wouldn’t disagree with any of those bullet points.  But I’d look at the first group (“the good”) and be inclined then to suggest that this wasn’t the area to be looking if I was trying to do something about (a) economywide productivity growth or (b) adoption of new technologies by firms.  Our labour market looks pretty flexible and responsive. The Commission itself says so.

So why then the push for much higher welfare payments (call them “social insurance” if you like) to people who lose their jobs, less means-testing etc etc?  It can’t be economics –  facilitating ready movements of people from one job to another etc –  so it really has to politics; a view on a different set of income distribution arrangements.  That is stuff elections should be fought over.  But it simply isn’t that credible that the absence of these very general northern European approaches is causally connected to the failures of productivity here  (except perhaps in the reversed causation sense that richer and more productive countries may choose to be more generous).

The Commission is dead keen on us following the example of Denmark, the Netherlands, and Sweden.  These are all highly productive economies (which appear in the grouping of top tier countries –  northern Europe and the US – I often use here in productivity comparisons).  But it isn’t obvious that their labour markets function betters than ours does.  I’ve shown some comparisons re Denmark previously, when Grant Robertson in Opposition was touting the Danish “flexicurity” approach.   In that post, I concluded

I imagine that life on the unemployment benefit is a bit more pleasant in Denmark than in New Zealand, but it isn’t obvious that the Danish structure, as a package, is producing, over time, better outcomes than what we have here.  And their model is vastly more expensive, and more heavily regulated, consistent (of course) with Denmark’s position as the OECD country with the third largest share of government spending as a per cent of GDP (57 per cent).  New Zealand, by contrast, has total government spending of around 41 per cent of GDP

Perhaps more regulation and more spending was Robertson’s point.  I guess we have elections to debate such preferences, but it seems a stretch to believe it would be an approach that would make our labour market function better.  It isn’t obvious Denmark’s does.

But lets update the comparisons and extend them to include the Netherlands and Sweden as well.

First, take a look at the OECD’s indicators around employment protection legislation.  Recall the Commissioner claiming New Zealand has “job security” and suggesting we need to move further away from that.   Well, here are the comparisons.

The OECD indicators on Employment Protection Legislation
Scale from 0 (least restrictions) to 6 (most restrictions), last year available
Protection of permanent workers against individual and collective dismissals Protection of permanent workers against (individual) dismissal Specific requirements for collective dismissal Regulation on temporary forms of employment
Denmark 2013 2.32 2.10 2.88 1.79
Netherlands 2013 2.94 2.84 3.19 1.17
Sweden 2013 2.52 2.52 2.50 1.17
New Zealand 2013 1.01 1.41 0.00 0.92

New Zealand’s legislation around employment protection is more liberal on each measure than any of these flexicurity countries –  quite materially so in most cases.

Or unemployment rates, not just a one year snapshot but a glance back over this century to date.

flexicurity 3.png

Most of the time, most years, New Zealand’s unemployment rate has been lower than that in the median flexicurity country.  The differences aren’t always large, and aren’t even always same-signed, but it isn’t an obvious advert for the alternative model.

And what about employment rates?

flexicurity 4

Sweden has employment rates very similar to those in New Zealand, but taken together this group isn’t necessarily a great advert for an alternative income support model.  Of course, in richer and more productive countries more people can afford to work less etc, so I’m certainly not suggesting the whole difference is down to the presence/absence of flexicurity. Perhaps there is a political “income distribution” case to be made –  that’s one for political parties – but I’m struggling to see reasons why, evidence that, flexicurity offers potential labour market/productivity gains.

And to emphasise that flexicurity in these countries is just one component of a radically different approach to the role/size of government, here is a chart showing government spending.

flexicurity 5.png

The Commission even concedes (page 60) that materially higher income replacement rates when people become unemployed seems to be associated (in a cross-country relationship) with higher rates of (long-term) unemployment.  As they note, it isn’t an ironclad relationship –  there is always a lot of other stuff going on, which needs much more careful analysis to distinguish.   But why they would jeopardise one of the more impressive economic achievements of New Zealand this century (low averages rates of unemployment, especially long-term unemployment) isn’t clear.

Much of it comes down to this alleged “attitudes to technology” issue, even though the Commission makes no attempt at all to show that fears about technology or job displacement is somehow a major factor –  a factor at all for that matter –  in low rates of business investment in New Zealand.

They begin one section late in the report this way

flexicurity 6.png

So even though the Commission itself has concluded (reasonably, or so it appears to me) that “fears of mass job losses from automation [are] unsubstantiated” one public opinion poll is enough to suggest there is some widespread systematic structural problem.

One might well wonder whether (a) it was not ever thus (except perhaps in the hyper full-employment period of the 1950s and 60s, and (b) whether those fears are not being fed by people like the Minister of Finance.  Without evidence that any such fears are (a) much greater than usual, (b) causally connected to weak business investment in technology, and (perhaps) (c) evidence that such fears are lower in the flexicurity countries, it isn’t a great basis for proposing far-reaching policy change.

Following on from that extract we get this

Bredgaard and Daemmrich (2012, p. 2) described the Danish “flexicurity” system (Box 3.2) as a strategy for “economic competitiveness and sustainable national prosperity”.
Firms in Denmark gain competitive advantages from a mobile labour force and government funding of public services and infrastructure, while workers benefit from domestic employment opportunities and continuing training.

Well, perhaps, but I”m sure one can find champions for any country’s appraoch, but where is the systematic cross-country evidence, including relative to New Zealand (a country with lower average unemployment rates, lower long-term unemployment, higher employment).

And then there is this

flexicurity 7

But, as already noted, New Zealand not only has fewer job security protections than France –  the bad example cited here –  but fewer than those in Denmark, Netherlands, and Sweden.    And one might remind the Commission that correlation is not causation, especially when it isn’t supported by any independent argumentation to make the case that (a) flexicurity produces these poll results, and (b) more importantly, flexicurity increases the rate of uptake of new technologies across economies as a whole.   The Commission offers nothing on either point.

One could go on. The Commission notes that one “could” introduce “portable redundancy accounts” as, apparently they do in Austria. But makes no real case for doing so, and never seems to engage with (for example) the tax inefficiency (to the individual) of having various pots of money tied up in various places, all while (typically) having a mortage on the other side of the balance sheet.  They toy with ideas of mandatory redundancy, but again without any attempt to demonstrate a connection to productivity or business investment.  They worry about the ability of people who lose their jobs to service a mortgage, but never seem to adequately connect that concern to the fact that if there is a system that generates little long-term unemployment, most people are usually relatively readily able to find new jobs, and can self-insure (both formally, through mortgage protection insurance, and informally –  it isn’t common for both members of a couple to lose their jobs at once).  Mortgages in New Zealand are, of course, highly burdensome, but that is a reason to fix land supply and get the price of houses down, not to greatly enhance the welfare system.

Changing tack, I was also interested that the Commission did not touch on three other dimensions that might seem relevant to discussions around the sorts of schemes they propose:

  •  the fiscal automatic stabilisers in New Zealand tend to be quite muted.  That reflects the twin facts that our tax system isn’t highly progressive and that our unemployment benefit system is modest and pays a flat rate.     What the Commission proposes would strengthen the automatic stabilisers, but at the price of increasing the cyclical amplitude of cycles in the government’s budget balance.  There are pros and cons to such a change, but they didn’t seem to be mentioned at all,
  • the Commission rather overdoes the point about social insurance and how different New Zealand and Australia are to the rest of the world, but there is one important dimension they didn’t touch on.  In other countries, the social security systems are typically partly funded by social security taxes on wages.  That means tax rates on wages are typically higher than those on capital income.    This is a relatively attractive feature, given that business investment (especially foreign investment) tends to be quite sensitive to expected after-tax returns (and people like Andrew Coleman and me have been making this point for years).    Even if we did not increase welfare payments to the unemployed there would be a good case to lower income tax rates and raise the lost revenue through a social security tax on labour incomes.  This wasn’t a dimension the Commission touched on and while, considered politically, that might not be surprising, it is quite a gap analytically.

In sum, there is no sign that the current Productivity Commissioners have any sort of robust defensible model for thinking about New Zealand’s long-running productivity failures. In particular, they show no sign of having thought hard about why firms operating here –  and who might operate here –  have proved so reluctant to invest more heavily over long periods of time.   There is no evidence offered that excessive rigidity in the labour market, or fears of workers, is any part of the issue at all.

And yet they jump to champion quite radical changes in our welfare system, even including near the end of the report a folksy politicised cartoon

flexicurity 8.png

The economic case just is not made.  Sure, it would be great to have a highly productive economy, but the Commission simply has not made a serious effort to demonstrate any sort of causal connection between their (apparent) personal political preferences around unemployment benefits/social insurance and any sort of plausible path to much better productivity outcomes in New Zealand.   (And here one might note that places like France and Belgium –  with quite restrictive labour laws, much more so than the flexicurity countries –  have similarly high average rates of labour productivity.)

If they want to champion such a model –  and reasonable people can debate the merits of some aspects of it in its own right – there is an election next year. Perhaps the Commissioners might consider standing for Parliament instead of using taxpayer resources to champion a different answer to inherently political questions.

 

 

 

Falling population shares: a highly-productive big city

Writing about Wales the other day I included this chart

wales 1

The comparable chart for Scotland is even more stark (16 per cent of the Great Britain population in 1801 and just over 8 per cent now).

But what really caught my eye when pulling together the numbers was this chart.

london 19.png

I guess part of my brain knew that greater London’s population had fallen for several decades, but that bit never quite connected with the bits thinking about world cities, agglomeration and so on and so forth.  London is one of the great world cities, a key financial centre in an age when capital is more mobile than it was for decades after the war.  There is no other really great city in the UK, the UK’s population hasn’t increased that rapidly by New World standards, and yet the share of the UK population resident in greater London is less now than it was for decades prior to World War Two (true even using the orange dot –  for which there is no time series – the estimate of the population of the (defined by contiguity of population rather than local authority boundaries) of the greater London urban area.

(As it happens, on checking one finds that the New York metropolitan area population is also lower now, as a percentage of the total US population, than it was several decades ago – I could only see data back to 1950.  But the US is different  –  there are multiple very large cities and the spread of air-conditioning greatly affected the liveability of many of those places.)

As you may recall from Saturday’s post, estimated GDP per capita in London is 188 per cent of that of the EU as a whole (and about 180 per cent of the UK as a whole).  The only other (Eurostat-defined) region that comes even close to London is (close to London) “Berkshire, Buckinghamshire, and Oxfordshire” (at 151 per cent of EU as a whole).

These have the feel of places where if more people were able to live there more people would be better off.  The whole of the UK might even be better off on average (a larger proportion of the population able to do more highly-productive jobs), even if the London premium over the rest of the country narrowed somewhat.

And yet, of course, as everyone knows London house prices are really expensive –  price to income ratios similar to those in Auckland (with incomes higher), typically for small houses and small sections.  You can tell similar stories about San Francisco/San Jose or New York (where GDP per capita are well above those of the US as a whole).   Rigged housing and land markets really seem to have visible consequences in pricing people out of working in highly productive cities.

Where the story is much less compelling is in Auckland (or Sydney or Melbourne). I wish it were otherwise –  I’m a strong supporter of land use liberalisation –  but

(a) on the one hand, the populations of those cities (urban areas) have actually increased very substantially as a share of national population (especially Auckland: 8.5 per cent of the population in 1901, and about 33.5 per cent now), and

(b) in none of the Australasian cities do the estimates for GDP per capita show up with any very substantial margin over the rest of the country (see, by contrast, London above).  People who just don’t earn that much (or produce that much) have found a way to live in those cities anyway.

Fixing the New Zealand urban housing markets is, or should be, a matter of dealing to one of the grosser injustices in our economic system, but it is far from obvious that there is a compelling case in issues around productivity and wider economic performance.  If anything, there are probably already more people in Auckland – and perhaps Sydney/Melbourne –  that there really are highly-productive opportunities that are either waiting for them now or would spring up were housing once again as affordable as it should be.

 

Productivity (lack of it) and other things

When I was writing some comments last week on Reserve Bank Deputy Governor Geoff Bascand’s speech in Australia I was playing round with some comparative data and stumbled on this chart.

nzau 1

Over the entire period (since 1991) real GDP per capita has grown at exactly the same rate in Australia and New Zealand.   And I haven’t even cherrypicked the starting point: my chart starts when the SNZ quarterly GDP per capita series starts.

Of course, even in 1991 we were materially less well off than Australians, but should we take some comfort from having kept pace over now almost 30 years?  I’d say not.

Here’s why.   Look at the employment rates in the two countries

nzau2

You might be among those who think the more employment the better but (a) working is a cost (an input) to the employee and (b) wouldn’t it have been much preferable, even if you think higher employment rates are some great thing, for it to have resulted in more growth in average per capita income than in the country where employment rates didn’t increase as much?   Australia’s unemployment rate is a bit higher than ours, and that is a mark against them, but it is only a small part of the difference in the employment rates.

And here is a chart that is perhaps even more stark.

NZau3

Across the whole population, the average Australian is now working 5 per cent more hours than in 1991, while the average New Zealander is working 22 per cent more hours.

And yet the bottom line, growth in average real output per capita, is the same.

The difference is productivity – or, more specifically, in our case the lack of anywhere near enough productivity growth.

I’ve got other things on today, so that is it for original content.  But earlier this morning I was rereading my submission to the Reserve Bank consultation on the Governor’s plans to require large increases in bank capital.   There wasn’t anything in it I would now resile from.  I also skimmed through former colleague, and expert in bank capital modelling, Ian Harrison’s papers (here and here) and I doubt he would resile from anything in there.

But what remains striking is how little engagement there has been from the Governor on his proposals.    He has only given four on-the-record speeches this year, not one of which has involved a serious sustained attempt to make his case, let alone engage with alternative perspectives.  The only attempts I’ve seen to respond to alternative perspectives seem to simply involve suggesting that anyone who disagrees with him is somehow bought and paid for, and therefore their views aren’t worthy of serious notice or scrutiny.

At one level, it shouldn’t be surprising, given Orr’s personality and intolerance of challenge or disagreement –  and the fact that, formally at least, he doesn’t have to convince anyone but himself (since he is prosecutor, judge, and jury in his own case, and there are no rights of appeal). But as matter of good governance, in a democratic society, it reflects very poorly on him, on his handpicked senior managers, and on the Bank’s Board and Minister of Finance who are paid to hold the Governor to account but in fact act as if there role is to simply get out of the way and let the Governor get on with it, poor as the process and substance have been, poor as Governor’s conduct increasingly seems to have been.

And so I’ll leave you with some of the unanswered points from my submission

An unbiased observer, looking at the New Zealand economy and financial system, would struggle to find a case for higher minimum capital ratios.   Among the factors such an observer might consider would be:

• The fact that the New Zealand financial system has not experienced a systemic financial crisis for more than hundred years (and to the extent it approximated one in the late 1980s, that was in the idiosyncratic circumstances of an extensive and fast financial liberalisation which left neither market participants nor regulators particularly well-equipped),

• Our major banks – the only ones that might pose any serious economywide risks – come from a country with very much the same historical record as New Zealand,

• Despite very rapid credit growth in the years prior to 2008 (increases in the credit to GDP ratios among the larger in the advanced world, spread across housing, farm, and other business/property lending), and a severe recession in 2008/09 and afterwards, the banking system emerged with low loan losses,

• Since then, banks have not only increased their actual capital ratios (and been required to calculate farm risk-weighted assets more stringently) but have also substantially improved their funding and liquidity positions (under some mix of regulatory and market pressure).

• Over the decade, bank credit growth (relative to GDP) has been pretty subdued and there has been little or no evidence (in, for example, Reserve Bank FSRs) of any serious degradation of lending standards.

• The balance sheets of the large banks remain relatively simple, and there has been no sign (per FSRs) of the sort of financial innovation that might raise significant doubts about the adequacy of existing models.

• In terms of the wider policy environment, government fiscal policy remains very strong, we continue to have a freely-floating exchange rate, and there has been neither legislation nor judicial rulings that will have materially impaired the ability of banks to realise collateral.

• And the Open Bank Resolution option for bank resolution has been more firmly established in the official toolkit (note that if OBR were fully credible then, in the absence of deposit insurance, there would be little case for regulatory minimum capital requirements at all).

• And repeated stress tests –  over a period when the regulator had no incentive to skew the tests to show favourable results –  suggested that even if exposed to extremely severe adverse macro shocks, and associated large price adjustments for houses, farms, and commercial property, not only would no bank fail, but no bank would even drop below current minimum capital requirements.

• Consistent with this experience – also observed in Australia, the home jurisdiction of the parents of our major banks – the major banks operating here continue to have strong credit ratings (consistent with a very low probability of default), and the ratings of the parent banks are even higher.

• There has been no change in the ownership structure of our major banks, or in the implied willingness of the Australian authorities to support the (systemically significant) parents of the New Zealand banks were they ever to get into difficulty.

Add into the mix indications that New Zealand banks CET1 ratios, if calculated on a properly comparable basis, would already be among the highest in the advanced world –  in a macro environment with more scope for stabilisation (floating exchange rate, strong fiscal position, little unhedged foreign currency lending) than in many advanced countries –  and there would be a fairly strong prima facie case for leaving things much as they are.

But the Reserve Bank’s consultative document – and associated material, including speeches and interviews – engages substantively with almost none of this context.

And

It is grossly unsatisfactory that throughout months of consultation the Bank has made no effort to illustrate how its proposals for minimum CET1 ratios and the associated floors around the calculation of risk-weighted assets, compare with those planned by APRA for the Australian banks.

Such an exercise should have been relatively straightforward, especially if the Reserve Bank had done what most New Zealanders might reasonably have expected, and worked closely together with APRA in formulating its proposals.  Of course, New Zealand is a sovereign nation and the Reserve Bank (regrettably) has final decision-making powers in New Zealand but:

• APRA has a considerably deeper pool of expertise, including at the top of the organisation, than the Reserve Bank of New Zealand,

• The nature of the risks in the two economies and markets is quite similar (including similar legal institutions, and similar housing markets),

• If anything there is a case for thinking that APRA minima would be ceilings below which New Zealand requirements for our large banks should be set (since we have the benefit of strong parent banks, and well-regarded supervisor of those banks, whereas the parents  – and parents’ supervisors – themselves are on their own, and we have also chosen to have the OBR as a frontline resolution option),

• For the institutions that might pose potential systemic issues in New Zealand, any substantial increase in capital requirements can reasonably be seen as an attempt to grab group capital for New Zealand.  Why not work these things out together?

The onus should, surely, be on the Reserve Bank of New Zealand to demonstrate – make the case in detail – why the New Zealand subsidiaries of Australian banks should be subject to more onerous capital requirements than the parents, and banking groups as a whole, are subject to.  But not once has the Reserve Bank attempted to make that case.

I ended

New Zealanders deserve better than they have had in the poor process and weak substance that together made up this consultation.

To which one can only add that the repeated reports  –  some of things in public, others less so –  of the way the Governor has handled himself, his own conduct, through this episode are deeply disquieting.  There is little sign of the sort of character and temperament we should expect from a senior public servant exercise so much barely-trammelled power.  The Minister of Finance may declare that he has full confidence in the Governor.  The public should not, and if the Minister continues to sit on the sidelines doing nothing but expressing full confidence that should probably raise more questions about the Minister himself.

Meanwhile, one wonders what our new Australian Secretary to the Treasury makes of her first encounters with national policymaking and advice.

Productivity growth (or lack of it)

In yesterday’s post I included this chart of multi-factor productivity growth data for the 23 advanced countries the OECD produces estimates for.

king mfp

One always has to be a bit careful about MFP estimates, which are only as good as the model (and labour and capital input estimates) used to calculate them.   But when I looked at the OECD labour productivity growth data –  same countries, some period –  the picture was strikingly similar.

GDP phw 23

There is, perhaps, more of a suggestion that productivity growth was already slowing before the events of 2008/09, but still a fairly sharp fall-off in the last decade as well.

I used 10 year average data in these charts because (a) Lord King appeared to be focusing on the pre and post crisis periods (it is now roughly 10 years since the crisis), and (b) because, at least for some countries, there is quite a lot of year-to-year noise, which probably only signifies measurement error.  But out of interest, here is what those lines look like calculated as five year averages.

productivity 0ct 19

There is some sign of a bit of a rebound in productivity growth, especially for MFP.  But (a) most recent periods are probably prone to revisions, and (b) even the latest observations are nowhere near the growth rates being recorded 15 or 20 years ago.

Over the most recent five year periods, New Zealand ranked 4th to last for labour productivity growth, and simply last for MFP growth.    We managed 0.0 per cent average annual growth in labour productivity (on this measure) over the five years. By contrast, the median average annual growth rate for labour productivity over that period for the eight former eastern bloc members of the OECD was 2.3 per cent.

The OECD MFP data begin in 1984.  That just happens to be when the decade of far-reaching economic reform began in New Zealand.     When that reform process started New Zealand was already lagging badly behind the advanced members of the OECD: the OECD doesn’t have MFP levels data, but in terms of real GDP per hour worked, ours in 1984 was only about 75 per cent of the median for the 25 countries for which there is data.   The reform process was supposed be about catching-up again.  (There are a few people who will dispute that last claim, suggesting that it was only really about ending the decline or even slowing it.  But even if some of those individuals really were pessimists even then –  perhaps because they think the reforms were not nearly far-reaching enough –  it was not the way the story was sold, whether by local politicians or international agencies. Here was the Minister of Finance in 1989.)

caygill 1989 expectations.png

So how have we done since 1984?  On MFP growth

MFP since 84

There are (a few) countries that have done worse than us, but not many (and not mostly ohes that represent much to boast about).  You’ll either recall, or have read about, the rank inefficiencies in the New Zealand economy in 1984,  But since then we’ve lost ground relative to the typical other advanced OECD countries.

It is only one estimate.   Labour productivity –  GDP per hour worked –  is less model dependent and thus a bit more reliably estimated.

real GDP phw since 84.png

We do a bit less badly on this measure.  But the median of these advanced countries –  already materially richer/more productive than we were – managed average annual growth of 2.2 per cent per annum over this period while we managed only 1.6 per cent annum.  Over 35 years, that amounts to drifting a long way further behind.   We are now about 65 per cent of the GDP per hour worked of the median country for which the OECD has data for the whole period.

And one last chart: labour productivity growth since 2000 (when there is data for all of them) of the former eastern-bloc countries and New Zealand.

e europe oct 19.png

All of these countries were not-very-market-at-all Communist regimes in 1984 (three weren’t even separate countries).  Three of the eight now have average productivity levels equal to or exceeding New Zealand (and the worst only lags us by about 15 per cent).  But their growth rates are still much faster than ours.

I’m not here to refight the wars over the broad direction of the reforms New Zealand undertook from the mid 80s to the mid 90s. Most of those reforms were sensible –  although I’d nominate three important exceptions.  But the fact remains that, appropriate or not, decades on we have made no systematic progress on convergence and catch-up, and are actually drifting ever further behind.

But is there any real sign either of our major political parties care, let alone be willing to identify and initiate changes that might finally turn things around?  Not that I can see.

There are global problems and failings –  where this post began – and we can’t do anything about fixing those.  But we could –  and should – be doing much better for our own people, starting (as we do) already so far behind.