National’s economic plan

I’d seen a few underwhelmed comments on the speech by Simon Bridges earlier in the week, “National’s economic plan for 2020”.   But just possibly some of those critics had missed some real gems, that might signal an Opposition party really serious about addressing New Zealand’s longrunning economic failures. For anyone wanting the short version, there was nothing of that sort.

I was quite critical of Bridges’s speech to the National Party conference last July

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing –  not a word –  to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments –  led only by National and Labour –  have presided over.    There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) –  and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

But I was a bit more positive about the economic policy discussion document released a month or so later.

Quite a few of things National is proposing look sensible. The general direction looks sensible.   The rhetoric is better than it was –  although, by itself, such rhetoric is cheap, and is the sort of thing most Oppositions for 25 years have eventually come round to saying.  But the scale of the policy response they are talking about is simply incommensurate to the scale of the problem (much of the policy mix they are suggesting is carrying on a broad approach they adopted in government, and productivity growth was very disappointing then).  For New Zealand average labour productivity to match that in top-tier OECD countries would require a 60 per cent lift from where we are.    That is simply huge.  Huge problems are rarely successfully answered with small changes (even a succession of them).

And so my challenge to National is along the lines of that the rhetoric is great, and I hope it reflects a shared sense that New Zealand’s long-term economic performance really is deeply disappointing, and has not sustainably improved –  relative to other advanced countries –  for any prolonged period for many decades now.  As they say, that has real implications for us, our children and our grandchildren, for the material living standards –  and public and private services –  we can achieve for the population as a whole.

But if you are serious, and you really mean what you say – all those good quotes I posted earlier –  you need to keep thinking harder, digging deeply, consulting broadly and testing and evaluating the proposals and analysis put to you.   Great ambitions need to be matched by excellent analysis, courageous policy, and skilful management of the political challenges.   Perhaps for many in the National caucus, winning the next election is all that matter, but I’d urge the party, and its members, not to focus on the small ambitions, but on the really big challenge that, successfully confronted, would so much transform New Zealand for the better, for almost all New Zealanders.

That was six months ago,  The election is now only seven months away, and if the speech earlier this week wasn’t intended to set out too many details (specific tax rate changes etc), if there was any sign at all that they were serious about more than just gettingback into office, it should be showing through by now, reflecting some sort of integrated story –  and telling that story –  about what has gone wrong, what needs to be done quite differently, and how National under the leadership of Mr Bridges proposed to set about doing it.   But no.

So what does he have to say?

It is pretty much all cyclical stuff.

The first page is pretty much a boilerplate recitation of the woes and challenges of the wider world, and there isn’t anything very much to disagree with.    Then we get this

Our commodity prices are high and our terms of trade are near the best they have ever been. From our primary sector through to our technology and innovative sectors, New Zealand should be booming and the envy of the world.

Perhaps there is a small amount to such a story on a cyclical basis, but no one in their right mind would envy our structural performance, among advanced economies, at any time this century (arguably, for most of the previous half-century either).

I’m not going to disagree with much of the shorter-term stuff

Because Jacinda Ardern’s Government has failed to deliver on its promises, has piled on the tax, cost and red tape, made things more uncertain domestically at a time of global uncertainty, and as a result New Zealand has become a country of lost opportunities.

They [people] deserve a government that does what it says it will, that delivers with certainty and removes barriers and burdens like tax, cost and red tape.

But then it starts getting a bit odd.

We have slipped to the seventh lowest GDP per capita growth in the OECD. We are behind countries like Chile, Hungary, Poland, Latvia, Estonia, Lithuania, Spain and even Greece.

Which is a rather odd list to be anguished about, seeing as all those eight countries have lower per capita GDP than we do (Spain is very close).  In conventional analysis of such things, one might reasonably expect (and hope) that poorer countries will grow faster than rich countries so that, over time, economic performance converges.    Oh, and Greece was coming off the back of probably the most savage economic downturn in the advanced world in almost a century, so it would be a surprise –  nay, a worry –  if they did not eventually begin to limp back towards full employment.

So, really strange list of countries, but it is certainly a fair point that seventh lowest per capita GDP growth in the OECD is pretty bad.    Unfortunately it has become par for the course.  For the whole period since 1970, we’ve had the third lowest growth in real per capita GDP in the OECD (small sample of countries for which there is data for the whole period).    There is complete data for the whole OECD membership since 1995, and over that period –  after all the reforms we did, but also period presided over by both National and Labour governments – we were 11th worst (out of 36 OECD countries).

And on productivity growth –  real GDP per hour worked – the only secure underpinning for long-term improvements in living standards, we’ve been 7th worst in the entire OECD over that whole period since 1995.

We’ve been doing poorly, mostly drifting backwards, relative to other advanced countries for a long time.     And if one year’s growth –  thrown around by all sorts of things, including measurement challenges (who knows how our latest annual growth rate will finally be measured, or ranked against those of other countries, when all revisions are in several years hence) makes for short-term political headlines, it is mostly a distraction from the real long-term failures.    A deliberate one one might suggest.

I couldn’t exactly replicate the Bridges claim that we were 7th worst in per capita growth –  I’m sure it is so on some or other series, but the ones I happened to check gave slightly different results.   I’m assuming he was using annual data, for which the most recent numbers are of course 2018 –  quite a lot (good and ill) has happened since then. I also checked the OECD quarterly seasonally adjusted per capita data, and as happens can offer a factoid Bridges might like: in the two years to September 2019 (latest official data, and covering the full period of this government) New Zealand’s per capita GDP growth shows as being 11th worst in the OECD, while for the previous three years (final term of the National government) we were 14th best –  ie actually better than the median OECD country.

But…..productivity.  Have I mentioned productivity?  (Bridges didn’t)   Over that whole five year period, our labour productivity was fifth worst in the OECD.   That was National’s failure, and it is Labour’s failure.  It would now take a 67 per cent lift in average New Zealand labour productivity to match average productivity in the leading OECD group (a bunch of north European countries and the US).

Now, in fairness to Bridges, there is one vestigial reference to such gaps

In comparison, if our GDP per capita were as good as Australia’s, the average Kiwi would be 35 per cent richer.

By my reckoning that is more like the productivity gap than the GDP per capita gap, but either way it is a big number.   No narrower now that it was –  wider on the productivity measure –  before the last recession.

Bridges goes on

That doesn’t happen by accident, it doesn’t take a country the size of Australia to achieve it. It happens when you have a strong economy focussed on you. Led by a competent government with a track record of delivering.

As Economic Development Minister and Associate Finance Minister, I saw how real this is.

Except that the gaps didn’t narrow then either, and all he goes on to enumerate is a series of either modest cyclical points or wholly rhetorical ones

It’s about getting up in the morning and seeing New Zealand ambitious and confident about itself again.

National’s response

National’s focus is simple and resolute.

  1. We will keep taxes and red tape low and grow incomes to help with your cost of living
  2. We will be responsible managers of the economy
  3. We will focus on growing the economy for all
  4. We will invest more in core public services like health and education
  5. Finally, we will create more jobs and opportunities for all New Zealanders

Except for the first half of item 1, Labour could – probably did – trot out exactly the same list in 2017.

He then gets a little more specific

To do this, today I am announcing five key measures that I want the sixth National Government’s first term to be measured by. They are things that matter to Kiwis because they impact us in our everyday lives.

  1. New Zealand’s economic growth is back to at least three per cent per annum.
  2. New Zealand’s growth rate per person is in the top half of the OECD
  3. We are reducing the after-tax income gap with Australia
  4. More New Zealanders feel they can reach their potential at home, rather than overseas
  5. We have revived business confidence so that businesses feel like they can take more risks and create opportunities for you and your family

Nothing very wrong with that I guess, but not much ambition either –  nothing about the level of GDP for example.   Nothing about productivity, and –  re the final point – business investment was really rather subdued under the previous government as well.

How will this be done?

Over the next few months I will be announcing our comprehensive Economic Plan.

The five major planks to it are five packages on:

  1. Tax relief
  2. Regulation reduction
  3. Infrastructure
  4. Small Business
  5. Families

Details to come, to be sure, but it is hard to believe it will amount to much, beyond a bit of political product differentiation, and (no doubt) a few useful steps at the margin.     If you plan to spend more, and keep the budget more or less in balance, for example, there is hardly room for game-changing tax reform.     And if I really quite like this

We have already promised to cut red tape and regulation. We will light a regulations bonfire in our first six months of government, and cut two regulations for every new one we create.

it isn’t much different to what National always says in Opposition, which never amounts to very much in government.  Why will this time be different?  Did Bridges have a reputation as a reforming liberaliser when he was a Cabinet minister?

The speech goes on with some soft-soap stuff that I won’t trouble you with.   And then we get to the conclusion

National’s view is that the 2020s should be New Zealand’s decade.

Which sounds good, but there is nothing in the speech suggesting thought, ideas, plans, ambition commensurate with the scale of that challenge.   It is really just a promise to manage a bit more compentently –  not an unworthy goal necessarily, but just part of keeping our ongoing relative decline tidy.   Ours kids deserve better.

Then there is this sentenc.  I read it first yesterday and read it again today and it still makes no sense –  or, most generously, just repeats itself in saying nothing.

Our ambition as a country can never be too great for what we need to achieve.

The decades of economic failure just keep on mounting up, on watches overseen by both National and Labour.  The scale of the failure –  the extent to which relative material living standards here have slipped away – is huge.  But while Bridges –  just like Ardern, or Key, or Clark, or Shipley –  might like to leave the impression they might finally be the one to wave a magic wand, all the evidence is that they (a) they don’t really care, and (b) have no serious ideas about what went wrong and no serious interest in knowing, or doing, what it might take to really turn this country’s economic future around.

If, perhaps, none of that is a surprise, I suppose we should simply be “grateful” that Bridges’s speech, just a few months out from the election, makes that indifference utterly clear.

 

 

Annual productivity data

Statistics New Zealand last week released their annual measured sector and individual sector labour and multi-factor productivity data for the year to March 2019.  It isn’t data I tend to focus on, mostly because my interests are substantially in cross-country comparisons and also because my focus is whole-economy rather than on specific sectors and sub-sectors.  But it is still useful for thinking about productivity performance within New Zealand over time and we are now beginning to get a reasonable run of time series

(I can’t quickly find the official SNZ definition of the measured sector, but think of it in terms of what it isn’t (non-market bits of the economy like government administration).)

Here is labour productivity for the measured sector.  I’ve shown both the actual data (in logs) and the extrapolation of the trend line for the 1996 to 2008 period.

measured sector LP

The difference at the end of the period is roughly equal to 10 per cent productivity foregone.

Here is the same chart for multifactor productivity (MFP).

MFP to 19

Those who are inclined to minimise New Zealand’s longstanding and ongoing productivity failures will, of course,  (correctly) point out that productivity growth in the advanced world as a whole has been slower in the last decade.    That might be some sort of excuse for countries at or very close to the productivity frontier –  best in pack.  It is no excuse at all for a country starting so very far behind the leaders (and, as I’ve pointed out here before, hasn’t stopped a bunch of eastern and central European countries –  often now about as productive as New Zealand, having been communist basket cases 30 years ago –  continuing to put in strong performances).

What about further disaggregated data?  SNZ publishes data/estimates for labour productivity for a wide range of individual sectors and subsectors, in many cases – making up what is known as the “former measured sector” – going back to the 1970s.   (Sadly, even if I run the trend line through the data all the way from 1978 to 2008, the gap around the last decade’s performance still looks stark.)

What about some more disaggregation?  SNZ show results for three high-level groupings: goods, services, and primary production.  The latter can be quite volatile (droughts and the like).  Here are the MFP numbers for those groupings.

MFP sectoral

The primary industries performance was pretty impressive –  doubling in twenty years –  but that good performance itself ran out more than twenty years ago now.    Within primary industries, agriculture itself still does quite well relative to productivity growth in the rest of the economy.

And finally a couple of charts on individual sectors.  Here is the MFP estimate for something SNZ call “Information and communication technology industries”

MFP tech

Not much growth this century   –  in fact, less than for the measured sector as a whole.

Then again, rather better than the performance in these two sectors.

health MFP

And for anyone interested, these are the six sectors with the highest (estimated) MFP growth over the last 15 years as a whole.

Per cent increase in MFP, last 15 years
Rental, Hiring and Real Estate Services 19.1
Forestry, Fishing, and Services to Agriculture, Forestry and Fishing 20.1
Textile, Leather, Clothing and Footware Manufacturing 27.1
Information Media and Telecommunication 33.4
Retail Trade 42.6
Wood and Paper Product Manufacturing 45.2

Quite a mixed bag.

Overall, however, the productivity performance of this economy remains dismal.  Sadly, there is little sign any of our major parties care.

 

The Productivity Commission again

The Productivity Commission looks into topics the government of the day asks them to.  The current government asked for a report on issues around the “future of work” (a favoured topic of the current Minister of Finance when he was in Opposition) and the final report is due out next month.

The Commission has released a series of five draft reports looking at various aspects of the issue.  Late last year I wrote quite critically about one of those reports in which the Commission championed the case for a larger and more active welfare state, claiming that by adopting such policies New Zealand’s productivity performance might be improved.  As I noted

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.

It was one of the less impressive pieces I’ve seen from the Productivity Commission.

Just recently I noticed the Commission announcing the release of the last of its draft reports.  I was a little surprised that they were allowing only just over two weeks for submissions (they close next Monday if anyone is interested).  When I finally read the latest draft, “Technology adoption by firms”,  I was less surprised: there was very little of substance there (including only about 20 pages of core text).  There was, of course, a summary recapitulation of the argument that people who lose their jobs should get from the state.

Beyond that, and as often with the Commission, there were some interesting perspectives and charts.   They have apparently had some new research done (as yet unpublished) on the implications of land-use restrictions for worker mobility, and there are a couple of charts from that forthcoming paper but (a) it is hard to know what to make of them without seeing the underlying paper, and (b) there is no sign they done anything cross-country thinking on the issue (bad as land use restrictions often are, it seems unlikely that they explain much about New Zealand –  or Auckland –  economic performance relative to Sydney, London, San Francisco, Hong Kong or wherever.  It is a hobbyhorse cause of the Commission’s – and one I mostly agree with them on –  but the case for a strong connection to New Zealand aggregate productivity performance is poor (and our labour market functions pretty well as it is).

Of course, since the focus of the paper is on firms (mostly private entities) and the question seems to be why those firms operating in New Zealand don’t invest more heavily in technology (or, I suppose, why there aren’t more such firms), the answer surely has to be (when all boiled down) “because the risk-adjusted returns to doing so don’t seem sufficiently attractive”.    And yet I don’t think that line appeared at all.  Nor, therefore, is there any sense that we should assume firms, and their owners, are already doing what is in their own economic best interests.    If so, the focus should be less on individual firms – although perhaps case studies can sometimes enlighten –  and much more on the wider economic policy settings (and any exogenous constraints- remoteness possibly being one of them).

Some regard for history might be helpful too. The Commission suggests on a couple of occasions that policy stability can be important, which is no doubt true in the abstract, but might offer less than they suggest in a country where economic policy has been pretty stable for most of the last 25 years, but that particular stable policy regime has not been accompanied by good economic performance.  Materially different and better outcomes are likely to require some quite different policy approaches.

Instead, what they have to offer is really not much more than a grab-bag, not supported by much.  Perhaps it was telling that of the two case studies mentioned in boxes in the draft report, the one on Weta never mentioned the massive taxpayer subsidies to the industry/firm, and the other Zespri never seemed to mention that export monopoly Zespri has, even though the Commission has often pointed to the importance of competition and easy entry and exit.

At the policy level, it was notable that three whole-economy variables/tools did not get a mention at all.  There was no mention of the real exchange rate, even though ours have unfolded this century in ways quite out of step with productivity growth differentials.  There was, as far I could see, no mention of company tax rates, even though ours are now quite high by international standards, particularly as they affect overseas investors.  And despite the scale of New Zealand migration, there was no mention –  good or ill –  of how the system might be affecting firm incentives to invest.    Foreign investment doesn’t even get much of a mention, other than to note the way the recent foreign buyer restrictions might be limited new housebuilding.

And of what was there was fragmentary at best.   Thus, we are told that “increasing emissions prices” “would encourage technology adoption by firms”.   Quite possibly so, but with no way of knowing whether the resulting technology adoption would be good for the economy or otherwise (one of the Commission’s messages is that we should embrace technology to lift material living standards).  Higher minimum wages can also encourage “technology adoption”, as firms try to substitute away from the now artificially more expensive input.  All sort of regulations can require investment in new technology, but that isn’t –  simply by assumption –  a good thing from a living standards/productivity perspective.

We are also told that strengthening something called the “national innovation system” would help, but  –  as was the case when the government brought back R&D subsidies –  no serious attempt to analyse why the returns to private firms to invest more heavily seem to be not-overly-attractive (when there are other countries, without subsidies, that see high private R&D spending).

We are told that targeted government intervention can have a role.  At times you get a sense that here they are pandering to the government, citing the “industry transformation plans” that are currently in the works (actually, I hope they are pandering there). But they go on to attempt to spell out examples of “successful targeted interventions” in New Zealand’s history.  Their first item is “industry training” –  it is no more specific than that, so I can’t quite tell what they mean.  And the second is this

encouraging technology development, diffusion and adoption in New Zealand’s agricultural industries (eg, the establishment of experimental farms, a “farm extension service” to spread good practice, and research institutions such as Lincoln Agricultural College, Massey University and the Department of Scientific and Industrial Research)

Even if you thought these were all success stories –  I don’t claim the specific knowledge to know –  they date from 100 years ago (DSIR founded in 1926) or even 150 (Lincoln founded in 1878).   It isn’t exactly a compelling narrative of modern “targeted interventions”.

Much of the rest is similarly scattergun in nature.  I’d happily see some regulatory reform around genetic modification, perhaps there is a case for competition policy changes (but the Commission doesn’t really claim to know –  “competition laws have not been fundamentally reviewed to assess their suitability for the digital age”).  Perhaps legislation around “consumer data rights” has a place, but they don’t seriously attempt to link this to obstacles to business investment.  And so on.

It isn’t that I think most of the specific policy suggestions are wrong –  some may be, most probably aren’t, some I’d support quite strongly –  but that they are little more than grab-bag of favoured measures, not well-grounded in any compelling narrative about New Zealand’s economic underperformance, and the obstacles to matching our strong labour market performance with a highly productive overall economy.  The Productivity Commission has been around for almost 10 years now, and we really should have been able to hope for more.   But I guess some of the issues get awkward (for Commissioners and their masters) and politically uncomfortable, so it is easier to play at the margins.  Amid the championing of personal political/policy preferences, there will probably be the odd bit of interesting analysis, perhaps some useful peripheral reforms, but the core challenges will be no closer to being addressed.

But then it isn’t as if the Prime Minister and Minister of Finance want anything much different –  unless some magic fairy dust somehow conjured up better outcomes –  and there was that sadly telling quote the other day from the man who would be Minister of Finance.

How will doing more of what we’ve done for the past three decades finally make us wealthy? I asked. Goldsmith offered no explanation.

 

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.