Perhaps the politicians are content with this record

I’m on deadline trying to finish a chapter for a forthcoming book, but was checking some numbers and noticed that the OECD now has 2018 labour productivity estimates for most countries.

This is the company we keep these days (comparable levels of real GDP per capita, in PPP terms).

e europe.png

(For the two countries with asterisks the numbers are for 2017).

And here is total growth in labour productivity over the period 2012 to 2018 for each of those countries.

e europe 2

(On my reading of SNZ data, the OECD’s New Zealand numbers looks a little low: probably something between 0 and 1 per cent looks to be a better estimate).

It wasn’t that 2012 was particularly exceptional in New Zealand –  so that we were coming off an artificially high base –  just that since then productivity growth has vanished.

GDP phw may 19

I do hope our political leaders –  both main parties –  and their business and media cheerleaders are happy.

Citizens shouldn’t be.

Agricultural sector productivity growth

In the last few weeks, presumably simply by coincidence, I’ve had various comments and emails about productivity growth in the agricultural sector.    The most recent one finally prompted me to dig out the official data and check that my impressions were still supported by the data.  They were.    Agricultural sector productivity growth was very strong, but has been much more subdued for some time now.

There are two main measures of agricultural sector productivity: labour productivity (in effect, output per hour of labour input) and multi-factor productivity (in effect, the residual after what can be attributed to growth in labour and capital inputs has been deducted). In principle, MFP is superior.  In practice, estimates rely more heavily on the assumptions used in the calculation (although –  diverting briefly –  to the various readers who have sent me a recent piece by GMO on TFP/MFP, I reckon there is less to that critique than the authors claim).

Agriculture is one of the sectors for which we have consistent productivity data back to year ending March 1978.  By New Zealand standards, that is a long run of data.  Note that there is quite a bit of natural volatility from year to year because of fluctuations in the climate (droughts and all that).

Here are the charts showing growth in labour productivity and in multi-factor productivity (both expressed in log terms, so that the slope of the line indicates the growth rate).

agric LP

Really rapid growth in the first 20 years or so (up 150 per cent in 20 years), but much slower growth since then.  It isn’t disastrous growth by any means –  averaging just under 1.5 per cent per annum from 2005 to now –  but nothing startling either.

And MFP.

agric MFP

Once again, really strong productivity growth for the first 20 years, and much less since then (none at all in the last decade).  If one had confidence in the data, that might be more concerning.

Perhaps –  and it is an obvious question to ask – you are wondering if the slowdown in agricultural productivity growth is just part of the general slowdown in labour productivity growth in New Zealand (seen mostly starkly in the overall economy figures, where there has been very little growth at all in the last five years or so).

So here are the same two charts –  labour productivity and MFP –  but this time showing agriculture relative to the overall “former measured sector” (the series SNZ publishes that also goes back to 1978, covering the 70 per cent or so of the economy where productivity is relatively less hard to measure).  All series are indexed to a common base in 1978 (so none of this is about productivity levels, it is all about cumulative growth rates).

Labour productivity first.

agric LP and FMS

and MFP

mfp agr

There is clearly something in the story.   Growth in the “former measured sector” productivity itself has slowed –  labour productivity growth averaged 2.4 per cent from 1978 to 1998 and 1.6 per cent for the 20 years since 1998.  But whereas agricultural sector productivity growth was (far) outstripping that in the rest of the “former measured sector” in the earlier years –  the upward-sloping bits of the last two charts –  in the last 20 years (and even more so in the last 10) productivity growth in the agricultural sector has been a little slower than in the rest of the “former measured sector”.

I don’t have a policy point to make here.  Sector-level productivity isn’t my area.  Relative optimists might look at the data and suggest liberalisation played a big part in the earlier productivity surge, and that liberalisation wasn’t ever going to be repeated.  Perhaps, but bear in mind that our agricultural sector was always the part of the economy most heavily exposed to international markets  (by contrast, a sector like “Transport, postal, and warehousing” –  with similar total labour productivity growth over 40 years –  was almost certainly much more sheltered).   Pessimists might focus on the role of unpriced externalities (particularly around water pollution, but also methane emissions) and wonder how agricultural sector productivity might respond as regulation bears more heavily there (although it is possible we could see higher average productivity and lower total output).   Others might reasonably wonder about these productivity measures for agriculture in particular: in most sectors labour and capital are the critical inputs, but land is a huge input in agriculture and it isn’t directly accounted for (something which matters –  much –  more in looking at levels estimates).   [UPDATE: A SNZ person got in touch and pointed out that they do take account of land in their capital services estimates.]

As for me, my only motivation was to update my impressions.  Sadly, the latest data confirmed them.

 

Easy to do business, bad place for business

I noticed the other day a tweet from the chair of the Productivity Commission calling attention to the fact that New Zealand once again tops the World Bank’s ease of doing business index.  The top five this year were New Zealand, Singapore, Denmark, Hong Kong, and South Korea.

New Zealand has ranked at or near the top of this index for some time (in fact, ever since it was created about 15 years ago).  From their country note on New Zealand these charts show New Zealand’s data in more detail (the first showing our rank on individual components, and the second our absolute scores) .

ease of doigng business

No doubt there are people in MBIE who know all about why we score poorly on some of these sub-indices, and what could or should be done to improve (and even perhaps, on occasion, why what the World Bank is measuring isn’t necessarily what they think it is).

But New Zealand has consistently scored well on this measure.   That is noted regularly in analyses of our economic performance.  Generally, we want to have a good regulatory etc environment in which it isn’t difficult for someone with an idea, someone spotting an opportunity, to set up and run a business.   I haven’t dug more deeply into the index to understand why, but I was interested to see our one perfect score was on “getting credit” –  this being about business credit, not housing.

Scoring highly in this index is almost certainly better than scoring poorly.  Contrast the top five with the bottom five countries; Libya, Yemen, Venezuela, Eritrea, and Somalia.   But if there is some causation at work in the implied direction (improve your score on this index and your economy is likely to improve) there is probably also some (weaker) causation in the opposite direction: rich and well-governed countries are likely to score better on an index that often looks at sophisticated features of a regulatory system.

Whatever the aggregate story, there is no simplistic one-to-one mapping from a good score on this World Bank index and better economic performance.  New Zealand is the standout illustration of that point.

In this chart, I’ve shown labour productivity (real GDP per hour worked) levels and growth rates for the top 5 countries for the decade from 2007 to 2017, using the most recent version of the Conference Board’s database.  If the benefits of a high “ease of doing business” score show up anywhere in official data it should be here.

ease of doing bus productivity

South Korea wasn’t in the top five a decade ago (in fact, it was only ranked 21st).  Probably the various reforms they’ve done over the last decade, which have improved their score in the World Bank index, have contributed to productivity growth.  That is part of how they have been catching up and converging.

But what I found interesting about the chart is that –  for this small group of countries/territories – the productivity growth pattern has been about what you would expect.  The countries with the highest initial levels of labour productivity had slower growth rates than those with lower initial levels of productivity.  The exception, of course, is New Zealand.

Take a bigger sample and there will be other exceptions (the UK, for example, ranks number 9 and –  after a good couple of decades, but only middling levels of advanced country productivity –  has had a really poor productivity growth performance in the last decade.    But my focus is New Zealand.

We score quite well on all manner of such international surveys.  Take skills for example.  A year or two back, the OECD adult skills data suggested New Zealand workers  were among the most highly-skilled in the OECD.    And yesterday I noticed a report suggesting that New Zealand was in the top 3 countries in the world, behind Finland and Switzerland.

Again, it is presumably better to be near the top of such a list than at the bottom

The WEFFI report, by the Economist Intelligence Unit, looks at policy initiatives, teaching methodologies and the socio-economic environment of 50 countries. It found the five worst-ranked countries to be Egypt, Nigeria, Algeria, Iran and Pakistan.

But it doesn’t seem to bear any relationship to getting to the bottom of New Zealand’s specific economic underperformance –  not just over the last decade, but over most of the last 70 years.

One of the odder features of New Zealand public service life is the number of top-tier public servants who now seem to run Twitter accounts and disseminate material through those accounts.  I’m old-fashioned enough to think that senior public servants shouldn’t really be seen or heard except by Cabinet ministers (to whom they give their advice, and implement decisions taken by political masters).  More pointedly, public servants’ Twitter accounts are at grave risk of being, in effect, party political broadcasts for their masters since senior public servants can’t really be out openly disagreeing with the Minister so anything that is tweeted is not going to upset the Minister or his/her office, and yet it bears the imprimatur of a supposedly-neutral public servant.

On the other hand, these accounts can shine a little light on what top public servants are up to and what causes they are championing.

One of the tweeters is the (fortunately soon to have departed) Secretary to the Treasury, Gabs Makhlouf, who has spent the last eight years presiding over –  perhaps even inspiring –  the degradation in the capacity of what should be the government’s lead economic advisory agency.  In his most recent tweet a few days ago he linked to a piece by the (often stimulating) academic economist Dani Rodrik.    There is a lot to disagree with in Rodrik’s piece, but I just to quote his conclusion.

…economists are well positioned to develop institutional arrangements that go beyond what already exists, their habit of thinking at the margin and sticking close to the evidence at hand encourages an aversion to radical change. But, when presented with new challenges, economists must envision new solutions. Imagination is crucial. Not everything we try will succeed; but if we do not rediscover the value of FDR’s credo – “bold, persistent experimentation” – we will certainly fail.

One can only assume that Makhouf agrees.   But there is just no sign of The Treasury under his leadership having seriously re-thought the New Zealand productivity failure.   If there is any bold thinking (and here “thinking” would be a polite description) it is around avoiding confronting that failure at all, chasing off after the insubstantial living standards framework and the associated “wellbeing Budget”. Feel better, I suppose, even if we can’t do better.  It is perhaps great as a political distraction  –  politicians do that sort of thing –  but we should expect something much better from a premier economic agency than turning away from the most striking economic failure in our history, and playing distraction in the hope no one will notice.  In principle perhaps the two –  “wellbeing budgets” and some serious fresh thinking on productivity, specific to New Zealand –  could both be done, but (a) resources are limited and (b) nothing in any Makhouf speech has ever really suggested a desire, or an ability, to confront the specific productivity challenges here.   One can only wistfully hope –  with no reason for optimism, given who (SSC and Grant Robertson) does the selection –  that his successor will be different.

As for my own alternative story?  I don’t have any particular problem with the rankings people like the World Bank come up with –  from a regulatory perspective doing business in New Zealand probably is easier than in most places – but those indexes just don’t shed light on the salient issues for New Zealand.  Citing them, as anything more than a stepping off point  – “despite this high ranking…..” – is akin to looking for lost keys under the lamppost because that is where the light is, rather because there is reason to suppose it is where the keys are.   From a regulatory perspective, New Zealand probably isn’t a bad place to do business –  although there always many things that could be improved –  but from a more fundamental perspective New Zealand –  most remote significant inhabited land mass on the planet –  looks like a pretty awful place to do business from, in anything much other than utilising the limited natural resources.    Were it otherwise, we’d have seen more investment, more exports (and imports), more globally-oriented firms basing themselves here.

Against that backdrop, actively pursuing an ever-bigger population through a large-scale immigration policy that is championed across the bureaucracy –  including by Makhlouf’s Treasury –  is fundamentally damaging to the longer-term economic interests of New Zealanders as a whole. (And, as I’ve noted, many times before that is so whether the migrants  –  mostly decent and well-motivated people – come from Brisbane, Bangalore, Brahmanbaria, Buenos Aires or Birmingham.)  Unless and until our political leaders are willing to confront this – and at present all parties in Parliament are signed on to one of the largest (per capita) immigration programmes in the world, there is very little likelihood of those high rankings –  ease of business, teaching skills, or whatever –  translating into material living standards to match those in other countries at or near the top of these indices.

Australia faces many of the same issues New Zealand does in this regard, but the economic constraints are –  at least temporarily –  less binding because of the newly-developed abundant mineral resources they are able to bring to market.  It was interesting to read in The Australian this morning that the government there is planning to cut their permanent migration intake.   The reported number would still be high by international standards, but in per capita terms would be only about three-quarters of the target in place in New Zealand –  and that in a country with more opportunities and more wealth.   Of course, the current government is almost certain to lose this year’s election –  and some other aspects of the reported package are just daft (trying to compel immigrants and even students to the regions – so it may never happen.  But it suggests a more serious willingness to engage than has been evident from either main party in New Zealand.

Continuing to look under the lamp post, rather than look for actual diagnostic answers and policy solutions, is just a recipe for keeping on failing economically.

 

 

Nurses, pay equity, and the real structural problems

I’ve heard or read a couple of strange stories in the last day or so about the nurses’ trade union making the case for a “pay equity” settlement for their members.

Of course, the very notion of “pay equity” settlements is bizarre, fit only for somewhere like the old Soviet Union.  Some government officials decree that job x should be paid the same as job y, as if the price of a banana should be adminstratively and arbitrarily set equal to, say, the price of a kiwifruit because the two might have (say) similar nutritional value.

But what interested me were two lines being used by the nurses in support of the view that they were underpaid (neither line seemed to have much to do with the false equivalency of “pay equity”, but were rather intended to support the claim that nurses were –  absolutely –  underpaid).

The first, reported here, was this

“In Australia, nurses can be paid as much as $90,000 as a base rate with penal and on-call rates as well. The limit in New Zealand sits around $68,000.”

Last I looked, real GDP per hour worked in Australia (in comparable – PPP –  terms) was 41 per cent higher than in New Zealand.  That is the best aggregate measure of labour productivity.  You’d expect wages and salaries for most jobs to be higher in Australia than they are in New Zealand.   That appears to be so for nurses.   A larger share of New Zealand’s population is in paid employment than is the case in Australia, so the difference in per capita income is a bit smaller, but still just over 30 per cent.  In material terms, Australia is now a richer and more successful country than New Zealand is.  Those gaps keep (slowly) getting wider.

Because of the somewhat-common labour market between the two countries that creates some specific problems for New Zealand.  Plenty of people will look across the Tasman, weigh up the pros and cons of the heat, the snakes and spiders, and the challenges and opportunities of big cities, and move.    Since our somewhat-common labour market applies across the board (not just, say, to public sector nurses), it isn’t a problem we can fix by simply agreeing to all pay ourselves more.  Those sorts of outcomes have to be “earned”  –  not about individuals working harder, but about the economy as a whole finding better and remunerative opportunties, lifting earning possibilities for everyone.  Do it enough, and one day that might even be a net flow of New Zealanders coming back from Australia (Ireland managed it, it can be done).

I’m sure the Nurses Organisation is better connected to people at the top of the government than I am, so I can only urge them to suggest to their friends and allies who currently hold office that economywide productivity might be elevated quite a long way up the list of government priorities (in the Labour Party “Our Plan for New Zealand” brochure dropped in my letter box the other day it featured not at all).  Remind them, perhaps, that for decades New Zealand has been failing on this count, reducing successive governments to pretending to a success that just hasn’t been achieved.  In consequence, wages are much lower than they really should be, and we’ve been more limited than anyone would have liked in dealing with all sort of other social problems.

(Of course, from a Nurses Organisation perspective the strategy I’m proposing would fail any sort of cost-benefit assessment: neither National nor Labour show any sign of being seriously interested in doing what it might take to generate much better productivity and incomes, and (by contrast) the nurses seem to have the government wrapped around their little finger on the pay-equity path to improving their own position. But I’m sure nurses are public-spirited people, and they have children too, not all of whom will choose to be nurses.)

The other strand of the nurses’ argument was a bit closer to home. A Wellington hospital nurse was quoted as saying

Only a quarter of the nurses she worked with lived within walking distance of their hospital.  The result was that only a quarter of the nurses Ms Hopkinson worked with lived within walking distance of their hospital.

“We can’t afford to live in the communities we nurse in, we’re priced out of these neighbourhoods.”   12 years ago when she started, nurses lived in the central city, but that was no longer the case.

“They’re commuting from Featherston, from up the Kapiti Coast, Upper Hutt; they’re a long way away and they won’t be able to make it to us after an earthquake.”

Even in Wellington, it did seem a bit of a stretch to argue for a pay rise so that nurses could walk to the hospital when the 1 in 300 year earthquake hits.  The present value of the cost of that possible post-quake complication will be pretty small indeed.

Now, as it happens I do live within walking distance of Wellington hospital. It is a pleasant middling suburb, and when I was younger I knew lots of nurses who lived in the neighbourhood, attended our church etc etc.  It was close to their work and convenient.  As I’ve noted previously, I bought my first (three bedroom, 30 year old) house in this same suburb 30 years ago –  actually bought it from a teacher who was moving to Wanganui where housing was more affordable (it was near the peak of the then-boom).  The Reserve Bank’s inflation calculator tells me I paid about $296000 in today’s money for that house.

Real wages and productivity have increased since then.  Real GDP per hour worked has risen by a third, so roughly speaking spending $400000 on a house today would bear a similar relationship to incomes as $300000 then.

You cannot buy any house in Island Bay –  still less a three bedroom house, 30 year old, decent-sized section, garage etc – for $400000.  As it happens, earlier this week a real estate agent sent me a several page list of sales in the area in the last few months.  The cheapest property sold was a unit with no land at all, and 60 square metres of house: that went for $400000.  The next two cheapest ($507K and $570K) were also units and had 60 and 70 square metres respectively.  The cheapest house that looks roughly comparable (size, age, but much smaller section) to that first house of mine went for $805000.   The median price across those particular 37 properties was $960000.

It is insane.  No wonder nurses can’t afford to buy anything decent reasonably close to Wellington Hospital (there are slightly cheaper suburbs, but they’ll all have had much the same escalation).   It is not that nurses are underpaid.  And it isn’t just the nurses.  Anyone in a moderate-income job –  especially if there is only one income, or one fulltime and one part-time income –  will really struggle.  And, much as I quite like Island Bay, it isn’t Fendalton or Remuera or St Heliers –  yes, we have a beach too, but even with warming sea temperatures the sea is always more ‘refreshing’ than inviting.

It simply isn’t an issue about nurses, or nurses’ pay.  It is a straightforward consequence of vicious choices that a series of central and local governments have made to mess up urban housing markets.  Government has failed, very badly.  And if it perhaps doesn’t impinge too terribly on the children of the wealthy, it greatly restricts the options of most everyone else looking to get into the housing market, nurses included.  They are, to put it, colloquially, stuffed.  And if that isn’t you or your children yet, it will be mine in a decade’s time.  (Rents are not my primary focus, but in an age in which real interest rates are at record low, real rents should also be lower than ever.)

I’m sure the Nurses Organisation is better connected to people at the top of the government than I am, so I can only urge them to suggest to their friends and allies who currently hold office that fixing the urban land market might be elevated quite a long way up the list of government priorities (in the Labour Party “Our Plan for New Zealand” brochure dropped in my letter box the other day it featured not at all).   Nice Mr Twyford appeared to understand the issue when he was in Opposition, but there has been as little action from him in government as there was from the class enemies of the Nurses Organisation, the previous government.   Remind him, perhaps, of those fast-growing cities across swathes of middle America where good houses really are still affordable.  There is no shortage of land in New Zealand, not even in Wellington (except to the extent the Nurses Organisation friends at the Wellington City Council make it artifically so.   Do not just paper over the cracks, but fix the problem at source.

(Of course, from a Nurses Organisation perspective the strategy I’m proposing would fail any sort of cost-benefit assessment: serious land-use reform from either National or Labour still seems like a long shot (by contrast) the nurses seem to have the government wrapped around their little finger on the pay-equity path to improving their own position. But I’m sure nurses are public-spirited people, and they have children too, not all of whom will choose to be nurses. All of whom will eventually want houses.)

From any sensible policy perspective, so-called pay equity is just daft.  From the perspective of any particular group of workers, perhaps it is the fastest path ahead –  zero-sum game (well, worse) across the whole economy, but beneficial for those particular individuals. But, probably without really being aware of it, the Nurses Organisation put their finger on two really big symptoms of policy failure in New Zealand –  productivity/earnings and housing – that affect almost everyone.   While pursuing their own short-term self-interest, I would urge them to add their voice to the call for serious structural reform in these two areas.   They need it.  We all need it.  Political parties, meanwhile, keep on failing to deliver.

Wages and productivity

There has been a longrunning US debate/puzzle around the relationship (or apparent lack of it) between productivity growth and growth in wages/compensation. It was revisited earlier this week in a (very long) post on the excellent Slate Star Codex blog.  The author introduces his post with this chart, pretty familiar to anyone aware of this issue.

wages US

I’ve always found the issue interesting, but been content to do little more than read the occasional summary article.  Arguments often seem to turn on rather arcane measurement issues and I just don’t know the very detailed US data that well.

But as I read through the long post, I noticed something that probably hadn’t struck me previously.  The productivity measures used in this chart (and others like it) are those for the non-farm business sector.   That is the series that gets the most focus in the US, which makes some sense in that it is (a) regularly published by US official agencies, and (b) if you are interested in the performance of the business sector (and not wanting to be thrown around by climatic effects) it is probably natural to focus on.

By contrast, I tend to focus on measures of GDP per hour worked.   That is mostly because (a) it is what is available on a fairly consistent basis for a wide range of countries, and (b) because it is what is readily able to be calculated quarterly for New Zealand, using published data.  And my interests tend to be the economy as a whole.

In the US context it can make quite a lot of difference which series one focuses on.   In this chart, I’ve shown the two series, starting from 1970 (which is when the OECD real GDP per hour worked data starts from).

US productivity.png

It shouldn’t be much of a surprise that whole economy productivity growth is slower than that for the non-farm business sector: incentives (lack of them) and opportunities (types of activities governments do) both tend to work that way.

And then, of course, I noticed that charts like the first one tend to use real variables, which opens up all manner of issues about the “correct” deflator, including issues as to whether the CPI was well-measured in years gone by (there were some fairly significant biases).    But quite recently, I’d compared nominal wage growth in New Zealand to growth in nominal GDP per hour worked, which abstracted from deflator issues (even if it might raise other questions), so I thought I’d do the same for the United States.

I took the compensation per hour series for the US non-farm business sector (official US series) and nominal GDP per hour worked (from the OECD), indexed them all to 1970, and divided one series by the other.  This is the the result.

us compensation

On this measure, US wage growth has lagged a bit behind the growth in the overall economy “ability to pay”.  But it is a hugely smaller gap than is suggested by something like the (widely-used) first chart in this post.

Is nominal GDP per hour worked a reasonable benchmark?  I reckon it is.  Growth in nominal GDP per hour worked captures both real productivity effects and changes in the terms of trade (which have been adverse for the US over this fifty year period).    As ever, there isn’t likely to be some mechanical relationship between labour earnings and GDP per hour worked.  Market pressures shift over time, and so does (for example) the relative importance of capital in generating what growth there is.   Labour shares of the total economy’s output always have, and probably always will, fluctuate over time.   But it seems at least as good a benchmark against which to analyse developments as most others on offer.

Since most of my readers are from New Zealand, two final charts as a reminder of how things are here.

First, a chart comparing real GDP per hour worked with the measured sector labour productivity data.   We don’t have such long runs of data, so this is just since 1996.

NZ productivity measured and total

Unsurprisingly, whole economy productivity growth lags that in the measured sector (that excludes much of goverment activity).

And here is a chart I’ve shown previously showing how wages (the analytical unadjusted LCI series) have grown relative to nominal GDP per hour worked.

wages and GDP

Whatever the story in the US, wage rates in New Zealand have been increasing faster than nominal GDP per hour worked (loosely, “the ability of the economy to pay”).

That might seem quite good for New Zealand employees.  But it is worth bearing in mind that since 1995, we’ve had about 28 per cent growth in labour productivity (real GDP per hour worked) and the US has had about 44 per cent growth in economywide labour productivity.  The windfall of a higher terms of trade has helped us, but if your economy isn’t generating much real productivity growth it isn’t a good outlook for anyone much (workers or owners) in the longer term.

 

 

Pondering localism

I’m spending much of the day at Local Government New Zealand’s Localism Symposium

When it comes to centralisation, New Zealand is an outlier amongst developed countries, with decision making heavily concentrated in central government politicians and officials. For every tax dollar spent by local authorities, Wellington spends $7.30.

This is not a record to be proud of. Comparisons with OECD countries show that productivity per capita and decentralised decision making are correlated, and on both measures New Zealand ranks back of the developed world pack. More practically, New Zealand’s diverse communities have long outgrown one-size-fits-all policy making, and there is a growing acceptance that we need to devolve and decentralise decision making to celebrate and leverage our differences.

The challenge is how do we do it?

Local Government New Zealand and The New Zealand Initiative have joined up to develop a policy roadmap on just how to devolve and deconcentrate power through our Localism Project.

On 28 February 2019, LGNZ and the Initiative will present the first cut of this work at the Localism Symposium. We invite interested parties to come and critique our work in a workshop session in Wellington to help develop a robust framework through which communities can have their decision making powers restored, and share insights into public perceptions of localism and local government.

Count me sceptical.  I’m unpersuaded the local authorities should get more power.  Given the choice between the New Zealand government –  of whatever stripe –  and Wellington City Council, I’ll take the former any day.  Not only are they generally more competent (and regular readers will know I’m no fan of any recent government) but it is a great deal easier to monitor them and hold them to account.   Then again, perhaps I’m just a died-in-the-wool central government bureaucrat (“you can take the boy out of the bureaucracy, but not the bureaucracy out of the boy”).   But what could one reasonably expect of the council of one of my old haunts, Kawerau (population <7000)?

And I’m more than a little sceptical about whether there is any meaning in that reported correlation: after all, the United States has plenty of fiscal decentralisation, but New Zealand is about the same size (population) as the median US state.

The New Zealand Initiative has been championing varieties of decentralisation models for some time.    I wrote, sceptically, here about one of their earlier reports.   As I noted, among various other points

I’m a South Islander by birth and inclination, and if someone proposed a genuine federal model for New Zealand –  South Island, lower North Island, and Upper North Island –  I’d probably be emotionally sympathetic to it.  But even then I’d refer supporters to the Australian experience, and wonder just how much genuine decentralisation would occur and for how long. 

Australia struggles to maintain effective federalism.

In the material they’ve sent out for the workshop today, there are some interesting ideas I could probably support and even champion.  For the rest, I guess I’ll be a voice of critique…..and open to being persuaded that more of the case is persuasive than I think now.  I suspect a really compelling case for decentralisation relies either on geography, strong and settled regional identity, or history.  We are a small country, fairly recently settled, and there will be few people for whom (say) the sense of being a Taranaki-ite is at least as important as being a New Zealander (unlike, say, the situation in Scotland or Texas).    To that point, US state boundaries haven’t changed in a very very long time, while two of the four local government areas I lived in while growing up simply don’t exist any more – abolished at the stroke of a ministerial pen.

Had we kept the provincial government system  –  avoided the Vogel money grab –  perhaps we’d now have a similarly long tradition of decentralised government. In days of easy travel and easier technology it is hard to create a stable and enduring constituency –  other than local government politicians and officials –  for trying to create it de novo.   And –  although we can’t run the experiment –  I’d bet against it having made much difference to things that ail us, like house prices or productivity.

I did notice however that the New Zealand Initiative’s enthusiasm for Switzerland –  which really does have lots of decentralisation –  carries over into the material.  The Initiative has long been keen on singing the praises of Switzerland, which is much richer than we are.  But, as a reminder to people, here are the productivity growth performances of the OECD countries since 1970 (when the OECD databases start).  This is total growth in real GDP per hour worked from 1970 to 2017.

Switz

Bad as New Zealand’s productivity growth performance has been over this period, Switzerland is still the only OECD country to have had (slightly) less productivity growth.    And it isn’t just the early part of the period: for the period since 2000 you need to go to two decimal places to separate the (lower quartile) productivity growth rates of the two countries.

Switzerland is rich, and pleasant in many respects.  But relative to the rest of the OECD it used to be much richer.  Appealing as the Swiss decentralisation seems in some ways –  and much of that reflects deeply rooted histories of separate distinct communities, including linguistic and religious differences –  it isn’t obvious why it offers some path to better productivity growth in New Zealand.

Fixing the housing mess is also claimed as one of the possibilities of the sort of reforms LGNZ and the New Zealand Initiative are suggesting.  Did I ever mention –  why, yes I think I did – that Switzerland not only has very high house prices, very high levels of household debt, and very low levels of home ownership?    Not outcomes to envy.   They aren’t (I presume) because of decentralisation, but they’ve happened despite it.

 

Investment,the capital stock and some not-pretty pictures

(For anyone who followed a link looking for my post on the National Party and the PRC, it is here)

A few days ago one of my posts included the chart showing that there has been very little labour productivity growth in New Zealand for most of this decade.  A commenter asked

A question for you on the productivity flat line. Is it reflective of levels of investment? How does the productive capital stock per worker look over the last decade?

And so today I’ll try to step through some of the data that sheds a bit of light on that question.  As background, it is worth bearing in mind that for decades New Zealand business investment as a share of GDP has been relatively low by OECD country standards, especially once one takes account of our relatively fast population growth rate.  The biggest exception was that outbreak of government-inspired wastefulness, Think Big, in early-mid 1980s.  Not all investment captured in the national accounts statistics is “a good thing”.

First, some flow data.  Here is investment as a share of GDP (using quarterly seasonally adjusted data).

investment 1

Lots of houses repaired (Canterbury) and built (nationwide) but once you set residential investment spending to one side. the remaining investment as a share of GDP has been very subdued indeed, not really much higher than during the recession at the end of last decade.

There isn’t an official published series of business investment, so I use the same proxy the OECD does: start from total investment and subtract residential investment and government investment spending.   There is a small overlap there (some government residential investment spending), but with that caveat noted here is the proxy for business investment as a share of GDP.

investment 2

The only times this business investment proxy was lower than at present was in the depths of the two serious recessions (1991 and 2000-10).   And yet over recent years, our population was growing consistently faster than at any time in recent decades.  Businesses tend to invest when there are prospective profitable opportunities –  especially when financing conditions aren’t unduly constraining.  Presumably, those opportunities just haven’t been there in New Zealand in recent years.

My commenter’s question was about capital stocks.  Statistics New Zealand publishes net (of depreciation) capital stock data.  The upside is that there is a good long time series, but the downside is that it is annual data so that the most recent observation is for the March 2018 year.

Here are a couple of stock series, expressed as percentages of nominal GDP.

investment 3 (I don’t know what accounts for the sharp lift back in mid-70s, but you can see the Think Big effect in the early 80s.)

Those were nominal (current price) series.   If we want to look at the capital stock relative to real variables (eg hours worked) we need to use the constant price data instead.  Here is the real capital stock, ex housing, per hour worked.

investment 5

I’m not quite sure what to make of the entire chart – I’m a little surprised there wasn’t more growth in the 1990s –  but for the more recent period it is certainly consistent with the (very weak) productivity picture.

Perhaps as sobering is this simple chart, showing the percentage increase in the real capital stock from the year to March 2008 to the year to March 2018.

investment 7

Pretty significant growth in the non-market component (the bits not subject to market tests, either at the evaluation stage or in operation, and basicially set by government –  central or local) relative to the growth in the market sector non-housing capital stock.  Firms operating in more-or-less competitive markets just don’t seem to have seen the remunerative projects to invest in.   That isn’t in any fundamental sense the “cause” of our really weak productivity growth, but it will be a reflection of the same factors.

On my telling, the persistently high real exchange rate is, in turn, a significant proximate part of that story.