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.

Two charts and a speech

A post of two unrelated graphs this morning.

Just before Christmas I wrote a post prompted by an FT story about new OECD work that attempted to standardise estimates of hours worked to improve cross-country comparative productivity (GDP per hour worked) estimates.   Before writing the post, I’d confirmed with Statistics New Zealand that they had been consulted and that there were no material implications re New Zealand data.    Reading numbers, rather roughly, off a chart I’d attempted to illustrate the implied new OECD rankings.

But the OECD has now included the new hours worked estimated in their own official published data, and (thanks to a tweet from the chair of the Productivity Commission) I noticed this chart yesterday.

OECD labour productivity 2017

As I noted in the earlier post, this revision lifts several countries (Austria, Switzerland, and Sweden) into the upper bracket of OECD countries.  It also improves the position of the UK (in yesterday’s post I noted that they were now about 30 per cent of us, but on these revised and improved data the lead is just over 40 per cent).

But it is our position relative to the emerging OECD economies that really interests me.    Not only are Slovakia and Slovenia ahead of us –  they’ve been there or thereabouts on the old measures since about 2014 –  but now so are Lithuania and Turkey.  Go back 20 years and both  – on the old measures, but presumably on the new ones too –  were miles behind us.  Based on their productivity growth performance this decade, the Czech Republic and –  a few years later –  Poland will be beating us before long.

In a way “beating us” isn’t the right word.    It isn’t a competition in the sense that their gains mean we are worse off.  We should celebrate their economic gains.

But it is the right word if we use the experience of other countries to benchmark our own performance.    In modern New Zealand history, not one of those countries in the previous paragraph has ever been richer or productive than New Zealand.  Until now.  30 years ago all but Turkey were just beginning to throw off decades of Communist rule –  with all the misallocations of resources and skewed incentives and degraded institutions that went with that dreadful system.    Lithuania wasn’t just part of the Soviet sphere of influence, it was –  by conquest –  part of the Soviet Union itself.

And 30 years ago we were a stable democratic country, with the rule of law, long-established market institutions (even if they’d been a bit attenuated in the protectionist decades) just about –  although we didn’t know it then – to enjoy decades of a significant trend improvement in our terms of trade.     And yet these are the outcomes we’ve managed, that our policy frameworks applied to available resources have produced.

And for those who’ve liked to believe that large-scale non-citizen immigration, and a larger population, were a material part of what might improve New Zealand’s productivity prospects, here is the percentage change in the population of the former eastern-bloc OECD countries and (at the other end of the spectrum) of the high immigration OECD countries.

Population growth (%) 1990 to 2017
Latvia -27
Lithuania -23.4
Estonia -18
Hungary -5.5
Poland 1
Czech Republic 2.5
Slovakia 2.6
Slovenia 3.5
Canada 32.7
New Zealand 39.3
Australia 44.3
Israel 86.1

I wouldn’t recommend the experience of the Baltics (low birth rates and high emigration).  I don’t envy them a geographic position right now to Russia either.    But the absence of much immigration, and little or no population growth doesn’t seem to have held any of those former eastern-bloc countries back from a pretty impressive resurgence.  They all have a long way to go to match the best-of-class among the OECD countries, but so does New Zealand…..and we’ve been making no progress at all towards that sort of goal.

The Reserve Bank’s Monetary Policy Statement is due out this afternoon.  Yesterday the Bank released its latest Survey of Expectations.  There wasn’t a great deal of interest in the data, but this was the series that caught my eye.

mon cond year ahead 19

The Bank has been running this question for almost 20 years now, asking respondents (on a seven point scale) their expectation of “monetary conditions” a year from now.  They also ask about perceptions of current conditions.  Perceptions of current conditions are quite loose in the latest survey, but what is striking is that almost always when respondents think current conditions are loose they expect a substantial tightening in the next year or so.   That was what the data showed in 1999, 2001, 2003, 2010, and 2013.  It wasn’t what showed up in 2015/16: then relatively easy conditions (probably then mainly a proxy for relatively low interest rates) were expected to be followed by even easier conditions.   A succession of OCR cuts followed.  As of the latest survey, a net 69 per cent of respondents think conditions are easier than neutral (not quite a record), but by the end of the year a record (see chart) 73 per cent of respondents expect things to be easier than neutral.

This result doesn’t yet show up in the OCR expectations themselves –  which are edging downwards but a year out the mean expectation is still above 1.75 per cent (the median is bang on) –  but the expected easing in “monetary conditions” looks a bit more consistent with market pricing, in suggesting the OCR cuts are becoming more likely.

(At the margin, the OCR expectations in the survey would have been a touch lower if I had actually submitted mine.  I filled in the form, printed out a copy for my records, and then must have failed to push the button to submit it.    The lowest official OCR expectation for December 2019 is 1.5 per cent, but the table in front of me says I wrote down 1.25 per cent.  We’ll see.)

And a final suggestion for journalists at the Reserve Bank’s press conference this afternoon.  The other day a reader sent me an invitation they’d received for a function you could pay to attend at which the Governor was going to be speaking next month.

This year it is Dr Adrian Orr, the Governor of the Reserve Bank who will also speak about the bank’s views of the economy in an candid off the record way.

Perhaps the organisers mis-spoke, but I’d have expected the Bank to review carefully how the Governor’s involvement in any such event was described.    When market-sensitive matters are involved –  and Governor’s/Bank’s view on the economy clearly qualifies –  it is highly inappropriate for any Bank officials (even the Governor) to be speaking “candidly” in an off-the-record environment.  Anything other than the most anodyne comment should be done in the Monetary Policy Statement (or associated press conference or testimony to Parliament) or in on-the-record speeches, to which everyone has access at the same time and the same way.   It is even worse when access to the Governor, for potentially market-sensitive material, is sold-off, even if there is a decent charity cause behind it.

I’ve written about this sort of thing previously

I notice that NBR’s Shoeshine column this week also touched on that earlier INFINZ event, describing it as an “expletive-laden speech” on all manner of topics, and observing “unfortunately, this speech was never put on the web (very strange for a Reserve Bank governor’s speech)”.    Not so strange if it were genuinely just rehearsing old ground, but the various accounts suggest it wasn’t.

Asking the Governor about the approach he thinks appropriate to his speeches  – about his commitment to openness and transparency – would aid the cause of accountability.

The PM’s economic plan

I read the Prime Minister’s economics speech yesterday. I wasn’t impressed.  There is simply no sign that she cares one jot about New Zealand’s decades of underperformance or that she has any sort of analytical framework (herself or from her advisers) for even thinking about the issue.  It may be repetitious to say so –  as a reader this week suggested –  but the utter unseriousness about our ongoing relative decline really matters; perhaps not directly or much for many people my age or older, but for our kids, and their future kids.  Including for the question of whether the next generations even stay, rather than joining the million or so New Zealanders (net) who’ve left over recent decades.

She continues to perpetuate what are little more than lies

“…on key economic measures the Government is delivering”.

That would be the economy with no productivity growth, with foreign trade flat or falling as a share of GDP, and with houses that are increasingly unaffordable to younger generations.  Some delivery.

She runs a fairly conventional story about risks in the global economy, and keys off a line from the IMF Managing Director suggesting that “policymakers need to make greater efforts to prepare for the slowdown”, noting that “that is a message we are heeding”.

That’s why our economic plan includes the following key planks:

  • Doubling down on trade and broadening our trading base to protect our exporters and economy
  • Reform of skills and trade training to address long-term labour shortages and productivity gaps in the New Zealand economy, and to make sure we are prepared for ongoing automation and the future of work
  • Changes to tax to make the system fairer
  • Addressing our long-term infrastructure challenges
  • Transitioning to a sustainable carbon-neutral economy
  • And of course investment in wellbeing, because this is inextricably linked to our economic success too.

Not one of those strands really has anything much to do with coping with a cyclical downturn (getting onto the Reserve Bank to deal with interest rate lower bound might,or even arguably something around fiscal policy), but even if one takes them as the components of a longer-term economic strategy it is underwhelming at best.

Take trade, nothing the government is doing (and there is a page of it in the speech) is any different than the previous government was doing.  You might approve of that approach or not, but the point is that during the term of the previous government foreign trade fell as a share of GDP.  The latest Treasury forecasts, prepared on current government policy, didn’t suggest any reversal.

No one supposes that a capital gains tax is going to make any material difference to the productivity/efficiency of the New Zealand economy.  As the Prime Minister says, the goal there is “fairness” –  which might be a perfectly reasonable argument, but there is no credible story in which it makes us in aggregate materially better off as a country.

Despite its appearance in the list, there was nothing in the speech about those “long-term infrastructure challenges”.  Lots has been spent on infrastructure over the last 15 years – when productivity growth was feeble, tailing off to non-existence, so why should we (or her audience) think things will be different now.  And is there any sign of using the infrastructure we already have more efficiently –  eg congestion pricing in Auckland (and perhaps Wellington)?

As for the carbon-neutral economy, that might on some tellings be a worthy or even noble objective.  But the government’s own consultative document last year reported estimates that achieving that goal would cost anything between about 10 and 20 per cent of 2050 GDP.   Some people dispute those estimates, but I’ve not seen any credible story in which New Zealand’s aggressive pursuit of carbon-neutral would make us economically better off.

As for “investing in wellbeing”, I guess she has to include at least one reference to this vacuous project. But it, after all, involves a de-emphasis on economic performance, not lifting that performance.  In discussing wellbeing in her speech, she is openly complacent about GDP growth, rather than giving any sense that we really need to be doing a lot better (productivity etc) if many of the other aspirations society has are to be met.

Which brings us to skills, which gets 2.5 pages in the speech, apparently a prelude to whatever specific reforms are being announced next week.  Labour has long been keen on pushing the line that a significant part of lifting productivity in New Zealand involves lifting “skills”.  I guess it sounds good –  whether workers or firms, who is likely to object.

Except, of course, that OECD cross-country comparative data suggests that adult skills levels in New Zealand are already among the highest in the OECD.   I wrote about this in a post a couple of years ago, and here are some of the charts and text.

Here is how our adults scored on literacy.

oecd literacy 2

And numeracy

oecd numeracy

And on “Problem-solving in technology-rich environments”

oecd problem solving

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand. Perhaps there is something very wrong with the way the survey is done, and it is badly mis-measuring things, but those aren’t usually the OECD’s vices. For the time being, I think we can take it as reasonably solid data. And the broad sweep of the cross-country results makes some sort of rough sense: typically the poorer countries are to the left of the charts (relatively less highly-skilled).

And when the OECD lines up the skills scores against the productivity data one of the largest gaps (lagging productivity) is for New Zealand   The cross-country scatter plots don’t show a tight relationship by any means, but they do tend to suggest that the skills and talents of our people aren’t what holds New Zealand back.

Sure, it looks as though our schools could usefully focus on teaching maths better, and no matter what the aggregate scores some individuals will almost always lag behind.  But as some sort of centrepiece of an “economic plan”  skills just isn’t an obvious place to start.   The Prime Minister and her advisers might find it more rewarding to start with areas in which New Zealand more visibly stands out: persistently low rates of business investment, persistently high real exchange rates, and persistently high (relative to other countries) real interest rates.  But I guess confronting some of those stylised facts might raise questions about economic policy over recent decades that they would rather avoid.

In the midst of her section on skills, these sentences caught my eye

Take the building sector for example. We know we need more tradies and they are just not coming through fast enough.

That’s absolutely no reflection of the people who are involved in the sector – far from it. What it is, is a damning statement that the system has been left to drift, to muddle through.

Perhaps, but count me a little unconvinced.  Here is Quarterly Employment Survey data on construction sector jobs as a share of total filled jobs, back to 1989.

construction jobs.png

There are roughly twice as many people employed in construction as there were in 2002, and the increase in the share of the total workforce is really huge.   I’m not convinced it is a particularly helpful sign that 9 per cent of our total workforce has to be employed just building houses and shops for each other, but it is what happens when policymakers have turbocharged population growth.  Perhaps more relevantly, the construction sector is highly cyclical –  globally –  and if I were counselling a young person about possible career options I’d be suggesting that a construction sector workforce as high as 9 per cent of the total isn’t that likely to last for long. But no doubt the Prime Minister sees things differently.

If there is any sign of a plan, it isn’t one that is going to do anything to lift our economic performance, in the short or longer-term.   All indications are that the Prime Minister doesn’t care.  More worrying is the possibility that neither do many of her audience –  comfortable successful business figures, mostly doing well out of an economy skewed increasingly inwards.

Someone needs to cut through the indifference of the political and economic establishment.  But it won’t be the Prime Minister’s party –  or her allies or the National Party.

Productivity: any hope from Treasury?

In my post yesterday I noted briefly the dismal productivity record in New Zealand in recent years, nicely captured in this chart.

real GDP phw dec 18

That poor record builds on decades or underperformance, dating back to the 1950s.  In all the time since then, there has never more than a year or two at a time when New Zealand has outperformed other advanced countries, and mostly we’ve achieved less productivity growth than they have.  As a result, we’ve moved from being among the very richest and most productive economies in the world to one where the top-tier of OECD countries have rates of labour productivity about two-thirds higher than those in New Zealand (and countries like Turkey and various former eastern-bloc countries –  where market economies were unknown for decades –  are nipping at our heels).  This table is from a chapter on New Zealand economic performance in a forthcoming book (which I foolishly allowed myself to be persuaded to participate in)

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

You might have hoped that this shockingly poor performance would worry someone in office –  political or bureaucratic.  But there is no sign it ever does, for long anyway.  It occasionally provides a good line for Opposition parties (of whichever stripe), or even for incoming governments in the heady days when everything is the fault of the previous government and you’ve not yet been expected to produce results yourself.  Our current Prime Minister and Minister of Finance were occasionally heard to refer to the problem in 2017, but hardly at all since then.

Once upon a time it was something one might have expected The Treasury to care about, have views about, and be offering rigorous advice to the government of the day (of whichever party) on.  After all, productivity is the only secure foundation for material prosperity, and material prosperity allows societies to make all sorts of other choices with fewer constraints than otherwise.  But that isn’t today’s Treasury.  If there are people in the organisation who still think about these things, it certainly isn’t an issue that ever seems to trouble the senior management – the more so under the lamentable stewardship of Gabs Makhlouf over the last eight years.  As I noted late last year, when Treasury is forced to write down its view on the productivity outlook, results make it clear they have the wrong model.

After my post yesterday, a commenter observed

The only hope on the horizon is the appointment of a new Secretary to the Treasury who is given or [secretly] works on a single goal of devising policy to genuinely increasing productivity…..

The Treasury has lost its sparkle over the last 30 years and it is time it regained some lustre, it’s ‘reason for being’ and grew some courage.

I couldn’t disagree with the sentiment, even if I wasn’t optimistic that there was any hope at all.  But the comment prompted me to have a look at the documents on the SSC website supporting the current advertisement for a new Secretary to the Treasury.

The procedure for the appointment of public service chief executives is set out in the State Sector Act.  Section 35 provides that when there is a vacancy the State Services Commissioner must

invite the Minister to inform the Commissioner of any matters that the Minister wishes the Commissioner to take into account in making an appointment to the position.

That is the Minister’s opportunity to scope the job, and identify his or her priorities.  And although there is now a perception that appointments are made by the State Services Commissioner, in fact the law is clear that the Cabinet can not only reject a nomination, but can appoint their own preferred nominee.   In other words, while Peter Hughes (the State Services Commissioner) has considerable influence, appointments ultimately reflect to a substantial degree the choices and priorities of ministers.  Thus, under the previous government it was ministers who fast-tracked citizenship for Gabs Makhlouf to allow him to be appointed. (And thus Bill English –  who later acquiesced in the reappointment of Makhlouf –  bears responsibility for the failures of The Treasury this decade –  including the complete absence now of any comprehensive analysis and advice on the productivity failure).

But what of the current search?  The advert and supporting documents will reflect the Minister of Finance’s own priorities and views of what The Treasury should be doing.

Even the short advertisement itself starts in an unpromising way.

The Treasury is the Government’s principal economic and financial advisor. Its work improves the wellbeing and prosperity of all New Zealanders by ensuring the nation’s macroeconomy is stable,

In fact, if anyone does macroeconomic stabilisation at all well it would be the Reserve Bank –  that is a key part of the Bank’s role.   Sure, The Treasury advises the government on policy around the Reserve Bank, but the Bank is both operationally independent and has a direct line to the Minister on the policy issues.  But not a mention of productivity –  lifting the level of economic performance –  or any of its cognates.

Later in the advert, I was briefly encouraged

The Secretary will be both an expert in financial and economic policy leadership and  state sector management and strategy.

Good luck finding a person with both sets of qualities, but I don’t want to cavil just yet –  an “expert in financial and economic policy leadership” would be good.   An expert in financial and economic policy itself might be even better –  someone who would command credibility among staff, ministers, and the wider policy community.

Three other documents accompany the advert.  One is purely process oriented, and I’m not commenting any further on it.

The second is the position description.  In the opening bumpf  about the organisation there is finally some welcome reference to Treasury’s responsibility for things around the level of economic performance (emphasis added)

The three key outcomes the Treasury works towards are improved economic performance and prosperity for all New Zealanders, macroeconomic stability, and a higher performing State sector.

But that’s it.  Once the document gets on to the specific position of Secretary to the Treasury, it is all lost once again.   There are the specific accountabilities for the Secretary, moving beyond the generic statutory responsibilities:

The Secretary of the Treasury is also accountable for:

• Leading and overseeing New Zealand’s public finance system;

• Working collaboratively with the State Services Commissioner and the Chief Executive of the Department of the Prime Minister and Cabinet to ensure a consistent and aligned approach to State sector system leadership;

• Advising on, and implementing strategies for, managing the Crown’s balance sheet including debt; risks; contingent liabilities; and the government’s investment in companies and other entities;

• Advising and reporting on fiscal management for the Crown and monitoring departmental operating and capital expenditure; and

• Building succession for the Treasury’s leadership team and working with colleagues to leverage the Treasury’s talent for system benefit while building a diverse and inclusive organisation where staff have career pathways.

Nothing about economic performance (level or variability) –  advice thereon – at all.

And these are policy-related “critical success priorities”

• Leading, organising and managing the Treasury so it delivers on the Government’s goal of a shared prosperity where all New Zealanders benefit from the wealth that growth in the economy provides;

• Refreshing the macroeconomic framework (fiscal, monetary and financial stability) to ensure it is fit for purpose for the next twenty years, including driving the further development of a wellbeing approach;

• Promoting greater transparency and understanding of the Government’s economic goals through supporting the embedding of wellbeing measures in the Public Finance Act and through the Secretary’s and other Treasury communications and engagements;

• Providing advice to assist the Government to meet its policy priorities within its Budget Responsibility Rules;

• Working collaboratively with others, including Māori, to collectively develop and deliver creative solutions to resolve long-term challenges including child poverty, housing, climate change, and freshwater;

The first of those is about distribution (not “growing the pie”), and the second is about some odd mix of stability and the wellbeing approach.  The third is about transparency, the fourth about fiscal policy, and the fifth perhaps illustrates the government’s priorities.  Productivity appears not to be one of them, from the agency styled as the government’s principal economic advisers.    I’m not necesssarily suggesting there is much wrong with what is on the list –  one can debate the vacuity of the wellbeing approach another day –  but what isn’t there is telling.

The third document is the application form, which is useful because it sets out the capabilities SSC (on behalf of the Minister) says it will be assessing applicants on.  These are the capabilities applicants are required to demonstrate (in writing)

Think, plan and act strategically; to engage others in the vision, and position teams, organisations and sectors to meet current and future needs.

Lead and communicate in a clear, persuasive, and impactful way; to convince others to embrace change and take action.

Work collectively across boundaries to deliver sustainable and long-term improvements to system and customer outcomes.

Drive innovation and continuous improvement to sustainably strengthen long-term organisational performance and improve outcomes for customers.

Bridge the interface between Government and the Public Sector to engage political representatives and shape and implement the Government’s policy priorities.

All probably fine and reasonable in their own way –  if what you want is some generic public service manager –  but again what is notable is the absences.   Neither here, nor anywhere in any of the documents, is there any sense of wanting someone who might model excellence as a policy adviser, or lift the performance of the organisation in a way that might deliver credible and compelling answers to the appalling productivity underperformance of the New Zealand economy.

And why not?  Presumably because neither Grant Robertson, nor his boss, nor his party, nor the parties they govern in league with, care.  Nothing –  in these documents, in speeches, interviews or anywhere –  suggests otherwise.

To revert to my commenter’s hope, I guess there is nothing to stop the person who is eventually appointed choosing to make productivity a priority and foster work developing compelling analysis and recommendations.  But it doesn’t seem very likely.  Even if Treasury isn’t as resource-constrained as some government agencies, there won’t be lots of capable staff resources readily able to be diverted to something that just isn’t a government priority.  But more importantly, what sort of person do we suppose is likely to get the job?   And why would such a person, who got through the selection process (acceptable to both SSC and the Minister) be likely to change their spots once in office.  What would be their incentive?  And how likely is it that they’d be the sort of person who would even care much, or understand the issues well enough to know where to start.

As was the situation eight years ago, there are few obvious strong contenders for the role –  at least among people with any serious economic or financial expertise.    Looking through the list of current Treasury senior management, there are some capable people (although part of a leadership team that appears more interested in, say, diversity than in productivity), but really only one of those people could conceivably offer that level of expertise at this stage.   Around the rest of the public sector, I wonder if Geoff Bascand (Deputy Governor at the Reserve Bank, who was open about the fact that he applied to be Governor and missed out) might be interested.  Perhaps there are ambitious people at MBIE – an agency better known for delivering on ministers’ priorities than for serious analysis.   One can’t help thinking that applicants who are female will, all else equal, have something of an edge. But none of the names that spring to mind seem any better than the likely underwhelming field of male applicants.

Then again, Grant Robertson isn’t serious about dealing with the country’s most important economic failing, so perhaps it doesn’t really matter much who oversees the playground where analysts divert themselves thinking about concepts of wellbeing, while New Zealand is likely to keep drifting further behind.

How are wage earners doing?

For the last few years –  probably almost since the economy began emerging from the long recession of 2008 to 2010 –  there has been talk about how low average wage increases have been.   Those lines have sometimes been run in discussions of the general rate of inflation –  all else equal, if inflation had been nearer target, average nominal wage increases probably would have been a bit higher –  but more often it seems to have been a real phenomenon people had in mind; some sense of wage earners being “left behind”.

I’ve been increasingly sceptical of that story, and did a few posts  12-18 months ago to illustrate the point.   Some of the data aren’t updated very often, and there are historical data revisions, so I thought it might be time to take another look.

The first series I’ve been interested in is the labour share of GDP –  as approximated by the share of all the value-added in the economy accruing as compensation of employees. To make this comparison, one needs to adjust out for taxes and subsidies on production (all else equal, a shift from income taxes to a higher GST won’t raise wages –  or leave people worse off on average – but will raise measured GDP).  The data are only available annually, and only up to the March 2018 year, but here is the resulting chart.

labour share 2018

There is a little bit of short-term variability in the series, but if (say) one compares the latest observation (year to March 2018) with the last observation before the recession (year to March 2008), the labour share of GDP is still a touch higher now than it was then.  In both cases, it was higher than it had been at any time in the previous fifteen years or so.   As I’ve noted previously, the trough was in the year to March 2002 (on my telling, this was not unrelated to the fact that the real exchange rate had then been around historic lows).

The other comparison I find interesting is to look at how wage rates have evolved relative to (nominal) GDP per hour worked.   Nominal GDP captures both any productivity gains the economy has managed and any terms of trade gains (as well as general inflation).  Over the longer-term one would expect those variables to be the biggest influence on developments in economywide wages.

In putting together this chart, I’ve used the SNZ analytical unadjusted series of the Labour Cost Index, which purports to be the right measure for these purposes (wage rates, rather than just average wages –  the latter distorted by composition changes, and wages before any adjustments for productivity –  the headline LCI series attempts to adjust for productivity gains).    The series doesn’t get wide coverage but –  absent any serious efforts to suggest the data are of unusually poor quality –  should.

Unfortunately, the analytical unadjusted LCI series is only available back to 1995 (the private sector sub-component only to 1998) but even that is now well over 20 years of data.

In the chart I have:

  • indexed nominal (seasonally adjusted) GDP per hour worked (using the HLFS and QES), and
  • indexed the analytical unadjusted LCI series,

both to 100 in the March quarter of 1995, and then taken the ratio of the wage series to the GDP per hour worked series (so that the resulting series is equal to 1 in the March quarter of 1995).

lci wages vs gdp

There is a fair bit of short-term noise, but the trend is pretty clear.  On this data, wages have been rising faster than the overall earnings capacity of the economy.   That was so in the 00s, and has been so –  albeit to a lesser extent – in recent years too.  For anyone inclined to want to debunk the analytical unadjusted series, note that this chart is not wildly inconsistent with the labour share chart I showed earlier: the labour share of total income has increased since the early 00s, with the biggest change occurring in the pre-recession 00s themselves.

So what is the problem?  There are two.  First, general economywide inflation has been unexpectedly low this decade, and below the target midpoint now for years.   Not surprisingly, against that backdrop nominal wage inflation has been lower than it might otherwise have been.

But the second –  and far bigger –  issue is that lack of productivity growth.   Here is my regular chart, last updated just before Christmas

real GDP phw dec 18

There has been no labour productivity growth for the last four years, and very little this decade.  Sure, the terms of trade have been reasonably good, but you cannot expect strong sustained growth in (real) wages if productivity growth is so moribund.   If anything, real wage growth has been surprisingly – and probably unsustainably –  strong given that feeble growth in the earnings capacity of the economy.    It is all consistent with a story of a high and overvalued real exchange rate  –  domestic demand pressures give rise to wage inflation, but in the process squeeze the outward-facing sectors of our economy.  You’ll recall that exports (and imports) peaked as a share of GDP at about the turn of the century, and are no higher now than they were 40 years ago –  even though successful small economies typically see a growing reliance on two-way international trade.

It would be good if our political “leaders” –  and their advisers in The Treasury –  actually focused on these sorts of imbalances and underperformances.  But nothing serious is heard any longer from the Prime Minister about the productivity underperformance.  Taking it seriously might confront them with hard choices, and I guess vapid rhetoric about “wellbeing Budgets” comes more readily.  New Zealanders –  including New Zealand wage earners –  deserve much better.

 

Material progress: how very recent

There was a news story a few years ago in which some academics were reported as suggesting that pretty much everyone of West European descent alive today was descended from Charlemagne, first Holy Roman Emperor.   That he had 18 children, legitimate and otherwise, only increased those probabilities.  35 generations back we each have about 34 billion notional ancestors and yet the total population of north-western Europe back then was only about 20 million.

I didn’t give the story much thought until last week.  For the last few months my 12 year old daughter has been hard at work tracing family trees, with a bit of help from Dad.   I was mostly interested in the last couple of hundred years, but she has been keen to trace every line possible as far back as we could go.  We’ve put in some intense effort over the holidays and last week she stumbled on the path that took us all the way back to Charlemagne (and a couple of centuries before him).   Just seeing that continuous path –  one of the billions that made her her – on a couple of sheets of A3 gives a fresh vividness to those earlier centuries.

Of course, the other thing that even a little economic and social history does is to serve as a reminder of just how recent our material prosperity is.  I downloaded a copy of the UK 1861 census form for one particular set of ancestors –  just before they got on the (slow) boat for New Zealand.   They were farm labourers in a small town in Yorkshire, living in a street where the other residents were also farm labourers and the like – and one is explicitly described as a pauper.  The UK in 1861 had (on the Maddison database numbers) the best material living standards anywhere, rivalled only by Australia.  But life was tough, hours were long, amenities were few, and (for example) infant mortality rates were shockingly high.   According to a book a distant relative wrote recently, 26 people were to die on their trip to New Zealand –  quite an “investment” in the prospect of better opportunities.

One of the children of that Yorkshire family, then just one year old, made the most of the opportunities 19th century New Zealand offered.  He built businesses and served as mayor of Christchurch from 1912 to 1919 (and later as an MP).  At the time, New Zealand is estimated to have offered among the very highest material standards of living anywhere in the world.  But I wrote last year about what those “best material living standards” amounted to only a hundred years ago.

Imagine a country in which the average age at death was only about 45, 6 per cent of children died before their first birthday, and another 1.5 per cent before they turned five.  Not many children are vaccinated.

Most kids get to primary school –  in fact it is compulsory –  but only a minority attend secondary school.  By age 15 not much more than 15 per cent of young people are still at school.   Only a handful do any post-secondary education (total university numbers are about 1 per cent of those in primary school).   Houses are typically small –  not much dedicated space for doing homework – even though families are bigger than we are used to.   Perhaps one in ten households has a telephone and despite the street lights in the central cities most people don’t have electricity at home.

Tuberculosis is a significant risk (accounting for seven per cent of all deaths).  Coal fires – the main means of heating and of fuel for cooking – mean that air quality in the cities is pretty dreadful, perhaps especially on still winter days.  Deaths from bronchitis far exceed what we now see in advanced countries. There isn’t much traffic-related pollution though – few cars, so people mostly walk or take the tram.  The biggest city is finally about to get a proper sewerage system, but most people outside the cities have nothing of the sort.      And washing clothes is done largely by hand – imagine coping with those larger families.

Maternal mortality rates have fallen a lot but are still ten times those in 2018 in advanced countries.  One in every 50 female deaths is from childbirth-related conditions –  which leaves some kids without mothers almost from the start.

Welfare assistance against the vagaries of life is patchy.  Most people don’t live long enough to be eligible for a mean-tested age pension.   Orphans aren’t in a great position either, and there is nothing systematic for those who are seriously disabled.  There is a semi-public hospital system, but most medical costs fall on individuals and families, and there just isn’t much that can be done about many conditions.

There are public holidays, and school holidays, but no annual leave entitlements.  No doubt the comfortably-off take the occasional holiday away from home, but most don’t, because most can’t (afford it). Only recently has a rail route between the two largest cities been opened –  but it takes 20 hours for cities only 400 miles apart.

I wouldn’t choose to live in that country.  Would you?

And yet my grandparents did live there –  they were all kids then.  This was New Zealand 100 years or so ago, just prior to World War One.  I took most of that data from the 1913 New Zealand Official Yearbook.

In constructing the family tree those infant mortality rates were brought home more vividly, when I found one great uncle and one great aunt both of whom died aged less than one in the years just prior to World War One, both in comfortable Christchurch families.

Over the holidays, I read an old masters thesis –  written at Otago in 1950, and still occasionally cited –  that somewhat updated the picture, at least as regards household management and facilities.   According to the Maddison collection of data, New Zealand in 1950 still offered perhaps the third or fourth best material living standards anywhere in the world.   This particular student had conducted what appeared to be a reasonably well-designed survey, and set of interviews, with women in a sample of households in central Dunedin, looking at what appliances each household had, which of a variety of services they used, and so on.  The survey and interviews were conducted in early 1950.   Here is one summary table.

appliances 1950

You can see the spread of technology.   100 per cent of these households had an electric iron, and 72 per cent had a vacuum cleaner (presumably none would have in 1913).  76 per cent even had an electric toaster.  But many were still cooking using a coal range, just under half had an electric jug or kettle, and only 7 per cent had a refrigerator –  in a major city in one of the richest countries on earth, less than 70 years ago.   There were, of course, few (probably no) domestic freezers, microwaves, dishwashers –  or the myriad of more specialised appliances that now line the shelves of Briscoes.  And, on the other hand, sewing machines were widespread.

The student recorded the occupational status of each household (typically, the employment of the husband) and analysed the incidence of these appliances across different occupational classes.    The incidence of domestic technologies (those in the table above) in professional occupation households was, for example, about about twice that among labourers and pensioners (the differences being statistically significant).

The second strand of the survey that underpinned the thesis was the use of various external services.    When only 7 per cent of (these) households had a refrigerator –  and presumably none a freezer – fresh food was a major issue.

Bread for example

bread

(If you didn’t bake your own) it had to be collected every day it was baked.  According to the survey most walked to the shop to buy it.

Around half of the respondents had their groceries delivered, and around 10 per cent shopped using their own car.  The rest walked and carried the groceries home (typically from choice, since delivery was generally available).   Meat couldn’t be stored with long without a fridge, and the survey found that few butchers offered to deliver, so a walk to the butcher was pretty much a daily requirement.   Many of the respondents didn’t have a telephone, so even if delivery had been available, they’d still have to have walked to the butcher to place the order.

What of fruit and vegetables?

fruit and veg

The thesis goes on to look at the use of commercial laundry services, house-cleaning and window-cleaning services (including a slightly arch comment about the one respondent who claimed never to clean their windows), and the employment of people to assist in household chores or child-minding.

Perhaps like all writing, that 1950 thesis is also something of a period piece. There are asides about the price controls and butter-rationing still in place in post-war New Zealand, and a near unwavering sense that household management is a woman’s work.  And if there is a recognition of the importance of price –  this was, after all, a thesis partly done under the Economics Department

tech

there were also some curious asides

tech 2

Best national accounts estimates suggest that average material living standards in New Zealand in 1950 were not much more than a third of those today (and over that period New Zealand has had among the slowest rates of productivity growth of any country).   The data captured in that thesis help illustrate some of the concrete differences.

That thesis was my mother’s.  She is the great-granddaughter of that 1861 Yorkshire farm labourer, and the great-niece of that former mayor and MP – she was told to blame him when she couldn’t start school at five (Depression-era economies by the government of which he was an MP).  She was the first person on either side of my daughter’s family tree to graduate from university (at least in modern times), at a time when only about 5 per cent of young people went to university (and only about 1 per cent of women).  In one of the richest countries in the world.

It is her 91st birthday today.    There have been staggering material changes over the span of her life, let alone that of her grandparents and their generation.     Echoing Robert Gordon perhaps, I’m less convinced that if I live to 91, there will have been anything like that scale of improvement over my life.  I’m just about to walk to the butcher and supermarket.  Then again, in 1962 one couldn’t trace back generations of ancestors from the comfort of one’s own computer screen.

 

Productivity failure: Treasury clearly has the wrong model

In various commentaries on yesterday’s GDP data, I saw suggestions that the revisions to recent years’ data suggested that the New Zealand economy had been growing “strongly” in recent years.

As context for that observation, and perhaps shedding a bit of light on the sadly diminished expectations that appear to have taken hold in New Zealand, consider this chart, of real GDP per capita growth.

real GDP aapc 18

After a deep and quite long recession, the peaks in growth in per capita real GDP were a pale shadow of what had been achieved in the previous two economic cycles.   2 per cent annual per capita growth over the long-term would be a reasonably impressive result, but when the growth rate peaks at 2 per cent, and recessions come along every decade or so, it is no more than mediocre at best.  For the last couple of years  (these are annual average numbers) per capita growth has been at levels only previously experienced –  last 25 years –  on the eve of a recession.

But my main interest in yesterday’s numbers was the productivity estimates derived from them.  As I’ve been pointing out for a couple of years now, there has been next to no productivity growth at all in New Zealand for some years.  But in making that observation one is always somewhat at the mercy of the major annual SNZ data revisions.  Sometimes what looked to be in the data gets revised away completely.

How about labour productivity?  Recall that SNZ does not publish economywide productivity estimates –  there is no obvious reason why, when their Australian and British peers do –  so I’ve calculated one, using an average of the two measures of GDP (production and expenditure) and the two measures of hours (QES and HLFS).   And this is the resulting chart.

real GDP phw dec 18

No labour productivity growth at all for the last three years, and a total of 1 per cent productivity growth in the past six years.  Productivity growth under the previous Labour government wasn’t spectacular, but in the six years to the end of 2007 (just prior to the recession) we managed 8 per cent productivity growth.  But only 1 per cent this time round.    It is dreadfully bad, and there are no acceptable excuses.  You’ll hear people talk about global productivity growth slowdowns, and that is true to some extent, but it is largely irrelevant here, given that we start so far behind the leading OECD countries –  those at or near the productivity frontiers.   We have so much room to catch-up, and yet if anything again we’ve been drifting further behind.

Sadly there is little prospect of much change for the better.    Neither the previous government nor the current one appear to take New Zealand’s appalling productivity record seriously, in the sense of doing anything much about it, or even commissioning expert analysis and advice (reluctant as I’d be to suggest another “working group”).   And in a sense they’ve been accommodated in that stance by their self-proclaimed lead economic advisers, The Treasury.   Treasury publishes their HYEFU forecasts each December and buried in the supporting tables are forecasts for labour productivity growth (on an hours basis).    I could only find those tables back for the last five years, but here is what they have been forecasting (I’ve shown the four complete forecast years for each set of projections).

HYEFU forecasts for labour productivity growth published in Dec
Forecasts for June yrs 2014 2015 2016 2017 2018
2016 2.2
2017 1.6 1.6
2018 1.1 2.1 2
2019 1.2 0.8 1.5 2
2020 0.7 1.3 1.7 1.1
2021 1.4 1.5 1.2
2022 1.3 1.2
2023 1.2

They seem to have become quite a bit more pessimistic about the medium-term outlook in their latest forecast, but they are still picking almost 5 per cent labour productivity growth in the next four years, when over the last four years we’ve had almost none.   Look at the first column in the table done at the end of 2014: Treasury was actually expecting quite strong productivity growth over that period.  It is pretty clear that they simply do not understand what is going on, and do not have even roughly the right model.  Their productivity projections are wrong, in material ways, year after year.   And if they might be getting a little less unrealistic in the latest set of forecasts, that is small consolation because there is no sign they are offering advice to the government that might turn around the disastrous underperformance.   Too busy with the feel-good “wellbeing Budget” perhaps?

It has been another poor year for New Zealanders at the hands of our policymakers and their lead advisors:

  • no serious action to address and reverse the house price disaster that successive governments have been inflicting on us now for 25+ years (house and land prices up again),
  • no action at all to address the decades-long productivity growth underperformance (particularly bad over the last few years) that now sees a country once among the most productive in the world languishing in the league tables among former eastern bloc states, far far behind our former peers among the leading group of OECD countries,
  • and no sign that either the government or the Opposition really care,
  • or that our Treasury really understands at all the factors that explain the utter (and ongoing) productivity failure.

Governments, of course, don’t create productivity.  But they can and do put roadblocks in the path, often initially unwittingly.    But over time every such roadblock comes with own vested interests.    There is the old line from Upton Sinclair about

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Perhaps that explains the resistance of many in the business community to the changes that are needed.   It can’t explain Treasury’s failure.  I suspect that for them, and perhaps for many of our politicians, it is more a matter of ideological commitments, and an unwillingness to shine the light on the issues and policies that really matter if we care at all about lifting economic performance for our fellow New Zealanders.

Whatever the explanation, it is well past time for a change of heart, and for beginning again to take seriously finally reversing the decades of (relative) failure.