Falling population shares: a highly-productive big city

Writing about Wales the other day I included this chart

wales 1

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

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

london 19.png

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

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

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

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

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

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

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

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

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

 

Productivity (lack of it) and other things

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

nzau 1

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

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

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

nzau2

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

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

NZau3

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And

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

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

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

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

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

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

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

I ended

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

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

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

Productivity growth (or lack of it)

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

king mfp

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

GDP phw 23

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

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

productivity 0ct 19

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

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

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

caygill 1989 expectations.png

So how have we done since 1984?  On MFP growth

MFP since 84

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

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

real GDP phw since 84.png

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

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

e europe oct 19.png

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

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

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

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

Disagreeing with Lord King

Mervyn King was successively chief economist, Deputy Governor and Governor of the Bank of England over 20+ years.  Now in private life, with all the honours the UK can bestow (as Lord King, and a Knight of the Garter). he periodically offers his thoughts –  lucidly, rigorously, and respectfully (a model, in that regard, for any central bank Governor) – on various economic policy issues.   There was. for example, his book The End of Alchemy a few years ago (which I wrote about here).  There is a new book, with another respected UK economist John Kay, due out early next year.

Over the weekend, at the IMF/World Bank Annual Meetings, King delivered the prestigious Per Jacobsson Lecture in Washington DC (video rather than lecture text).  His lecture has had quite a lot of media coverage (for example here), with an emphasis on the idea that we are “sleepwalking towards a new crisis” and with various ideas and emphases for reform.

There are things to agree with and to disagree with in the lecture. He is clearly right to be expressing concern about the likely economic and political consequences of any new severe downturn, with little conventional monetary policy capacity at the disposal of the authorities. If/when such a downturn happens it is going to be very difficult to navigate successfully.  That message needs to uttered loudly and often, to alert the public and (perhaps) galvanise some policymakers.

Where I’m rather more sceptical is around Lord King’s expressed enthusiasm for the idea that the disappointing growth performance over the last decade or so is primarily a problem of a shortfall of demand.  Of course, it is likely that there is a demand (and monetary policy) element to the story –  in most places, inflation has undershot targets and as central banks (and markets) have been repeatedly surprised by the fall in market interest rates, they’ve had a bias to hold policy rates higher than they probably should have been.

But King’s story is a much more radical one than that.

One of the ways he set up his story was by analogy with the last great period of macroeconomic disappointment, the Great Depression.   He notes that in most advanced countries now real per capita GDP is well below the level implied by the trend in the decades running up to 2008.  Here is a New Zealand version of the sort of chart he has in mind.

King NZ

And then he moves on to assert (a) that similar charts could have been produced in the mid-late 1930s, extrapolating trend growth in real per capita GDP for the 20th century up to the Depression and yet (b) by 1950 actuals had returned to the pre-Depression trend.  So, he argues, we should not jump too readily to the conclusion that what we are seeing now is fundamental, grounded in supply-side problems.  It might simply be an insufficiency of demand and with the right policies we too might find ourselves, 20 years on from the 2008/09 recession, back on the long-term trend line.

King’s story of the 1930s holds very well for the United States, where (for example) the unemployment rate was savagely high throughout the 1930s (a notable contrast to the situation today).   I’ll illustrate that in a moment. But it isn’t a story that generalised even then.  Here, for example, is UK real GDP per capita for the first half of the 20th century.

king uk.png

The first few decades of the 20th century hadn’t been great for the UK, but then the UK experience of the Great Depression was fairly mild and by 1937/38 the economy was running above the pre-Depression trend (and remained so all the way through to 1950).

Rather than illustrates dozens of different countries, in this chart I’ve shown the situation for the US and for Maddison’s grouping of 12 larger Western European countries.

king us.png

You can see King’s point very starkly for the US, but for the Western Europe grouping it isn’t there at all – the picture is more like that for the UK (above).   (For what it is worth, New Zealand was also above the trend line by 1937/38 –  a overheating economy running towards a fresh crisis –  and Australia was a bit below its pre-Depression trend line.)

So the general story just doesn’t seem to stack up very well at all.  There were significant demand (and monetary issues) associated with the Great Depression, but mostly they were dealt with within a few years.  The US was the glaring outlier –  a country that then managed to have another pretty severe downturn in 1937/38 as a result of its own demand (mis)management choices.

As is now widely recognised, global productivity growth has slowed very substantially.  Here is one illustration, using the OECD’s multi-factor productivity data for 23 OECD countries (the “older” OECD countries –  none of the former eastern bloc OECD members are yet included).   I’ve calculated rolling 10 year average growth rates for each country and then taken the median of those growth rates.

king mfp

Being a median measure, you can tell that almost half these advanced countries had (typically slightly) negative annual average MFP growth over the last decade. In the decade to 2007 (say) only two did.

By contrast, here are leading economic historian Alexander Field’s estimates for multi/total factor productivity in the US in decades past.

The period when overall economic activity lagged behind trend so badly, which pretty much everyone agrees was largely down to demand shortfalls, was also the period of very strong underlying TFP growth.

In a similar vein, here is table from a 2013 CBO report on TFP growth in historical perspective (which also draws on Field).

king us 2

Historical estimates get reworked, and I’ve seen some revisions to some of these numbers. But they don’t change the story of strong underlying TFP growth in the 1930s –  all it took was enough demand to translate those new possibilities into higher per capita GDP (back to the longer-term trend line in the charts above).

What about other countries?  Here is chart from a speech given a couple of years back by the Bank of England’s chief economist

king UK mfp.png

It is harder to read, but there is no sign of any slump in TFP growth in the 1930s there either (then again, as illustrated above, demand didn’t look to lag badly for long at all in the UK).

There is a story, that King also tried to tell, that somehow the incipient productivity gains now simply can’t be realised –  let alone translated into higher GDP per capita –  because the demand isn’t there and because of heightened policy and trade uncertainty.  But that doesn’t ring true either.  After all, equity markets have been strong, real borrowing costs have been low (unlike the 1930s), and –  if anything –  the IMF is worrying about corporate sector overborrowing and vulnerabilities associated with it.  That borrowing might not have been funding much new investment, but business credit conditions haven’t exactly been very tight for years now.

And as for uncertainty, yes we all now that the general policy and trade policy indexes are quite high at present, but (a) trade policy uncertainty has really only become a big issue since the start of 2017 and the economic underperformance was well in place before then, and (b) consider the 1930s…..the demise of the Gold Standard, ongoing sovereign debt defaults (including the US and the UK), Smoot-Hawley and all the associatred/subsequent trade protection, the rise of Hitler, Japan’s invasion of China, the growing fear of war.  I’d have thought all those made for much greater uncertainty than we see today, but even if you read things differently, it was hardly a decade that made for a stable and certain political or business climate.  And yet…..consider the realised TFP growth, consider (outside the US) the return to pre-1929 real GDP per capita pathways, contrast it with what we’ve seen in the last decade, and you should doubt that the 1930s provides much useful insight on our current situation.

I don’t have a compelling story for why the productivity slowdown has been so stark and sustaine among countries at or near the frontier.  But a demand-based story doesn’t yet seem very credible, and if such a case is to be made it is going to need to rest in argumentation, theory and evidence, based on something other than parallels with the 1930s.

(And, of course, whatever the frontier story none of it should be of much relevance to New Zealand, starting from average productivity levels so far behind those of the frontier economies.)

America and Argentina

A couple of weeks ago I saw, somewhere or other, a link to a short column (“America’s Argentina Risk”) by the prominent economist Kaushik Basu.

Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

In his column he tells us that he migrated to the United States in 1994.  But you don’t have to read the column to get the impression that he isn’t overly taken with the direction of his new country –  with rare exceptions (I’ll mention one below), Argentina is usually only invoked these days (indeed for most of the last century) with a “don’t become like Argentina”, or “we are all heading to the dogs, like Argentina” sort of tone.   Of the making of books and articles about Argentina there is, it seems, no end (I have a large pile of them on my shelves).

My own first impressions of Argentina were the military regime tossing dissidents out of planes over the ocean and then the invasion of the Falklands.  Not all its modern history has been quite that bad, but it doesn’t seem to have much to its credit whether on broader governance or economic performance.   It isn’t, say, Somalia or Zimbabwe.  But that isn’t saying much.  On the IMF metrics, Argentina’s real GDP per capita (PPP terms) now slots in between those of Mexico and Belarus.  In another few years even the PRC might have caught up.

It wasn’t always thus.  And that is Basu’s starting point.

During the first few decades of the twentieth century, Argentina was one of the world’s fastest-growing economies. It also had talent flowing in, with more immigrants per capita than virtually any other country. As a result, Argentina was among the world’s ten richest countries, ahead of Germany and France.

To illustrate the Germany and France point

arg 1

France and Germany were big and powerful countries, but they weren’t exactly top of the top tier per capita league tables.  Here is a chart from one of last week’s posts.

1900 GDP pc

And here is how Argentina compares to the United States, from when the annual data begin through to (almost) the present.

arg 2

There is short-term volatility and probably still some measurement issues in the earlier decades (you can safely ignore that blip up in the early 1890s (around the time of a massive credit boom and nasty bust, one that almost brought down Barings Bank)).   Argentina was managing about 80 per cent of the incomes in the US from the mid-1880s until about World War One.  Thereafter, there were really only a succession of steps further downwards every few decades.  These days, Argentina is barely a third of the US. It is sufficiently bad that its real GDP per capita is now only about half New Zealand’s.

As Basu puts it –  with a similar tone to the one I noted earlier

What followed was not so much a recession as a slow-motion slowdown, the scars of which are visible even today. Argentina thus became a cautionary tale of how a wealthy country can lose its way.

Thus far, no real argument.

But according to Basu this is all the result of an anti-immigrant mentality in Argentina since the 1930s and the US risks heading towards Argentina-like outcomes because of Trump “stoking fears of immigrants and foreigners”.  Basu’s is a model in which very high rates of immigration caused Argentina’s decades of quite impressive economic success and, at least by implication, any turning away from such a model threatens all such good outcomes.   (He does mention tariffs in the 1930s once, but clearly doesn’t see that as a major party of the story, since there is no mention for example of Trump’s use of tariffs in his jeremiad about the US).

There is rather a lot that is questionable about this story.

But perhaps most obviously, Basu’s story about the decline in immigration to Argentina was more or less mirrored in the United States.  Here is a couple of charts from a 1990s journal article (summarised here) reporting a historical immigration policy index for a range of countries (not including New Zealand).  Positive scores mean an active bias towards immigration (aggressive promotion, subsidies etc), zero means neutral (in this case, open doors but no active policies one way or the other) and negative scores involve increasingly intense restrictions.   Here are the charts for Argentina and the United States.

On this metric, policy in the US was consistently less encouraging than that in Argentina, Argentina’s immigration policies had become progressively less positive even in the decades of greatest economic success, and the tightening in policy from World War One was greater in the US than in Argentina.

The slowdown in immigration to Argentina was real.  Here is the foreign-born share of the population

250px-Non-native_population_in_Argentina.png

And in the United States in the 1970 census the foreign-born share of the population was just under 5 per cent.

Here is a chart of migration to the US

US migration.png

Net migration to the US plummeted after World War One and remained low for decades (and if you are impressed by the subsequent rise, recall that US population now is more than three times what it was in 1914).

And yet…..was it not in the decades after World War One that the US continued to move to its leading position in the world economy.   Were not the 1930s –  for all their other problems –  the decade in which the US recorded the strongest TFP growth ever (on that measure, the 1920s was the second fastest)?

I am not, repeat not, arguing that markedly slowing immigration to the US was in any sense the cause of those US economic outcomes, but it is somewhat staggering to find a leading economist suggesting that (lack of) immigration was a major explanation for Argentina’s decline when, writing about the US, he pays no attention to the sharp decline in US immigration at much the same time, when the US went on to be the only New World economy still in the very top tier of economic performers today (and even today –  whether under Bush, Obama or Trump – immigration to the United States is pretty modest in per capita terms).  Here is another chart from last week’s post.

GDP phw 2018

Whatever you might think of Trump –  and I’m no fan on any count –  it is hard to see the US yet being pushed down the ladder.

(Argentina’s real GDP per hour worked is 27.)

As it happens, Basu also appears to be unaware that Argentina now has one of the most open immigration policies of any country in the world.   It is all laid out here.   It is pretty easy to migrate lawfully and as for those who arrive unlawfully there is no discrimination re the provision of things like health and education services, and it seems that you have to do something really rather bad to be deported, and the government is keen to offer opportunities to illegal migrants to regularise their status (and stay).  As the open borders advocates who wrote the description note

“Argentina does not have truly open borders, but it comes remarkably close”.

This regime has been in place for 15 years now.

And yet very few people migrate to Argentina.  An OECD study last year looked at the role of immigration in Argentina, but noted

The number and characteristics of immigrants in Argentina suggest that their current economic impact is positive, but not large. As immigrants represent less than 5% of the population, their role in the country’s economy is certainly less pronounced than it was during the first half of the 20th century.

Net migration to Argentina remains exceedingly low.  I’m not sure why –  there are worse places in the world –  but a reasonable hypothesis might be that migrants flock towards success (which is a pretty sensible approach for them and their families) rather than being determinative of that success.   Argentina hasn’t found the model of economic success.   (It is an interesting question why, say,  economic migrants from Africa don’t try Argentina, but then one might reasonably wonder whether the liberal approach (whether to residence or welfare entitlements) would last long if there really were such a substantial influx.)

One could take various tacks from here.  One could illustrate the way most –  but not all – of the more successful economies in the last century haven’t been ones that consistently encouraged large-scale immigration.  Or that flat or even falling populations and/or absence of much immigration, don’t seem to have held back the various countries (from South Korea, Malaysia, the Baltics, Romania, Chile, Uruguay that 15 years ago had similar average levels of productivity to Argentina –  of those countries, only Venezuela and Mexico have done worse than Argentina.  Even Russia –  also similar average productivity-  has done better.

And there are various other questionable bits in Basu article – eg he seems to be championing holding up global interest rates. But I think I’ll leave the article here.  There is much to dislike about Trump, much to worry about in the wider world, but the economics behind the claim that the US is at risk of heading Argentina’s way just don’t seem to stack up.

What was and what might have been

Yesterday’s short post –  which countries were rich or highly productive in 1900 and which are now –  wasn’t really about New Zealand at all (it was an article about the US and Argentina that prompted me to dig out the numbers).   But it prompted a question about New Zealand from a reader that sent me off playing around with the relevant spreadsheets again.

The question was along the lines of when were we at our economic peak (relative to other countries) and, given that we no longer are what it might have taken, in terms of different growth rates, for us to match the leading group now.

As a reminder, for historical periods the standard collection of reference data is that by the late Angus Maddison.  He collated estimates of real GDP per capita for a wide range of countries.  The numbers are only as good as the estimates made by the researchers Maddison drew from.  Perhaps they could be improved on  –  some researchers have tried for individual countries –  but for now they are still the standard starting point.   For more recent decades, I prefer to use real GDP per hour worked estimates (which will tell more about an economy’s productive performance, the wage rates it will support etc), either from the OECD or the Conference Board (the latter for a much wider range of countries).

My first chart yesterday was the top group as at 1900 – a date chosen just as a nice round number.

1900 GDP pc

The top five countries on this chart were the top five pretty much all the way from about 1890 to just prior to World War Two.   Here is how New Zealand did relative to (a) the median of those five countries, and (b) to the country that would emerge after World War Two as the clear leader, the United States.

NZ rel to others pre war.png

There is a bit of noise in the year-to-year estimates (particularly those for New Zealand), so I’m not putting any weight on that 1920 peak,  But abstracting from year to year noise the picture is reasonably clear.  Relative to this group of countries –  highest incomes anywhere at the time –  New Zealand did just fine in the quarter-century to the start of World War One.  We were, there or thereabouts, right up with the very richest. On these estimates, the number one slot moved around among the UK, the US, New Zealand and Australia.

Wars are dreadful things.  But they tend to be relatively less bad for countries producing food and wool, and not facing any physical destruction to their own country.  Even better perhaps for distant neutrals, as the US was until mid-1917.

New Zealand’s relative decline in the 1920s is notable (and not inconsistent with a story I’ve run for some years, about the lack of any really favourable idiosyncratic productivity shocks favouring New Zealand based industries, of the sort we’d had in the 30-40 years prior to World War One).

But perhaps what is interesting is the recovery –  especially relative to the United States – in the 1930s.  In 1939, for example, we were basically level-pegging again with this top group of countries –  a touch behind the US (No. 1), a touch ahead of Switzerland (No. 2).

Was everything then fine as late as the start of World War Two?  I’d argue not.   First, business cycles matters and don’t always run in phase across countries.  The United States, in particular, was very slow to recover from the Great Depression. Here is the unemployment rate

fredgraph U 30s

That is an unemployment rate in excess of 15 per cent at the end of the 1930s. In New Zealand, by contrast, the unemployment rate had been under 6 per cent as early as the 1936 census and the numbers registered as unemployed dropped away very sharply in the following few years, especially in 1938.

I was reading the other day an academic volume The Macroeconomics of Populism in Latin America, and was rather struck by the parallels between New Zealand in the late 1930s and some of the Latin American case studies (from the 70s and 80s).  Most of those experiences ended very badly.  New Zealand authorities were running very expansionary policies in the late 1930s which certainly boosted GDP and employment in the short-run, but culminated in the imposition of extensive foreign exchange controls at the end of 1938 and would almost certainly have ended in a highly public debt default in 1939 or 1940 if we hadn’t been –  as it were –  “saved by the war” (first, the British desire to avoid serious ructions in the run-up to the war, and then the intensified demand for our primary exports etc once the war began).

Consistent with that story is that after the war, when all three economies were pretty much fully employed –  and none had been directly physically affected by the conflict – New Zealand’s GDP per capita was well behind (10-20 per cent depending on the precise year and country) those of Switzerland and the United States.  Our heyday really had been the pre World War One period.

The second strand of my reader’s question really related to how far behind we now are.

Here was my second chart from yesterday, showing the top-20 real GDP per hour worked countries (from the Conference Board database) in 2018.

GDP phw 2018

I’m happy to set aside Norway (markedly boosted by oil/gas) and Luxembourg (city state with some material tax distortions) and focus on the next group of countries (Switzerland to Belgium) I’ve highlighted here in various posts.    On this measure, the median real GDP per hour worked exceeds that of New Zealand by 68 per cent.

New Zealand implemented a huge range of policy reforms in the late 1980s and early 1990s.  The aspiration was to make material inroads on closing the gaps that had opened between New Zealand and the OECD leaders.  Sadly, the gap has actually widened.  1990 is a common starting point for comparisons –  not only was it well into the reform period, but it was just prior to the New Zealand (and other advanced country) recession of 1991, so comparisons are not messed up but that particular cyclical issue.   In 1990, the median of that group of seven leading OECD countries was “only” 56 per cent ahead of New Zealand.

But what if things had been different?  How much more rapid productivity growth (than we actually experienced) would we have to have had since 1990 to have caught up with this leading bunch?   That is 28 years.  We”d have needed productivity growth that was 1.85 percentage points faster on average, each and every year.

Would that have been possible?   Who knows.   28 years seems a bit ambitious. But I did have a quick look at the data for some emerging OECD countries. Over the last 20 years or so, these countries have had productivity growth rates (on average over that long period) in excess of 1.85 percentage points above those of the median of that “leading bunch” of OECD countries:  South Korea, Lithuania, Poland, and Slovakia.

Would it have been possible for us? Who knows?  Would it be possible now, for the next 25 or 30 years?   I don’t know.  Personally, I’d be a bit surprised if we could close the gap that quickly, or fully.  But for now we are still going backwards (relatively)…..as we have, more or less, for 100 years.   And there seems no great sense of angst, unease or urgency among any of political parties, or the economic establishment.

What a diminished legacy for the next generation.

 

 

 

Not doing very well at all

I heard the Prime Minister on Radio New Zealand this morning running (again) the same spin that seems to go with the job, that somehow if New Zealand’s economic performance is perhaps not all we might hope for, it is at least as good –  better is the typical claim –  than other advanced countries.     Almost always such claims seem to rest exclusively on the rapid and policy-driven population growth New Zealand governments have chosen –  which boost the headline numbers, regardless of whether they leave the average New Zealander better off (in New Zealand’s case, experience increasingly suggests not).

But any meaningful comparison of economic growth across countries needs to adjust for differences in population growth rates.  Per capita statistics aren’t a radical innovation.  They have long existed for exactly that sort of purpose.

It used to be quite hard to get a reasonable sample of countries’ quarterly real GDP numbers.  But the OECD now routinely publishes such numbers.   A few countries seem to be a bit slow at providing the numbers the OECD uses, but when I checked there were 32 OECD countries with quarterly real GDP numbers up to and including the June quarter of 2019 (our most recent data).

This chart shows the latest annual growth rates for those countries, using national agency data for Australia and New Zealand and the OECD data for the rest.  There are two measures: the annual percentage change is the increase from the June quarter 2018 to the June quarter 2019, and the annual average percentage change is the increase from the year to June 2018 to the year to June 2019.   The latter series is a bit less noisy, but also a bit less timely.  As it happens, this time New Zealand’s rank is exactly the same on both measures.

Growth in real pc GDP

There are countries that have done worse than New Zealand: if one broke the group into thirds we’d be close to the bottom third of countries.  But that shouldn’t be much consolation, since we have much lower starting levels of GDP per capita (and GDP per hour worked) than most of the countries to the left of the chart.  The vision was (once) supposed to be that we might once again catch up with them.

Instead, at best we’ve been roughly matching the countries that are much richer and more productive than New Zealand, while the countries that are increasingly similar to us in productive levels rack up really strong growth rates (see seven of the eight countries to the right of the chart –  and the Irish numbers are generally best discounted because of the corporate tax distortions).       Here are the respective productivity levels

east europe GDP phw

Over the last year, these countries averaged growth in real GDP per capita of just over 3.5 per cent per annum.  New Zealand?   About 0.8 per cent.     And yes growth rates are slowing around the world, but over the last three years, those eastern European successful economies averaged 4.3 per cent per capita growth, while New Zealand averaged 1 per cent (in the bottom third of OECD countries).  That is the sort of catch-up that can be achieved.

Are there potential caveats to all this?  In respect of comparisons with the older advanced economies (those now mostly materially richer and more productive than we are), yes.   GDP numbers are revised and with the added imponderable of the new results of the flawed census there will be changes to data over the next few months (SNZ is releasing some new labour market estimates later this morning). But nothing is likely to change the pattern I illustrated the other day

pc GDP growth

Growth in real per capita GDP – never good at the best of times this decade (compared to previous cycles) – has been tailing off, and that conclusion is most unlikely to be changed by any revisions.

Even more certainly, no conceivable revisions are going to change those huge gaps between the growth rates (per capita) of the rapidly emerging eastern European countries –  every single one of which was until now poorer and less productive than New Zealand for at least the last 160 years –  and the pitifully poor growth rates –  per capita GDP or productivity –  managed by New Zealand.  It is a bi-partisan failure, but Labour, Greens, and New Zealand First are now in government.  It is their responsibility, but they seem clueless, careless (ie many just don’t seem to care much if at all), and determined to do whatever possible to try to pretend there isn’t a problem, a failure, and that all is really pretty rosy in the economic garden, and if there are any issues they are all the fault of others.

The problem, the failure, starts at the top, with a Prime Minister and Minister of Finance who continue to simply repeat the spin, which bears little or no relation to the dismal reality of New Zealand’s multi-decade productivity underperformance.  But they are aided and abetted by the Governor of the Reserve Bank, who simply makes things up (he was yesterday out claiming that “The New Zealand economy has proved resilient through a period of weakening global growth and heightened global uncertainty”) and the situation won’t be helped by a Secretary to the Treasury who knows almost nothing about New Zealand or about managing a national economy.  Our economic and political institutions, and their key individuals, are failing us.  New Zealanders –  not those key decisionmakers and advisers –  pay the price of failure.