Sluggish productivity growth and financial crises

There has been some interesting material around recently on how many advanced economies (in particular) have undershot over the last decade or so the trends they appeared to be on previously.  Paul Krugman had an interesting column a couple of weeks back, and then the IMF had a whole chapter in their  latest World Economic Outlook on “The Global Economic Recovery 10 Years After The 2008 Financial Meltdown”.   Martin Wolf summarised and illustrated some of that chapter in his FT column last week.  Much of this work attempts to associate (causally) subsequent disappointing economic performance with the financial crises of 2008/09, something I’ve long been a little sceptical of.    The IMF also highlights that countries that didn’t have a financial crisis have shared in the underperformance.

I might come back to the IMF material (in particular) later but reading it prompted me to check out some New Zealand data.

As context, here is some OECD data for labour productivity (real GDP per hour worked) for the G7 countries as a group.

G7 productivity

The trendline shows what might have happened if the trend growth to 2005 had continued.  The gap at the end of the period is equivalent to a productivity shortfall of around 15 per cent.    Note that this productivity slowdown was clearly underway well before the financial crises.

And here is the New Zealand data.  Here I’ve used quarterly data, all the way up to 2018q2.

nz productivity

But this time the trendline extrapolates the trend in the actual data up to early 2012.  Because up to about that time there was no particular sign of a change in the trend. (And thus between 2005 and 2012 we actually did a little better than the G7 as a whole).

Over the six years since 2012, the gap between the actual data and the trendline translates back to a shortfall of about 8 per cent.  Real GDP per hour worked now would be around 8 per cent higher than it actually is –  with all the attendant implications for wages, consumption possibilities, and even government revenue – if that pre-2012 trend had been sustained.  And the pre-2012 trend had been pretty weak –  mostly we’d still been falling behind the rest of the advanced world.

It is always possible that much of the recent productivity shortfall will be revised away –  SNZ have, over the years, delivered some significant changes in history at times.  But I’m not aware of any particular reason to expect significant revisions (in any particular direction), so we simply have to work with the data we have.

As the G7 countries didn’t have a financial crisis in 2005, we didn’t have one in 2012.  In fact, we hadn’t had a systemic financial crisis at all since the late 1980s, and the localised (severe in the sector, but small economywide) finance companies crisis had been centred back in 2007 and 2008.  For New Zealand, there simply isn’t a plausible story in which financial crises –  domestic or foreign –  can explain our dismal productivity performance over the last half decade or more.    Neither the timing, nor the stylised facts around the New Zealand financial system, fit.

There are reasons why for countries at the productivity frontier a major financial crisis could impair domestic productivity growth even in a country that did not itself have a domestic financial crisis, but that isn’t a very relevant story here, New Zealand average productivity being so far below that in the leading group of countries (where productivity is about two-thirds higher than in New Zealand).

I’m not sure I have a fully compelling explanation for why New Zealand has done so poorly since around 2012 (my standard story encompasses several decades of persistent gradual  –  cumulatively stark  – underperformance, and period since 2012 looks –  on current data –  to have been unusually bad).   Perhaps the earthquakes, and the subsequent diversion of resources to a lot of vital, but low productivity, repair and reconstruction work is part of the story (as we knew from day one, in economic terms it was a nasty non-tradables shock that wasn’t going to be helpful).  Then again, the peaks of that work are now well behind us, and productivity growth has yet shown signs of improving.  Perhaps the strong terms of trade have been part of the story –  not stimulating business investment, which has been persistently weak, but boosting incomes and perhaps crowding out other stuff.  The real exchange rate –  not an exogenous influence –  got back to pre-recession levels from about mid-2011.   And, of course, the very sharp and substantial turnaround in the net immigration numbers –  also mostly not an exogenous development –  was getting underway from later in 2012.

Whatever the full explanation, the symptoms (eg weak business investment, shrinking exports and imports as a share of GDP) should be worrying, the outcomes (productivity, and thus potential incomes) are dreadful –  building on earlier decades of underperformance –  and the explanation can’t credibly lie in financial crises, domestic or foreign.

And nothing serious is being done about addressing this failure, by the last government, by the present one.  And The Treasury –  principal adviser to the government on such matters –  seems much more interesting in its Living Standards Framework and esoteric (and sometimes convenient) concepts of “wellbeing” than in actually advising on remedying the New Zealand productivity failure.

nnn

The government keeps film subsidies on

Subsidies and special deals for favoured firms/industries seem to have been becoming increasingly common in New Zealand.  There is Tiwai Point, the Sky City convention centre, the forestry industry, the export education industry and probably others I’ve forgotten.   There are the R&D tax credits the Prime Minister touts at every turn –  the only substantive item in her (very short) list of things the government is doing to reverse the atrocious productivity performance.

And then there is the film industry, into which many hundreds of millions of dollars have been poured over the last couple of decades.  There is an industry there, but one which official advice to the government makes clear has no prospect of viability without heavy subsidies.  That should be a good test as to whether there is any robust case for the subsidy.  Barring something like national defence considerations, any industry that has no credible prospect of ever standing on its own feet without subsidies or protection should be allowed to left to itself, probably to wither and die, but just possibly to transform itself.  And given the skewed incentives facing ministers, officials, and those in the industry – when such interventions are launched and when they are later evaluated – the standard of proof even for transitional assistance should be very high indeed.  It rarely is, of course.

This is another of those areas where there seems to be no discernible difference between National-led and Labour-led governments (and going by his comments in the last few days it isn’t even clear that the ACT Party is much different).

The current government showed some initial interest in looking to pull back on these taxpayer subsidies.  But, so we learned over the weekend, having had a look, they’ve backed away, and the party of workers, of the low income and disadvantaged, is going to keep right on with the big production subsidies.

The government has abandoned plans to rein in ballooning subsides for Hollywood, citing film industry opposition and the threat of lawsuits from the producers of James Cameron’s Avatar films.

But yesterday Parker, speaking from Australia, said following consultations with industry around the viability of their business – and thousands of accompanying jobs – without subsidies, and legal advice over a 2013 deal signed with Avatar producers, said cuts or changes to the subsidy scheme were now off the table.

“We’re not proposing to introduce a cap. We accept that the subsides are necessary, and we accept there’s a benefit to the country,” he said.

and

Parker said he wasn’t entirely dismissing the criticism by officials but said international rivals for film work were also offering subsidies.

“There’s something in that, but it’s also true that you have to balance that with whether you want to have a major industry. It’s a binary decision here – you either have this subsidy, or you don’t have an industry.”

“You’d be a foolish government to allow the film industry to fail, you might never get it back,” he said.

Now quite possibly they were on the hook over the Avatar deal, but that isn’t an argument for keeping the whole scheme in place (even if it might require a specific carve-out that respects the terms of a specific deal the previous government signed with the Avatar people).

Various official papers are linked to in those articles (notably these), which make it pretty clear that even MBIE’s hired-gun economic consultants were reluctant to attempt to put a number on the alleged economic benefit of the film subsidies, and other consultants hired to peer review the estimates the first ones eventually came up with were less than convinced by the results.  The Treasury estimated that net economic benefits were negative –  which is pretty much what one would expect when such large subsidies are required to keep the industry in business, and those funds have to coercively raised from other taxpayers.

But, notwithstanding all this, the Minister is convinced there is a benefit.  It would be nice to see his analysis.  Something for example about why, in a sector in which other countries’ taxpayers are wasting their money on subsidies, we should even be participating in such bidding wars.  And about why and how subsidising/protecting the film industry is so very different from all the other protected/subsidied industries we once had in New Zealand, that were in time forced to either stand on their own feet, or die.  And which, while they lasted, detracted from New Zealand’s overall economic performance, part of the decades-long story of declining relative productivity.

There are attempts at more sophisticated analysis in various reports MBIE and other agencies have commissioned (including this piece from last year by NZIER).  But I just had a quick look at a few summary indicators I could find.  Here, for example, is a line from a detailed table of New Zealand services exports (June years, $m)

2014 2015 2016 2017
Audiovisual and related services 504 490 397 280

Not exactly the trend enthusiasts would have been looking for.

The NZIER report has a chart of the estimated contribution of the screen industry to GDP over this decade.  In 2010 the estimate was 0.46% of GDP and in 2015 (the most recent year) 0.41 per cent of GDP.

In the annual SNZ release of screen industry data there is a table of earnings from screen industry jobs.  Here are those earnings shown relative to GDP.

screen industry jobs

On this measure, the relative share of the industry is a bit smaller than it was in 2005, despite all those subsidies.

There is also a similar length series of (a) the number of people employed, and (b) the number of jobs, which I’ve shown relative to the HLFS data on total employment.

screen E

And here is the same breakdown in respect of the number of jobs shown relative to the QES jobs filled data.

screen e 2

Employment isn’t everything –  there just might be stellar productivity growth going on.  But what NZIER could find on that front wasn’t particularly impressive –  and as they note, the numbers are shaky at best.  And in a sector of this sort, where New Zealand is a small part of a global industry, if there were really stellar productivity gains being achieved one might expect them to show up in a growing market shares, including (for example) rapidly rising exports and a rising share of total employment.  There is simply no sign of any of that.

Advocates seem reduced to some pretty feeble arguments not much different from “it feels good”.  In their taxpayer-funded report, NZIER devoted several pages to trying to make the claim that film subsidies are an effective part of “soft diplomacy”, exemplified apparently by cases like these

The German-aired Emilie Richards series (case study 6 over the page) is not well known in New Zealand, but in Germany it played a role in cross-cultural understanding. In the case of 800 Words (case study 7 overleaf), our Trans-Tasman relationship plays out in a drama series featuring New Zealanders and Australians together in daily life.

But as the discussion of these two cases unfolds it all seemed to reduce to not much more than “if you subsidise something, you will get –  and may even grow –  some firms and jobs that depend wholly on those subsidies”.  That is no sort of robust test.

Film subsidies look like a classic case in which, once established, it is extremely difficult to overcome the concentrated vested interests that want the subsidy to continue, even if there is no sign that New Zealanders as a whole are benefiting.  Perhaps there is a better class of cafe in Miramar as a result, perhaps ministers like hobnobbing with film industry people (although given the revelations of the MeToo movement it is hard to know why), and there are (of course) individual employees who would be adversely affected by the discontinuation of the subsidies –  as there is in any economic change, including the cyclical ups and downs in places like the construction industry.  But it isn’t a good basis for taking your money and mine to provide subsidies to the likes of Richard Taylor and Peter Jackson, talented as they (and their staff) may individually be.   Economic policy should be premised on considerations like economic efficiency, with any interventions benchmarked against credible performance data.  On that score, film subsidies were flawed from inception, and they clearly fail now.

A picture in continuity

Here is a summary chart of the real GDP outcomes for the June quarter (expenditure and production), the hours outcomes (QES and HLFS), and the implied change in labour productivity (real GDP per hour worked), taking the average change in hours worked from the average growth in real GDP.

GDP q2 1

There was quite a bit more activity all round, but it took a larger percentage increase in labour inputs (hours) to get the published percentage increase in output (GDP).  In other words, labour productivity fell: not just the growth rate, but the level.

Here is the same chart for the previous quarter.

GDP q2 2

It was worse: less GDP growth, but also an even larger fall in GDP per hour worked.   Productivity growth for the first half of the year was -0.65 per cent.  That isn’t an annualised number, but an absolute change; a significant fall.

Perhaps you think this just shows how dreadful the new government is.  Here is the same chart showing the cumulative growth rates for the last six months of last year (in blue) and the first half of this year (in orange).

GDP q2 3

To me, the similarities are (much) more striking than the differences.    Importantly, the level of labour productivity fell in both halves.

Looked at from a productivity perspective –  and that really is where one should focus, especially when the unemployment rate is not too far from the NAIRU – it is a pretty dreadful performance.    Of course, simply looking at two six month periods on their own doesn’t tell one much, but nothing in these data is inconsistent with the poor productivity record for some years now.

And neither the last government nor this one appears to have any serious ideas for, or any serious interest in, fixing this failure.

 

 

Automation, future of work, and other distractions

The Labour Party, led by the now Minister of Finance, has made great play in recent years of the looming “threat” of automation, and the claimed need to think hard about the Future of Work.  There was a taskforce in Opposition, repeated references in ministerial speeches, and now even a Future of Work Forum.  I’ve always been a little sceptical: the application of new technology has been a key part of how living standards have improved over the last few hundred years, and I’m sure most people are hoping for further improvements for themselves and their children/grandchildren.   And employment rates seemed to be about as high as they’ve been for decades.

And so I was interested this afternoon flicking through today’s online Financial Times to find an article citing some new OECD work suggestiong that New Zealand is among the advanced countries with some of the lower propotions of jobs at significant risk of automation.  Here is the key chart from the OECD paper.

automation2

New Zealand fourth lowest share of jobs at high risk of being automated, and lowest in the OECD for the combined high and significant risks.

For the geeks, here is some text from the paper on how OECD researchers have been revising down their estimates.

automation 4

Automation will, no doubt, continue to happen.  It should.  We’ll generally be better off for it (even if some individuals will face difficult adjustments, as they did in every phase of activity –  indeed every business cycle – since the Industrial Revolution).  But particularly if this methodology is even approximately right, it reinforces my sense that the Labour Party – and now the government –  (probably with good intentions) use the Future of Work issue, and automation risks/possibilities, as a distraction from, and substitute for, their lack of interest/ideas in addressing the real economic elephant in the room: decades of underperforming productivity growth that mean we would now need a two-thirds lift in productivity (all else equal) to once again match the leading countries, most of whom we used to consistently outstrip.

As Morning Report reminded us today on the anniversary of women’s suffrage, we should celebrate the automatic washing machine, for all the time it freed up, and opportunities it allowed people (then largely women) to pursue.  It is only one of a myriad of such innnovations, past, present and future.

But New Zealanders get fewer of the gains than most advanced country citizens, as successive governments have done nothing to reverse the productivity failure.

 

The Secretary to the Treasury and productivity

As I noted in Saturday’s post about The Treasury, the Secretary to the Treasury –  he of the rushed citizenship presumably on the grounds of some exceptional services the previous government thought he might offer to New Zealand –  gave a speech last week on productivity.

One can feel a little sorry for senior public servants venturing into the public domain.  After all, there are limits as to what the head of a government department can really say, while still retaining the confidence of his/her minister (let alone that of the State Services Commissioner).  Political masters change and with those changes there are changes in what can’t really be said in public by their most senior advisers.  All of which is probably a good reason why heads of government departments shouldn’t really give any but the most anodyne (or perhaps obscurely technical) public addresses (in fact, most simply keep quiet in public – do a search for speeches by the Secretary of Justice or the chief executive of MBIE and you won’t find much, if anything).  After all, their primary job is to advise ministers, not to act as public lobbyists for their own policy preferences  Upon leaving office they are, of course, free to champion whatever causes they like.

But all that assumes some idealised fine public servants, who have laboured to generate judicious but penetrating insights.  Wise men and women whose words shed light in dark corners, enrich our understanding, and could –  if only we listened – help resolve some of these intractable challenges that face any modern government and society.

And then there are the Makhlouf speeches.  I written about several of them here (eg here, here, here and here).  They often read fluently enough at a first glance, before quickly turning to dust under any close examination.

Last week’s effort wasn’t that much better.  At least the Secretary to the Treasury was talking about productivity –  something I noted was strangely totally absent from The Treasury’s Briefing to the Incoming Minister last year – but he didn’t have a credible or robust story to tell.

The speech was delivered in Queenstown, so Makhlouf began with some local colour –  some good, some bad.  Among the less positive indicators was

The mean income for people in the Queenstown-Lakes District in 2017 was about $51,000 compared with the national mean of $59,000.  With low incomes but the highest average weekly rental cost in the country and an average house value of more than $1.1 million, the housing affordability problem in Queenstown is in the same league as Auckland.

To which the Secretary’s response was

In response, the Government’s Housing Infrastructure Fund is contributing $76 million in 10-year interest-free loans to support an increase in Queenstown’s housing supply.

So the Secretary to the Treasury now thinks interest-free loans by the government are sensible economic policy?    This isn’t supposed to be some local MP’s party-political broadcast, but the Secretary to the Treasury, guardian of the public purse.

The Secretary then touches on the failure that is New Zealand productivity growth, recognising that we’ve done poorly (while taking no responsibility as head of the leading economic advice agency).  But there is nothing new, and litttle specific.

There are various unsupported assertions  (emphasis added)

We know that our productivity levels stem from a number of factors including weak international connections, the small size of domestic markets, low investment in knowledge-based capital and weaknesses in the allocation of labour.

as if symptoms (in some cases arguable ones) are causes, and then a string of platitudes

It remains a fundamental truth that successful economies need, among other things, a stable and sustainable macroeconomic framework, sound monetary policy and a prudent fiscal policy. It remains true that a well-regulated financial system matters, that properly functioning markets matter, that price signals matter and that incentives matter. And, perhaps most important of all, it remains true that productivity matters.

No doubt largely true (I’d quibble about the “well-regulated” financial system, substituting “sound and stable) but New Zealand has had these features for decades, and we are just slowly drifting further behind.

The second half of the speech builds off this paragraph

The Treasury believes there are a number of factors that always matter for productivity: our human capital, the management of our resources, our international connections, the dynamism of our markets and the effectiveness of our rule-making. I want to say a few words about each of these. To improve our productivity we will have to be more effective in their utilisation and the interactions between them.

First, skills matter.  As if we didn’t know.

There seemed to be two areas of focus

In the Treasury’s view, to help achieve this there should be an emphasis on attainment of cognitive and non-cognitive foundational skills and social skills that are transferable and support life-long learning, as well as greater rates of progression to higher tertiary qualifications.

But I’m not sure what the first half of the sentence really means (Great Books programmes for all, to teach people to think and write?) and the second half looks like a bid for even more tertiary education, when there is little sign that the massive public and private spend on tertiary education in recent decades has been reflected in commensurate increases in productivity or earnings.  And none of this seems embedded in some comparative analysis about whether, and to what extent, New Zealand is doing worse than other advanced countries.

The other specific was slightly surprising

I should also add that we will need to look carefully at whether our social welfare system – which was initially set up to help people make transitions from one job to another in what was expected to be a similar trade – is optimal for the changing world ahead of us.

I presume he means the bits of the system around the unemployment benefit (or whatever it is now called) since most of the social welfare system wasn’t set up to support employment transitions at all (age pensions, widows’ pensions, DPB, sickness and invalid pensions etc), but as his current political masters have, as a matter of policy, been weakening the sanctions in the welfare system that were, supposedly, designed to assist such transitions, I’m left a bit puzzled as to what the Secretary means by this cryptic observation.  Perhaps he is toying with notions of a Universal Basic Income (but, charitably, I’ll assume not)?

Then there is a section on resources.  Some of it seems sensible enough, including around water use rights.  I’m right with him when he favours congestion charging.  But I’m left wondering whether he or The Treasury really believes that either is a significant part of the story explaining our severe relative underperformance.  I don’t.

And lets just say that I rather doubt the robustness of The Treasury’s analytical framework when the Secretary includes these sentences.

The Emissions Trading Scheme is a good example of a tool that can promote the more productive use of resources. Including agriculture within its scope would provide incentives for investment in R&D or innovation in on-farm practices and improve productivity.

An ETS can, no doubt, be a good mechanism for constraining emissions, and even for doing so in a way which might be economically efficient.  But it simply isn’t a way to improve New Zealand’s economywide relative productivity and/or incomes.  Impose an impost (perhaps quite justifiably) on firms in a particular industry, and those who survive will have to adapt their production techniques, perhaps even lifting their own firm productivity.  But it will also considerably shrink the industry in question, when it is an internationally tradable industry, when efficient alternative technologies don’t yet exist, and when other countries aren’t adopting the intervention The Treasury proposes.  All else equal, New Zealanders would be poorer rather than richer if this bit of the Secretary’s prescription was adopted –  the government’s own commissioned economic modelling, by NZIER says as much.

Then Makhlouf moves on to “international connections”, one of the ill-defined buzzwords in this debate.

Mostly it is just empty conventional slogans

Improving the flow of people, capital, trade and ideas will help improve productivity. Strong people-to-people relationships build confidence and understanding and promote learning. They help our businesses to identify capabilities that will help them improve their productivity and ultimately compete and succeed in both domestic and global markets.

All of which would have sounded good in 1984, and yet we greatly liberalised immigration, got rid of most tariff barriers, signed up to all manner of trade agreements, and……the productivity gaps are larger than they were, and actual trade (exports and imports as a share of GDP) is smaller than it was.  The Secretary is either unaware of these basic facts, or simply chooses to ignore them.

I’m closer to the Secrerary’s position when it comes to foreign investment –  where he has to step delicately around the recent legislative choices of his masters –  but there is no sign that he has thought hard about why foreign investment here isn’t more attractive or, indeed, why not many New Zealand based firms do much foreign investment themselves.

There is a section on “markets” that I’m going to skip over.  I don’t particularly disagree with much in it, but there also isn’t much specific there, and nothing to suggest The Treasury has thought seriously about the connection to sustained New Zealand relative productivity underperformance.  Much the same goes for the section on Rules.  I’m all in favour of robust policy evaluation –  it is a shame it hasn’t been applied to Treasury advice on productivity –  and I’m sure there are real opportunities there, but again is there any evidence that things on that score are worse here than in other countries?  Perhaps, but if so he doesn’t mention it.

(The dig at the massive taxpayer subsidy to the cattle industry was interesting, and welcome

Speaking of incentives, I find the situation around the eradication of mycoplasma bovis an interesting one. Responsibility for the genesis and subsequent spread of the mycoplasma bovis outbreak sits with the cattle industry. The question is, should the taxpayer compensate those affected, or should the industry pay for the consequences of the industry’s making? We might also ask what incentives are signalled to the industry by these different options.

And yet, how different is it anywhere else? )

There was an odd section on co-operatives, as if it was a matter for governments to decide on the appropriate sort of vehicles through which business activity is undertaken, and one on public sector productivity, which was really no more than a footnote.

And then there was tax reform.  Mostly, it was in praise of the New Zealand tax system, including the –  highly questionable –  claim, that

the New Zealand tax system is much less distortionary than the tax systems of other OECD countries

That might be true, more or less, if we look only across activities in the same time period, but is demonstrably not true once we take account of intertemporal dimensions.  Not consuming your income now and delaying until later (ie saving –  particularly retirement savings) is much more heavily penalised by the tax system here than in almost any other advanced economy.  That is a distortion The Treasury has been consistently reluctant to address or (it seems) even acknowledge.

There is also no recognition of the possible connections between low rates of foreign investment, and low rates of business investment (symptoms he touches on elsewhere) and business tax regime, where (for example) our company tax rate –  a key consideration for foreign investors –  is now towards the upper end of the OECD range.

And then it was interesting to see that in a speech on productivity, the specific policy proposal that the Secretary devotes most space to (in the entire speech, not just this section) was the call for a capital gains tax.

But there is one area where we stand out as an outlier and which I think needs further attention. The current approach to the treatment of capital income – in particular, capital gains – is highly inconsistent. Some gains are already taxed but others are not. The result is therefore something of a patchwork, the results of which can be unfair, regressive and distortionary. A more consistent approach to the taxation of capital gains would increase the fairness of the tax system, and reduce distortions by levelling the playing field between different types of investments.

For these reasons, the Treasury has long believed there is a real case to extend the taxation of capital income. I recognise that this would come with its own risks, and give rise to higher compliance and administration costs. But there are interventions available to address these risks. The extent to which the impacts are realised – whether positive or negative – will depend significantly on the design of policy.

Some readers will support a capital gains tax.  I don’t particularly, partly because a real-world one (ie the sort many other countries actually have) just introduces a whole new set of distortions, but does anyone seriously believe that a capital gains tax –  whatever the case on “fairness” grounds –  is going to make any material difference to economywide productivity?  And if there is such a case, not even the Secretary to the Treasury advances it.

The Secretary, of course, has to keep on side with his masters, so we read this

I should also add that there are many things being done to address points I’ve just raised. The government has been working on education and training, welfare reform, tax reform and trade relations, to name just a few of the actions happening.

If the Secretary to the Treasury really believes that the goverment’s policy agenda –  at least as revealed to the public –  is going to make a helpful difference in reversing the decades of relative productivity decline, he must surely be the only such person.    But I guess that if he is going to speak in public, he has to say such stuff.

In the final paragraph of the speech there is material for both a brickbat and a rare bouquet.

The brickbat?

And the ‘we’ means everyone: businesses, workers and government seizing the opportunities offered by being part of, and closer to, the fastest-growing region in the world.

Which is simply nonsense of course,   New Zealand is incredibly remote from Asia, or from any other major part of the world economy.     We might be a little less far from some of Asia than we are from Europe or much of North America, but we aren’t even a little close to the major bits of Asia, let alone “part of” it (whatever that means).  When the Seceretary was at home in London he was closer to Mumbai or Bangalore or Delhi than he is in Wellington.  He was actually a little closer to Seoul or Shanghai too.

It is a fundamentally unserious “analysis”.

But there is a bouquet.   Early in his speech, the Secretary was rather downplaying the failure of New Zealand policy, and policy advisers, in observing that labour productivity is “now about 20 per cent below the OECD average”  –  an average considerably lowered by the entry to the OECD of a large group of emerging countries (especially in eastern and central Europe), all of whom throughout modern New Zealand history were considerably poorer and less productive than New Zealand.

But the Secretary ends

Recent research indicates that if New Zealand’s productivity caught up with the better-performing countries in the OECD, our incomes would be 50-60% higher.

It doesn’t take much “research” –  a quick download of an OECD table does the job.   Here is an extract of that table I did recently for a paper I’ve been writing on these issues.

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

If anything, a 50-60 per cent lift is an understatement: it would take a two-thirds lift in New Zealand productivity to match the average of this group of high-productivity countries.   And such a lift could be expected to be mirrored in commensurately higher living standards,

But it is great to see the stark magnitude of our failure –  and “failure” is the only honest word for it – as the note the Secretary ends on, even if there isn’t much sign the institution he leads has any serious answers.

And, to be entirely fair, the Governor of the Reserve Bank’s own speech last week makes the Secretary’s effort look like a fine piece of public sector analysis and communications by comparison.  I will write about the Governor’s extraordinary speech tomorrow.

 

A country is not a company

That was the title of an article by Paul Krugman, published more than 20 years ago now, in the Harvard Business Review.  The Prime Minister might perhaps consider reading it, and reflecting on it.

Yesterday morning the Prime Minister gave her promised speech on the economy.  It was, frankly, astonishing how little there was there.   There was some mention of the problems

Our overall objective is to build a productive, sustainable and inclusive economy.

On each score we have some way to go. When it comes to productivity, the OECD has said we are “well below leading OECD countries, restraining living standards and well-being”

and

We need to transition from growth dominated by population increase and housing speculation, to build an economy, that as I said, is genuinely productive, sustainable and inclusive.

and

First we want to grow and share more fairly New Zealand’s prosperity.

That means the gap between the highest and lowest income and wealth deciles reduces, real per capita income increases; the value and diversity of our exports grows and home ownership increases.

In particular we want to build our exports and have export led growth.

Which is all well and good, but there is nothing –   nothing –  in the speech about what the government proposes to do, and how it believes that the modest measures it does propose will deliver such better outcomes.   And, of course, no mention of the government initiative which, on the government’s own consultative document modelling, would severely undermine the competitiveness of core parts of our tradables sector, and reduce GDP by perhaps as much as 10 to 22 per cent.

And this from a Prime Minister who has now been in office for almost a year.  It is extraordinary.

But in this post I wanted to focus on the new Business Advisory Council the Prime Minister announced yesterday.  Perhaps it is all just window-dressing, intended to get some favourable headlines for a day or two, and perhaps placate the odd sceptic in the business community (although one might wonder how many sceptics will be invited onto the Council).    If so, I guess no real harm done.

But such councils can be a path towards cronyism.  On the one hand, attracting sycophants who like to be able to tell their mates they have the ear of the Prime Minister.  And on the other, more concerningly, enabling selected business heads to bend the ear of ministers and put pressure on them to make decisions favourable to the specific economic interests of those involved and their employers.  That might not be direct subsidies –  although we have had all too many of them in recent years –  but might involve making the case for regulatory changes which skew the playing field against new entrants, in favour of incumbents.

But by far the bigger issue, if the Prime Minister and the government are at all serious about the lines they ran yesterday, is “what do chief executives of businesses know about overall economic management, and the challenges of New Zealand’s longstanding productivity underperformance?”.  In Krugman’s words, a country is not a company.

Here are a few extracts from his article

What people learn from running a business won’t help them formulate economic policy. A country is not a big corporation. The habits of mind that make a great business leader are not, in general, those that make a great economic analyst; an executive who has made $1 billion is rarely the right person to turn to for advice about a $6 trillion economy.

Why should that be pointed out? After all, neither businesspeople nor economists are usually very good poets, but so what? Yet many people (not least successful business executives themselves) believe that someone who has made a personal fortune will know how to make an entire nation more prosperous. In fact, his or her advice is often disastrously misguided.

and

I am not claiming that business-people are stupid or that economists are particularly smart. On the contrary, if the 100 top U.S. business executives got together with the 100 leading economists, the least impressive of the former group would probably outshine the most impressive of the latter. My point is that the style of thinking necessary for economic analysis is very different from that which leads to success in business. By understanding that difference, we can begin to understand what it means to do good economic analysis and perhaps even help some businesspeople become the great economists they surely have the intellect to be.

and

Keynes was right: Economics is a difficult and technical subject. It is no harder to be a good economist than it is to be a good business executive. (In fact, it is probably easier, because the competition is less intense.) However, economics and business are not the same subject, and mastery of one does not ensure comprehension, let alone mastery, of the other. A successful business leader is no more likely to be an expert on economics than on military strategy.

And yet here was our Prime Minister yesterday (emphasis added).

The role of the Council will be to build closer relationships between Government and business, provide high-level free and frank advice to the Prime Minister on key economic issues and to create a vehicle to harness expertise from the private sector to inform the development of the Government’s economic policies.

….

“The Council will provide a forum for business leaders to advise me and the Government and to join us in taking the lead on some of the important areas of reform the Government is undertaking,” said Jacinda Ardern.

“The Council will report to me on opportunities it sees and identify emerging challenges. It will bring new ideas to the table on how we can scale up New Zealand businesses and grow our export led wealth.

“I want to work closely with, and be advised by, senior business leaders who take a helicopter view of our economy, who are long term strategic thinkers who have the time and energy to lead key aspects of our economic agenda.

Expertise on economic management, and the particular confounding challenges the New Zealand economy faces, just aren’t the sort of thing that tends to be fostered in the course of a corporate career.   Many of these people might have been superb marketers, exceptional operations managers, corporate finance whizzes, smooth operators around the edges of regulation and the tax system, and have risen to assume overall responsibility for (by New Zealand standards) fairly large organisations. They are absolutely vital skills, and business roles done well are a big part of how, in pursuing the interests of shareholders, society is also made better off.   But those skills bear no resemblance to the issues involved in addressing long-term economic underperformance.  For a start, the things businesses have to take as given are precisely the sorts of things governments often can vary, and (as Krugman eloquently notes) the sorts of constraints even a large business faces are very different from those an entire economy faces.   And so on.

There can be exceptions of course.  Sometimes people with a strong background in economics end up in top corporate roles.  Back in the day, for example, Don Brash as as private sector CEO was able to provide a valuable contribution in leading advisory groups around things like the introduction of GST.  More recently, Kerry McDonald –  former director of NZIER and later chief executive of Comalco and chair of the BNZ –  has continued to bring valuable contributions (eg here) to policy discussions and debates (although probably not ones likely to see him invited to join the Business Advisory Council).

But I don’t see many (any?) such people in the top tier of New Zealand business today. The head of Air New Zealand –  chair of the new council –  is reported to be obsessed with politics, but I don’t think we’ve ever heard his ideas on New Zealand’s longer-term economic underperformance.    Fonterra doesn’t have a permanent CEO, and Xero’s head is an Australian based in Australia.    The film industry and the export education industry survive on explicit or implicit subsidies.  And so on.  But even if there were a range of hugely successful outward-oriented businesses led by stellar CEOs lauded by their peers around the world……..it is simply a totally different skill set.

In her column in this morning’s Herald Fran O’Sullivan, who tends to articulate the perspectives of (in the Australian term) the “big end of town”, is pretty keen on the new Council.

Luxon positioned himself well to take a leadership role.

He recently hosted Finance Minister Grant Robertson to a private dinner in Auckland attended by a number of CEOs.

On the guest list were KiwiRail’s Peter Reidy, Spark’s Simon Moutter, Mercury’s Fraser Whineray and McKinsey and Company’s Andrew Grant. The Warehouse chair Joan Withers was also present.  …..

The chief executives at Luxon’s table are all “progressives” — interested in public policy, innovation and sustainability — and wanting to have a say and contribute to the direction of New Zealand.

Moutter led an innovation mission to Israel a couple of years ago to get a focus on the secrets to Startup Nation. Whineray led last year’s Go Swiss mission by business think tank, the New Zealand Initiative which delved into Switzerland’s focus on localism and vocational education — two contributing factors in that country’s success.

Kiwirail……that sink hole that absorbs billions of dollars of taxpayers’ money, contributing to our economic underperformance.

But it was convenient that O’Sullivan included this snippet, as before I read it I’d also been thinking of the cases of Simon Moutter and Fraser Whineray (the latter another head of a majority state-owned company).

As she notes, Moutter was dead-keen on the Israeli model.  I picked apart that idea in this post (followed later by this one).  As for Whineray and the Swiss trip (of which Fran O’Sullivan was part), they headed off to one of the very few countries to have had less productivity growth than New Zealand in the last 50 years (I wrote about some of the findings of the trip here).

It is great that these individuals care about New Zealand’s economic performance, but there is no particular reason to believe that in general they will have more useful perspectives to offer than the average moderately-educated voter chosen from the phone book at random.  Running a business no more equips you to provide useful advice on economic policy more generally (as distinct perhaps from specific bits around your industry) than it does to, in Krugman’s words, write great poetry or make military strategy.

Of course, the usual pushback against such business advisory councils –  again, at least if they are supposed to be anything more than window-dressing –  is that governments have access to a range of high quality contestible advice from….well…. economists (in particular those in key public sector agencies).    But that defence is weaker now that MBIE is run by an HR person with no policy or economics background (although apparently the CEO did previously work in Air New Zealand) and The Treasury seems to have given up on seriously addressing long-term productivity underperformance in favour of corralling a politically convenient, ideologically-driven grab bag of feel-good indicators into a forthcoming “wellbeing Budget”.

 

The Minister of Finance champions an economic strategy

Longstanding readers will know that I was pretty critical of the previous government for the utter absence of any sign of a set of economic policies that might have begun to reverse the decades of relative economic decline.  Worse, they and their acolytes too often seemed to make up stories about how well things were going when the data pretty clearly pointed in the opposite direction.   I’m not sure I’d be quite as harsh as Kerry McDonald and Don Brash, who recently gave the Key-English government an overall score of 0/10, but I’d be close, especially around productivity (and also around housing).

What has become increasingly disconcerting is that the new government –  now almost a third of the way through its term –  also has no credible ideas about reversing the decline and little interest either.  They seem increasingly reduced to making stuff up as well, and trotting out the same lines again and again without any sign of a really understanding the challenge, without any sign of a compelling analytical framework, and without any reason to think that the policies they talk of will make any material (helpful) difference.

I woke this morning to the news that the Minister of Finance had an op-ed in the Herald explaining how the government was going to restore our economic fortunes.   With suitably low expectations, I tracked it down.   Even with low expectations, I was struck by how weak it was, and left wondering why the Minister and his PR team thought the article was a good idea.

The Minister begins thus

The coalition Government is helping business modernise our economy to be fit for purpose for the 21st century.

Presumably he is aware that one sixth of the 21st century has already gone?  And that his party was in government for half that time?  But let that pass: as rhetoric it might be empty, but it is probably harmless.

This means being smarter in how we work, lifting the value of what we produce and export, supporting the environment, planning for future generations and giving everyone a fair shot at success. It means making sure that all hard-working Kiwis share in the rewards of economic growth.

All of which is hard to argue with, but isn’t exactly a) specific, or (b) new.  I keep a copy of National’s 1975 election manifesto by my desk, and flicking through it –  43 years on now – I think I spotted all those points (actually, in light of Eugenie Sage’s announcement on Sunday, I also found a pledge to “discourage all forms of environmental pollution and encourage the recycling of materials.  We will place a levy on difficult-to-dispose-of products’).   Labour’s 1972 manifesto, or its 1984 one, or its 1999 one probably had them all too.

Most New Zealanders know we cannot go on relying on a volatile mix of population growth, an overheated housing market buoyed by speculation, and exporting raw commodities as our growth drivers.

Quite a bit of that was in the 1975 manifesto too.    They are old lines, each trotted out by politicians of either main party for decades as the symptoms presented.     Not always even very accurately – does anyone actually think an “overheated housing market buoyed by speculation” added to national prosperity?   And not with much sense that the speaker had any sort of robust model of the New Zealand economy.  Let alone serious policies in response: for example, if this paragraph is to be believed, the current government is apparently uneasy about rapid population growth, but continues to run the same immigration policy as both its predecessor governments for the last 20 years.

And despite all this, a few sentences later the Minister of Finance tries to assert that

the fundamentals fuelling the economy are strong

Quite which “fundamentals” he has in mind – presumably not those in the previous quote (above) –  isn’t clear.  In fact, all he offers in support of his view is

Last week, the Reserve Bank said growth will still average 3 per cent over the next three years. And Mainfreight managing director Don Braid said recently: “I think the business environment is good right now.”

A government agency whose forecasts seem to command increasing scepticism among other forecasters, and one prominent business person.  Perhaps you are persuaded.  I’m not.

But finally we get to some of the things the government is promising.  First, what the Minister presents as a key component

Our plan to become more productive is built on getting our infrastructure sorted. This year, and for the next 10 years, we will invest more than $4 billion getting roads, rail and coastal shipping humming. We are sorting out Auckland’s congestion to save the $1b loss in productivity it causes each year.

Haven’t we heard these infrastructure stories (“we are taking steps to clear the backlog”) for 15 years now?  But even if they are doing everything well in this area, look at the number in the final sentence.   $1 billion –  assuming the estimate is robust –  is a great deal of money to you and me individually, but this is an economy with an annual GDP of $280 billion.  On the Minister’s own numbers, fixing congestion would lift GDP by about 0.36 per cent.  It would be very welcome, but it is tiny relative to the scale of the economic underperformance: with no productivity growth at all for the last three years, it might take 10 similar initiatives to just reverse the further slippage (relative to other countries) in the last few years.  But this was the only hard number in the entire article.

So what else does the Minister have to offer in his economic strategy?

We are investing to improve the skills of our workforce so that workers can adapt to changing workplaces. New programmes like our Mana in Mahi/Strength in Work apprenticeship scheme will get young people off the dole and support employers with the costs of giving them an apprenticeship to help them grow their business.

As I’ve noted numerous times previously, on OECD data New Zealand workers are among the most highly-skilled in the OECD.   And where the government is spending most heavily in the broad area of skills, it seems to be in providing fee-free tertiary education –  a policy that will (a) mostly redistribute money to people (and their families) who would already undertake tertiary education, and (b) to the limited extent it encourages further participation, presumably do so mostly among those for whom tertiary education offers lower expected returns.  It doesn’t have the feel of a productivity-enhancing policy, and the government has not (that I’ve seen) offered any numbers to the contrary.   As for getting “young people off the dole”, it is (of course) a worthy objective but haven’t we seen many such initiatives in the last 50 years?

Other policies supporting small and medium enterprises to manage costs include greater access to training programmes, e-invoicing and cutting compliance costs.

There may well be some useful stuff in that list.  But surely every government in modern times has talked of cutting compliance costs?  And, in practice, haven’t most ended up increasing them overall?  The previous government liked to boast of the 500 (?) items that comprised its Business Growth Agenda, but none of it (not even all of it) began to reverse decades of underperformance.  It was symptom of the drive for action without analysis.

New Zealand was built on innovation. The best path for us to get richer as a country is to invest in new opportunities and find better ways of doing things. The coalition Government is supporting business to lift research and development investment, with $1b set aside in the Budget for R&D tax incentives.

Hard to disagree with the second sentence, but without some compelling analysis suggesting that the government and its advisers understand why firms haven’t regarded it as worth their while to spend more heavily on R&D, it is difficult to be optimistic that more subsidies are the answer.   As I noted in an earlier post on the government’s proposals in this area

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). [both of which have far far higher levels of actual business R&D]

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.

But we are only stepping up to the big stuff

Our bold goal for New Zealand to have a net zero emissions economy by 2050 is essential as we face up to climate change. This goal creates economic opportunities. The business community is alongside us, with 60 of our biggest firms forming the Climate Leaders Coalition. The $100 million Green Investment Fund and the One Billion Trees initiative are key parts of this work.

Perhaps it is “essential”.   Perhaps it even creates “economic opportunities” –  big changes in regulation and relative prices always do, for some people.   But the government’s own consultative document, and modelling commissioned for them from NZIER, suggests that once one looks at the entire economy, a serious net-zero emissions target by 2050 will result in losses of real GDP per capita of 10 to 22 per cent (relative to the baseline in which no such target is adopted by New Zealand).   No democratic government is history has ever consulted on proposals that would lead to such a dramatic fall in expected future living standards and productivity.  And, as a reminder, on the government’s own numbers, the costs would fall wildly disproportionately on the poorest New Zealanders.   And, yes, there probably will be a lot more trees planted –  many of them probably on good, easy to access and harvest, land –  but just last week the government had to announce large subsidies to get even that programme underway.  Subsidies have never been the path to improved economywide economic prosperity.  Of course, few suppose the government proposes adopting a net-zero target for economic purposes, but they should at least stop misrepresenting the analysis on the economic effects from their own consultants.

We are also committed to ensuring no one is left behind in our economy. That’s why we have put in place the Families Package and lifted the minimum wage. It is why we have a $1b annual fund for regional infrastructure and economic development opportunities.

So the regions are so “stuffed” that only an annual subsidy scheme is going to help ensure they aren’t “left behind”?    That seems to be the implication of what the Minister of Finance is saying there.   And perhaps the Minister skipped over the likely tension between the laudable desire (see above) to get young people off the dole, and the really substantial increase in the minimum wage his government is putting in place (at a time when there is little or no economywide productivity growth)?

There are challenges in the world that are outside of New Zealand’s control. That is why we are running a surplus and being prudent with our debt levels. We are also diversifying our export markets to create new opportunities for our exporters.

There is no hint of what, specifically, the Minister has in mind with his final sentence.  But there is a certain sameness to it, going back decades and decades (nice quotes –  including about the potential role of forestry –  in that 1975 manifesto I mentioned earlier).  And, actually, taken over the decades there has been a huge amount of diversification of export markets –  no single country takes more than a quarter of New Zealand firms’ exports – but it hasn’t enabled New Zealand to lift the foreign trade share of its GDP much.  In fact, over the last 35 years that share has shrunk.

As Don Brash noted in his article the other day, the previous government had fine words too

Key spoke about the need to increase the export orientation of the economy, and set a target for exports of goods and services of 40 per cent of GDP, up from 30 per cent when he came to office. Today, exports are just 27 per cent of GDP

Just no policies to make a difference.

The Minister of Finance attempts to end his article on an upbeat note

We are committed to working with business, workers and communities to build a stronger, more productive economy that delivers the quality of life that all New Zealanders deserve.

A worthy objective indeed, but there is nothing in what he told his readers that is likely to address –  and begin to reverse –  the decades and decades of underperformance.  If we take seriously the government’s own numbers around the proposed emissions goal, the relative underperformance could be even worse under this government (were it to win nine years in office) than under its two predecessors.

I presume (hope) the Minister believes what he says, but until he starts to confront the implications of charts like this he is unlikely to make any progress (except perhaps by chance)

With a real exchange rate now averaging 25 per cent higher than in the previous 15 years, in a country where productivity has dropped further behind, it shouldn’t be any surprise at all that foreign trade shares are falling, that the economy is increasingly skewed towards the non-tradables sector (where competition is often, and often of necessity) quite limited, or that firms don’t see the likely payoff to investing heavily in R&D.   These are classic symptoms of a severely unbalanced economy.  Most often they arise from misguided government choices.  In our case, the biggest single misguided choice is the grim determination –  or perhaps enthusiastic dream – to keep on rapidly driving up our population in such an isolated location where the opportunities to take on the world from here seem few –  and all the fewer with such a severely out-of-line real exchange rate.

Really successful economies  –  ones with materially stronger productivity growth than their peers –  tend to have strong, and rising, real exchange rates.  But that strength is a consequence of success, an outcome of success, a way of spreading the gains.  Driving up the real exchange rate has never been a part of successful strategy to lift the relative productivity performance of the economy.  The reformers here in the 1980s recognised the importance of a sustained lower real exchange rate as part of a successful economic transition.  It is tragic that today’s political and economic leaders seem to have almost completely lost sight of that.

We have –  and will have –  a 21st century economy.  But the question is whether it will be a struggling upper middle economy, with hazy memories of glory days long gone, or one that once again matches many of the richer countries in the advanced world, something I’m pretty sure we could do, but for a small number of people.  If the government really believes they have the answer for how they can do it with a population that they  actively drive further up every year, they surely owe it to us to lay out their reasoning, their analysis, with much more specificity than the Minister of Finance has yet done.  That might include explaining why their clever wheezes and proposed reforms will make the difference their predecessors also claim to have aspired to for decades now.

Then again, perhaps tangible achievement no longer matters.  Under the government’s wellbeing approach perhaps warm feelings will substitute for world-leading incomes?