Brexit and UK economic performance

Flicking around the web yesterday afternoon I noticed this tweet from Matt Ridley (more formally the 5th Viscount Ridley), the British journalist, businessman and author of various smart books including The Rational Optimist: How Prosperity Evolves.  (Ridley was also formerly  –  from 2004 to 2007 when it hit the rocks –  chairman of Northern Rock.)

Ridley is reportedly strongly pro-Brexit.  In my book, that is to his credit (had I been British, I’d almost certainly have voted Leave too.  Then again, the next recession is likely to shake the euro and the EU itself to its very foundations anyway).

But it was the quote from the paywalled Telegraph article that caught my eye.  Those look like pretty impressive numbers, at least for the first 10 seconds until one realises that they are almost certainly total GDP comparisons and British population growth had been faster than that of most of the other countries of Europe.  And, of course, polling data suggests that was one of the factors that led to the Leave vote in the first place –  in and of itself, higher population growth is hardly a mark of Britain’s economic success, let alone a clear welfare gain for the British.

But it left me wondering how the UK had done on other, more relevant, economic comparisons. For example, growth in real GDP per capita and growth in real GDP per hour worked.   The euro was launched on 1 January 1999, so here are a couple of comparisons (using annual OECD data) for growth from 1998 to 2017.  The comparators are  the 10 older western European countries that are in the euro (excluding Ireland whose GDP numbers are messed up by the tax system, and don’t –  to a substantial extent –  reflect gains to the Irish, and Luxembourg) plus Denmark, which isn’t in the euro but whose currency has been firmly pegged to the euro since its creation.  I deliberately didn’t include the former eastern-bloc countries, partly because they joined the euro at various different times over the last 20 years and because something else more important –  post-communist convergence –  is going on there.)

First, real GDP per capita.

UK 1

and then real GDP per hour worked.

UK 2

It isn’t an unimpressive performance over that period as a whole, especially considering (a) all the hoopla at the time the euro was created, including from some trade economists, about the new economic possibilities, and (b) the UK productivity performance since the period encompassing the 2008/09 recession has been really poor (growth in real GDP per hour worked of only 2 per cent in total).   And, I guess, it is now more than two years since the referendum, and the real naysayers would have predicted a further worsening in UK productivty growth since then.

Of course, on the other hand, it is fair to point out that the UK is in the bottom half of these countries for its level of productivity.    On the OECD estimates, in 2017 only Italy, Spain, Portugal and Greece had lower average labour productivity than the UK.   But over the 18 years in the chart those laggard countries underperformed, while the UK did actually manage some convergence.

I don’t think these numbers themselves shed any real light on how the UK will do, in economic terms, relative to the rest of western Europe over the next decade or two (whether or not there is the brief, but perhaps initially quite costly, disruption associated with a “no deal”).  And it is interesting just how widely performance has diverged even among countries in both the commmon currency and the single market.   People make choices about nationhood, and how they want their country run, for a whole variety of reasons, and in most cases a few percentage points of GDP either way doesn’t weigh that heavily –  as I’ve pointed out previously, many post-colonial countries (notably in Africa, but including Ireland) underperformed economically after independence, but probably few really regretted the choice of becoming independent.   Brexit won’t change the twi n facts that the UK is a moderately prosperous country, nor the fact that –  inside or outside the EU –  it has productivity challenges, if it wishes ever again to be in the very front rank of economic performance.

I attended a lecture a couple of weeks ago by the historian and “public intellectual” Nial Ferguson.  He noted that he had supported Remain, for what seemed to be not entirely serious reasons (he is/was friends with David Cameron and George Osborne and thought they were doing a good job, and was himself going through a messy divorce and thought breakups were very hard).  But he had become frustrated by what he described as “the bleating, whining, grumbling of the Remainers” and suggested that he now supported Brexit for two reasons.  The first was that, in his view, the EU could only survive if it became more like a federal state (good luck with that) and the UK could never have been a part of such an entity.  And the second was a hope that Brexit would help the UK confront the fact –  captured in the data above –  that its economic challenges are there whether or not it is in the EU.

I was reading last night an 1882 lecture by French philosopher and historian Ernest Renan, titled “What is a nation?”.   It seemed relevant at present, emphasising as he does that nationhood isn’t about race or language, but about two things

One is the past, the other is the present. One is the possession in common of a rich legacy of memories; the other is present consent, the desire to live together, the desire to continue to invest in the heritage that we have jointly received. Messieurs, man does not improvise. The nation, like the individual, is the outcome of a long past of efforts, sacrifices, and devotions. Of all cults, that of the ancestors is the most legitimate: our ancestors have made us what we are.

A nation is therefore a great solidarity constituted by the feeling of sacrifices made and those that one is still disposed to make.


Nations are not eternal. They have a beginning and they will have an end. …..At the present moment, the existence of nations is a good and even necessary thing. Their existence is the guarantee of liberty, a liberty that would be lost if the world had only one law and one master. By their diverse and often opposed faculties, nations serve the common work of civilization. Each carries a note in this great concert of humanity, the highest ideal reality to which we are capable of attaining.

That makes sense to me.  As does, through all its challenges and mismanagement, Brexit.



The costs of Brexit

That was the theme of a presentation in Wellington on Monday, organised by the research institute Motu, by visiting British economist Richard Harris.  Harris is a professor of economics at the Durham University business school, but had apparently spent some time at Waikato early in his career.

The presentation was promoted as an update on the Brexit negotiations, seven months into the two year Article 50 notice period.  Of course, it takes not much more than a cursory glance at your British media outlet of choice to know that things are not going that well, not helped by the tenuous hold on office the current government has.   Competing agendas all round don’t help either.  Plenty of people in the British government –  and the Opposition –  didn’t want to leave.  For them, minimal change from the status quo would be the best outcome. But for those who actually favoured Brexit that solution would, understandably be anathema –  the goal for many of them was to restore the UK’s freedom of action to that of a typical sovereign state.    And on the other side, some countries face pretty bad outcomes if there is a hard British exit.  For others it isn’t much of an issue. For some it might even be an opportunity, to attract multinationals –  including in the financial sector – that have operations currently based in Britain.    And although everyone knows that rising trade barriers comes at a (likely) cost to all countries, the EU doesn’t want any other countries –  or regions –  getting the idea that leaving the EU was a serious option.

Harris’s presentation helped me see more clearly where the EU “divorce bill” demands are coming from, and put the numbers in some sort of context.  At present the UK pays a net 14.6 billion pounds a year into the EU, and the sort of numbers observers like the FT think the EU might accept are only the equivalent of two or three years’ “membership fee”, in a club that apparently operates five year budgets.  At present though, as the FT observes, a number acceptable to Brussels would be “deadly” in Westminster.

It was also interesting to see some numbers on how restrictions on trade between the UK and the rest of the EU would rise if there is no trade deal and the two sides fall back to trading on WTO terms.   On goods, tariffs would rise from zero at present to around 4.4 per cent on average.   On services, where barriers are mostly non-tariff, the restrictions would rise from a tariff-equivalent of around 2 per cent to something nearer 8 per cent.   In principle, the UK could offset this to some extent by securing early trade agreements with other countries –  including countries that the EU does not have deals with –  but good deals, with significant countries, aren’t likely to be secured easily or quickly.  As various commentators have noted, the EU-Canada trade agreement took eight years. New Zealand is already among several countries objecting to early EU/UK proposals to divvy up agricultural import quotas.

Even though there is a lot of talk about smoothing the customs barriers between the UK and rest of the EU –  including on the Ireland/Northern Ireland border –  to faciliate, for example, the value-chains in manufacturing that rely on the seamless movement of goods, there doesn’t seem to be any great optimism as to whether any of these schemes can be made to work well.   That matters, even more than to the UK, for Ireland in particular, which has a very large share of its trade with the UK (and not just with Northern Ireland).  The Irish have been making opportunistic bids to try to semi-detach Northern Ireland from the rest of the UK.

It was pretty clear that Harris hadn’t voted for Brexit, and didn’t support it now.  But he had a pretty hard-headed assessment: the decision had been made and there was no imaginable way it was going to be reversed.   He couldn’t see how effective deals could be in place in March 2019, and even talk of transitional periods beyond that had all sorts of (technical and political) problems.  He envisages a pretty “hard Brexit”, and is very gloomy as to how the UK will cope.

In fact, that was one of the odder aspects of his talk.  He presented a (familiar) chart showing that in the 20 years to 2007. British productivity growth had been faster than that in most other major advanced economies.  But since 2007 there has been no productivity growth at all in the UK.  No one quite knows why, or even how much of what we see might be measurement and how much genuine.  Performance has been poor recently, but that has nothing apparent to do with Brexit.

And yet Harris used this record to claim that if Britain was to take advantage of Brexit, it needed to have a high productivity economy to benefit from comparative advantage.  He said it twice, so it presumably was an intentional statement.  But Stage 1 economics students learn that everyone has a comparative advantage: economy B might be better at producing all sorts of different goods that economy A (that’s absolute advantage), but comparative advantage just tells you that economy A will nonetheless be occupied producing the things it is relatively less bad at producing.     Misunderstanding that point didn’t fill me with confidence in the rest of the presentation, although I’m guessing he just meant that one might be more optimistic about British economic outcomes –  in or out of the EU –  if it was managing decent productivity growth now.

Harris did present the results of a couple of modelling exercises that have been done on how large the real economic costs of Brexit might be.  They usefully highlight that the costs won’t just fall on the United Kingdom –  indeed, one of them envisages job losses (transitional presumably) twice as large for the rest of the EU as for the UK (the EU is of course much larger).    There are losses in this scenario because, even with full free trade with the rest of the world (which won’t happen any time soon), there are typically fewer profitable trade opportunities with places further away than with places close to home (one of NZ’s problems).

In one paper (by Vandenbussche et al), it is estimated that the level of British GDP will fall by 4.5 per cent in a “hard Brexit”.   What I hadn’t realised –  or thought about before –  is that Britain might not be the biggest loser.  In this particular model, Irish GDP would fall by almost 6 per cent, and that of Malta –  with close historic ties to the UK –  would also fall by 5 per cent.    If a 5 per cent loss of GDP seems large, no one really knows the likely absolute magnitudes. Harris quoted estimates from another study by Dhingra et al: they in turn had bad and less-bad scenarios, but the central estimate of lost GDP for the UK was around 2 per cent.

There is a pretty widespread view among economists that these costs, whatever the precise number, are both large and avoidable.  Of course, they might be avoidable, if Brexit was to free up Britain to adopt far-reaching microeconomic reform and liberalisation.  Sadly, that doesn’t seem remotely likely at present –  and of course, many of the costly restrictions the UK imposes now (eg land use restrictions) are entirely home-grown.

Instead, economic elites lament the choice to exit the EU and wish, longingly, that it could be reversed.  That sentiment is perhaps particularly evident in places like the IMF and the OECD –  and Harris cited quite a bit of material from the latter organisation, which has an institutional bias away from the national in favour of the multinational.

I suspect, by the tone of the questions, and the sympathetic murmurs when Harris made particular points, that there weren’t many people in Monday’s seminar who were sympathetic to Brexit.  I am.  Were I a Brit, I’m pretty sure I’d have voted for it –  although, in truth, I’m not sure I’ve ever voted in New Zealand for a programme that might reduce GDP per capita by 4 per cent.  But Brexit has just never seemed primarily like an economic issue, and that seems to be the difference between the public –  polls suggest they are still pretty evenly divided as they were last June –  and most economists.

And so I stuck up my hand and suggested that if we’d been doing this sort of modelling 60 years ago, as territories pondered the possibility of independence from Britain, the results would surely have shown that, for almost all of them, they would be worse off economically than if they’d stayed with Britain.  (And that modelling would never have allowed for the gross mismanagement that followed in many of the newly independent African countries in particular).  And yet if they had been presented with estimates of a 5 per cent loss of GDP, how many would have turned down the chance to be independent – to be free?  Even now, decades on, few probably regret the independence choice –  Somalis might be an exception.   The essence of my point of course was along the lines of why shouldn’t Britons today make a similar choice about the EU.  (And, of course, a 4 per cent loss of productivity sounds big, but it is the loss of 2 or 3 years productivity growth in normal times, invisible over a 50 year horizon.  Adding another week’s annual leave probably reduces GDP per capita by a couple of per cent.)

I’ve made this point here previously, but I was interested in how Harris was going to respond to it.  His response was to acknowledge that many Scots had certainly favoured independence, even at an economic cost – although of course they, like the Quebecois in the 1990s – decided to stay part of the larger country.  But then he fell back on avoidance, arguing that the issues were different for India or Zambia, as their cultures had been squelched by the British etc, and no one could suggest that anything of the sort could be said of Britain and the EU.  Had I had the chance of a rejoinder, I’d have noted that my points would have applied to the choices New Zealand, Australia, and Canada (and Ireland –  although the cultural issues were a bit different) had made to progress towards full economic and political independence.  It may well have come at a cost, but few then –  and fewer now –  will have regretted the choice.  And in all three countries the predominant population was English.  Probably few Slovaks regret their divorce from the Czechs.

Harris’s fallback was that “the EU was always only an economic club, and it remains an economic club”.      That was the conceit of many in Britain.  It was never the vision of the founders of the EU, or of those driving it today.  The very treaties envisage an ‘ever-closer union”, and even today newspapers such as the FT are full of talk of plans for closer banking or fiscal unions, even talk of an EU finance minister.   New entrants to the EU – although not Britain, Sweden and Denmark –  are obliged to commit to enter the euro.  And –  as a matter of conscious and deliberate choice –  being part of the EU means individual nations surrender the right to legislate for themselves in many areas.  That is a (lost, or foregone) freedom that many Britons seemed (and seem) willing to pay some price to reclaim.  If you don’t value the nation state –  or you aspire to some mega European state –  you’ll think that choice irrational.  But most people do seem to value the nation state –  and not just in the UK.    And the British exit polls last year suggested that it was just those sorts of “chart one’s own destiny” considerations that counted with those voting to leave.

Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

In the end, who knows whether it will matter much.  All the modelling assumes that the EU itself carries on much as it is.  A pessimist – perhaps an optimist –  might wonder whether the EU itself will last in its current form for much longer.  Public opinion in other EU countries seems to ebb and flow.   The next recession –  whenever it is –  is just going to accentuate the tensions already apparent in many countries, given that few EU countries have any material “fiscal space” and the ECB is likely to go into the recession with interest rates already at or below zero.  Perhaps in the end Britain will prove to be a pathbreaker –  something the eurocrats and EU-oriented elites must fear very deeply.

Harris concluded with a couple of slides making the point as to how little trade New Zealand firms/individuals and those in the UK now do.   He was inclined to the view that, therefore, what happens around Brexit doesn’t really matter to us.   I’m not sure he is right there –  even setting aside wishful thinking about full free trade between us, including in agriculture.    Even in the transition, a disruptive hard Brexit is the sort of event that could –  in the wrong circumstances –  matter for the world economy in 2019.  And for a small country, looking to materially increase its export orientation, we should certainly be hoping that a country of the size and sophistication of the UK can make it –  and prosper –  alone.  If they can’t, it wouldn’t bode well for us.

Brexit, Trump and all that

Last week, The Treasury hosted a guest lecture featuring two visiting academics under the heading Brexit, Trump & Economics: Where did we go wrongOne of the visitors –  Samuel Bowles, now a professor at the Santa Fe Insitute -had been around long enough that in his youth he had served as an economic adviser in Robert Kennedy’s presidential campaign,  and at other times as an economic adviser to the Castro government in Cuba.  The other –  Wendy Carlin –  is a professor of economics at University College, London.

When the invitation went out, I was rather puzzled by the title?  Who was this “we” that apparently “got things wrong”?    After all, I was –  and remain –  keen on Brexit, and will recall for a long time the thrill of that June Friday afternoon as the results rolled in.  And if I wasn’t a Trump supporter, I wasn’t a Clinton one either.  There is a fascinating question as to how Trump became the Republican nominee, but once that had happened one of two unattractive candidates was going to become president.

“We” turned out to be economists.  And by getting things wrong, Bowles and Carlin didn’t mean simply getting eve-of-polling-day forecasts wrong (after all, that late in the day even some pretty prominent Leave figures didn’t expect to win).  Instead, economists were held to blame for these otherwise unthinkable, apparently lamentable, events occurring in the first place.  If only economists had done a better job, the deplorable events would never have happened.  Or so the story went.  The tone was one that surely no right-thinking person could have wanted such outcomes (Brexit was even described as a “gloomy event”).    As this was the second Treasury guest lecture in recent months deploring Brexit, I start to wonder if the organisation now has a quasi-official view (or perhaps it is just the British CEO)?

I’m still not entirely persuaded that either event –  Brexit or Trump –  is quite as earthshattering as the liberal elite seem to make out, or even that they are very closely connected.  UK voters chose to leave the EU by a margin of 52:48.  That is a large enough margin not to require recounts, but hardly an overwhelming margin.  And the same voters only a year early had re-elected (this time with an absolute majority) David Cameron and Conservative Party, on a not-remotely-radical platform.  And today, Cameron and Osborne are gone, and Britain still has a not-remotely-radical (perhaps only slightly more reforming than John Key) Conservative government, with a massive lead in the polls – albeit, the latter is as much about the problems with the Labour Party as anything else.  The government is charged with implementing Brexit, and there seems to be not the slightest sign of some turn inwards, or reversion to protectionism, on goods and capital flows.

Of course, if your vision was one of ever-closer-union, and a mental model in which there was only a one-way door to the EU, perhaps it is a great shock.  After all, if Brexit works more less okay, it might suggest to other countries’ citizens that there are reasonable alternatives to being part of the EU.  And that simply isn’t so radical –  after all, most of the world’s people show no interest in becoming citizens of multi-national superstates.  And the tendency of the last 100 years has been towards more sovereign states not fewer.  Lower barriers to international trade help make that possibility more economically viable.

And it is not as if the public in the United Kingdom has ever been very enthusiastic about subsuming sovereignty into some quasi-democratic entity based in Brussels.  The technocratic elites may have been enthusiastic, but the public seem never to seen anything very wrong about being British.  When your country has been free, and on the right side of the major conflicts of the last 100 years, it is hardly a surprising stance.  Citizens of Spain or Austria might see things differently.

I wrote a post earlier in the year about the fascinating polling data from the early 1970s I stumbled across in a book reviewing UK entry to the EU in 1973.    For all the talk that it was poorer, unskilled, older people who voted to Leave –  as if somehow that changes the character of the decisions –  in the early 1970s, when overall opinion was pretty closely divided on entering the EU, it was those same groups who opposed joining.  And of course the same people who were young in 1972, are old in 2016.  As I noted in that earlier post, what was striking from the polling data (comparing the early 1970s and the 2016 exit polls), is the change in attitudes among the more highly educated groups.    Among the AB group (professional and managerial occupations), in the early 1970s there was a huge margin (50 percentage points) in favour of joining the EU. In the 2016 exit polls, there was a margin of only 14 percentage points  (57:43) in favour of remaining in the EU.   Poor and unskilled changed their minds (as a cohort) less than did the more highly educated groups –  and those more highly educated groups became much more opposed to staying in the EU.

But for Bowles and Carlin, economists had failed the world.  They presented familiar data showing that most economists thought that Brexit would come at some economic cost (and of course, the great and the good –  the OECD, the IMF, the Bank of England, and the UK Treasury shared that view).  And yet the voters had the temerity to ignore these experts.   When I pushed them on the point, they did –  somewhat reluctantly –  accept that it wasn’t necessarily unreasonable for voters to make decisions on grounds other than economic ones (as I noted, most colonial independence movements  –  even the Irish one – probably came at an economic cost).  But it was a reluctant concession –  these were people who could really only see one end in view, less national sovereignty, more global rulemaking, and they could only lament the choices of British voters –  blaming economists for championing policies which had “made the backlash inevitable”.

(The second half the guest lecture was a presentation about a new approach to teaching introductory economics.  It looked quite promising, but the connection between a possible better approach to teaching basic economics and voters in future “being more willing to take advice from economists” seemed tenuous at best.)

As for the Trump phenomenon, I’m also not sure quite how big an event that should be seen as.    The last count I saw gave Hillary Clinton 48.2 per cent of the popular vote, and Trump 46.3 per cent.    Four years ago, the Democratic candidate scored 51.1 per cent of the popular vote, and the Republican candidate 47.2 per cent.   Presidential elections aren’t decided by national popular vote totals (any more than, say, UK parliamentary elections are) but these aren’t big shifts in the overall vote share.  Yes, the presidency changes hands –  as it was going to do anyway –  but a few hundred thousand votes in a few key states and things could easily have been different.  Are economists really to blame for the fact that the Democratic Party chose such a weak candidate –  who largely ignored many of those tight rust-belt states, despite the advice of her own husband?  And whoever is to blame for Wikileaks I doubt it is the economics profession?

In 1984 Ronald Reagan took 58.8 per cent of the popular vote, in 1972, Richard Nixon took  60.7 per cent, in 1964 Lyndon Johnson took 61.0 per cent and in 1956 Dwight Eisenhower took 57.4 per cent.  Those were landslides (in a New Zealand context, electoral landslides –  1972, 1975, and 1990 involved perhaps seven percentage point gaps in overall vote shares).   This was a very tight election, fought between two deeply flawed candidates.  And if Trump’s success may have helped some Republicans in the House and Senate, very few were campaigning on some Trumpesque policy ticket –  whatever the specifics of such a ticket might actually have looked like.  Like them or not, the appointees to the Trump cabinet announced so far, don’t seem a million miles from many of the sort of people who might well have been appointed to serve in any Republican president’s cabinet.  And being a democracy, parties tend to alternate in office.

What was pretty clear as the Treasury guest lecture went on was that the speakers were mostly just pushing a social liberal ideological agenda (as they characterised their concern it was about a “a revolt against liberal tolerance”.  Things were wrong when their side didn’t win and somehow –  weirdly – economists were to blame.  That isn’t just my interpretation of the event –  it was a proposition put to them at the lecture by Professor Jonathan Boston, himself proudly socially liberal.  What wasn’t clear was why our Treasury was aiding and abetting their cause.   (Or for that matter, how  the ascendancy  –  voted in by US voters, well aware of most of his flaws – of such a symbol of the decadence of modern culture as Trump even represents a defeat for the social liberal project.)

In passing, there was one truly fascinating snippet in the lecture.  Bowles is adamant that a much higher level of economic equality is “not hard to create” –  and he treats such outcomes as highly desirable.  According to his research, the level of economic inequality in modern Denmark and Sweden is about the same as that found in ancient hunter-gatherer societies.  It was almost worth venturing into town for the afternoon just for that.

In the same vein, I came across an interesting report from a conference held in the UK last month under the title “Brexit and the economics of populism”.  The conference was attended by a cast of 50 or so academics, journalists, and some leading market economists from across Europe.    There were some very able participants and it looks to have been a fascinating day’s discussion.  The 12 page conference report is well worth reading for anyone with an interest in Brexit, Trump, modern macro and micro policymaking –  and in the attitudes of the (non-political in this case) elites.

What was perhaps striking –  and this is the real link to the Bowles/Carlin lecture here last week –  is that there is no sign in the entire report that anyone who spoke had themselves been a Brexit supporter (even though 43 per cent of the ABs had favoured Brexit). The report captures one questioner noting that it is not unreasonable for people to vote on non-economic grounds, and that is about it.  And the report is full of references to those ill-defined and pejorative phrases “populism”, “xenophobia”, “nativism” and –  heaven forbid –  “nationalism”.  I had to look up “nativism” –  it isn’t a term that pops up much in New Zealand debates.  According to Wikipedia

Nativism is the political position of supporting a favored status for certain established inhabitants of a nation (i.e. self-identified citizens) as compared to claims of newcomers or immigrants

One might play around at the margins with the precise wording, but it looks like a definition that probably describes the overwhelming bulk of voters.  And there will be few elected politicians  (ie people who have actually persuaded people to vote for them) who seriously think that the interests of foreigners rank equally with the interests of citizens.

Next thing people will be having a go at “familism” –  the belief that the interests of one’s own family might rank more highly in one’s own concerns than those of other people’s families, domestic or foreign.

The conference report suggests participants thought governments needed to do better.  And, of course, there are areas in which that is no doubt true.  Often enough, that might involve avoiding hubristic schemes –  like the euro, or the EU on current scale –  in the first place.  Or respecting the principle of subsidiarity –  pushing decisions back to national governments (and perhaps even lower levels of government) whenever possible.  And respecting public preferences and choices.  And acknowledging the sheer limitations of the knowledge of experts in so many areas –  including economics.

But that wasn’t the focus of the attendees at this conference.  Instead, it was a recipe that seemed to have three broad dimensions:

  • a more active role for government, in particular in discretionary fiscal policy (as if debt levels in many of these countries were not already uncomfortably high),
  • putting more decisions at an arms-length from elected politicians (whether delegating more fiscal policy to independent agencies, or promoting international regulatory alignment), and
  • convincing the public that there really were significant benefits from large scale immigration.

In fairness, there was some recognition that dysfunctional housing markets are a major problem, but no speaker or questioner is reported as having favoured extensive land use liberalisation.  Instead, more roles for active government were in view.

The immigration stance, of course, caught my eye.  As the report writer noted there is an “academic consensus that wealthy countries benefit from migration from developing to developed countries”, but most of the comment was devoted to trying to play down the potential costs to relatively unskilled native workers.  I’m sure these people are quite sincere in their beliefs that there are benefits to advanced countries (and their existing citizens?) but I can’t help thinking that if the gains were that real, and it were that important an issue, the advocates would find it much easier to demonstrate the benefits (to the rest of us) than they do.  Perhaps quite often large scale immigration doesn’t do much harm to natives, but there isn’t much sign that does much good either.  In fact, support for large scale immigration –  whether in Europe or Australasia – is often more of an ideological proposition than one grounded in robust evidence.  It seems as much about a desire to change a society –  in ways which natives often don’t want –  than to lift overall economic prosperity for citizens.    (But in defence of the Europeans, at least no one in this conference is reported as advocating for immigration on the specious grounds –  invoked often by our business leaders and the incoming Minister of Finance –  that immigration is needed to fill “skill shortages”.)

If you got this far, you might be wondering what the point of this post was.  I feel somewhat that way myself. But it was partly about getting a few things off my chest, partly about passing along the link to the interesting conference report, and partly about thinking through my reaction to those who ominously go “could it –  Trump, Brexit –  happen here?”       Could what?  A couple of close votes  –  one of which leaves in place a very moderate centre-right government, and the other of which installs a President who seems to have very few fixed views.  In the specific sense, clearly not. We aren’t part of some multi-national entity like the EU, and our electoral system is very different from that of the US.  Then again, perhaps there could be a revolt against decades of economic underperformance, decades of elite indifference to that underperformance, and an extraordinarily high target rate of immigration which changes the character of the country without doing anything apparent to improve its economic performance.  It could happen, but frankly it doesn’t seem very likely right now.  Easier just to keep on pretending everything is fine.



NZ and the UK: strongest performers in their blocs?

An article in yesterday’s Herald caught my eye. In a double-page feature on Brexit, it was headed “Options beyond the EU” and featured some comments from the former New Zealand Minister of Finance, Ruth Richardson.  I was a bit puzzled by the article, which didn’t really seen like a New Zealand article, but wasn’t attributed to any foreign newspaper or wire service.  When I checked it out, it turned out that it was a backgrounder that had run as part of a series in the Telegraph three months ago looking “at four non-EU economies to see if they could provide a model for Britain’s post-Brexit future”.  One was New Zealand.   (The Telegraph had gone so far as to described Richardson as  a”great economic reformer”, although the Herald quietly deleted the “great”.)

Several passages interested me:

Ruth Richardson, a former New Zealand finance minister and a great economic reformer, believes there is a clear parallel between the two nations, and the choice that each will face. “When Britain decided to become very closely connected [with the EU], Britain was regarded as the sick man of Europe,” she says, with the UK “almost on the brink of the International Monetary Fund dictating policy” to it. Similarly, “when New Zealand decided to explore closer economic relations with Australia, we were clearly the sick man of Australasia”.

However, Richardson says, “nations ought not to be trapped by historical perspective”. She believes that the arguments behind a once sensible decision may have shifted. As in business, decisions over a country’s political future should be made on the basis of what will work best in the here and now, Richardson says.

Both the UK and New Zealand have risen to become the strongest performer in each of their respective blocs, and the reasons to pivot towards emerging markets have become clear.


A pair of radical politicians helped New Zealand through this difficult period. Richardson was the finance minister in a Right-of-centre National party government from 1990 to 1993, and her efforts, combined with those of her predecessor, the Labour party’s Roger Douglas, transformed the economy from one at the bottom of the pile to something far more dynamic.

Shaun Goldfinch, a New Zealand-based academic, says that the country moved from being “one of the most hidebound economies outside the former communist bloc, to among the most liberal in the OECD”.

I wasn’t entirely sure that I recognize the pictures being drawn here.

In both cases, it is a picture of economies transformed –  the UK and New Zealand having ‘risen to become the strongest performer in each of their respective blocs’ (the EU and the CER respectively).

The UK entered the (then) EEC on 1 January 1973.  The initial six members of the EEC had been France, (West) Germany, Italy, Belgium, Netherlands, and Luxembourg.  I’m going to ignore Luxembourg in subsequent comparisons, and focus on the five reasonably large initial EEC economies.

For the UK the path to the EEC was pretty slow.  The first de Gaulle veto had occurred in 1963, and the second in 1967.    Over the 1960s, annual UK inflation  was around 1 percentage point above the median of the five EEC countries.  In 1972, just prior to joining the EEC, that gap was 1.4 percentage points.   Things got a lot worse in the following few years, but even then there was only one year –  1975 –  when the UK had the highest inflation rate of these six economies. Italy was typically worse.

And in the 1960s, real GDP per hour worked in the UK is estimated –  using the Conference Board data – to  have been almost exactly equal to that of the median country of the EEC-5.  Britain’s unemployment rate had been slightly below the median of the unemployment rates of those other European economies.

Of course, Britain had its challenges –  economic, and the psychological/political hurdles of the end of empire –  but it was hardly a basket case.

And nor has it, very obviously, gravitated to top of class since then

Here is real GDP per hour worked.

uk gdp phw

The decline in Britain’s GDP per hour worked, relative to those of the EEC-5, ended in around 1980.  And it has gone almost exactly sideways ever since.   Of these five European countries, Britain now only matches the real GDP per hour worked of Italy.  In the other four countries, labour productivity is around a quarter to a third higher than that in the UK.  Perhaps entering the EU staunched the decline, but there were probably a variety of other factors including financial liberalization (financial services being a huge chunk of British exports), the Thatcher reforms, and the end of the post-war catch-up phase.  But……Britain now has a lower level of labour productivity than all but one of these five European peers: it does no better than 80 per cent of the median of these other countries.  Not exactly a “top of class” performance.

One area where they have done better is unemployment.  The following chart shows the UK unemployment rate and the median rate for the same five European countries.  It combines official current OECD data (on harmonized definitions) since 1983, and several years of earlier OECD data from their Historical Statistics: 1960-1988 publication.

uk unemployment rates

Over the last 20 years or so, the UK has clearly done materially better than these five European countries.  Each of the other five is in the euro, but that shouldn’t explain any difference given that these five countries include four of the larger euro-area economies.  But even among those other five countries, the Netherlands has typically had a lower unemployment rate than the UK’s –  although that isn’t so right now.

And what about the New Zealand/Australia comparisons.  Negotiations on the CER agreement began in 1979, and the agreement was signed in early 1983.  Given that there are only two countries in Australasia, I won’t dispute the description of New Zealand by then as the “sick man of Australasia”.  Our economy had been very severely hit by the post-1973 fall in the terms of trade.   The large outflow of New Zealanders to Australia really gathered pace in the 1970s.  Neither country was running macro policy –  or micro policy –  that well, but New Zealand was generally accepted to be lagging somewhat behind Australia.  We compounded the problems with the Think Big energy projects programme in the early 1980s, which temporarily boosted demand, but simply threw away some of the nation’s wealth.

But the story wasn’t totally bleak.  Our unemployment rate, while rising, had been consistently below that of Australia. And over the years when CER was being negotiated, New Zealand’s real GDP per hour worked was about 79 per cent of that of Australia –  alert readers might notice that that is about the same ratio as that between UK GDP per hour worked today and that of the EEC-5 (see chart above).

I’m not about to dispute that lots of worthwhile reforms were done here during the subsequent years.  And I think it is likely –  although hardly certain –  that CER was helpful to both countries (although trade diversion effects were probably material in some sectors).  And there are whole sectors of the economy where I think policy  in New Zealand could reasonably be judged better, at least in terms of encouraging resource utilization, than that of Australia.  The labour market is one of them –  we don’t need elections called on the ostensible grounds of breaking the power of corrupt trade unions.  I know some readers disagree, but I think our approach to retirement income policy is superior to Australia’s.  And I often like to mention that taxi industry, where deregulation has given us a much better outcome than Australia has.

But has it made us the strongest performer in our little two country bloc?  Not really.

Take the real GDP per hour worked comparison, again from the Conference Board.

nz au real gdp phw

The late 1970s were a very bad period, as reflected in these data.  But on this measure things improved a bit of the 1980s –  partly no doubt the unsustainable boom that bust after 1987 –  before tailing off again.  Today, New Zealand’s GDP per hour worked is a little worse, relative to Australia’s, than it was when the CER negotiations got underway.  Perhaps the exam paper was upside down when that “best in class” grade was being awarded?  Of course, both countries are richer, and more open, than they were back then, but Australia has kept on doing a bit better than us.

And a significant part of the liberalization and reform process in both countries was the opening to external trade (not just bilaterally).  Here is the data for exports as a share of GDP.

exports nz and ausNew Zealand’s export share of GDP hasn’t changed in 35 years.

Of course, there are some area in which we do better –  and we have the distinct attractions (to New Zealanders at least) of no snakes or crocodiles.  As I noted earlier, the labour market tends to be one such area.  Here are the unemployment rates for the two countries back to the 1960s (prior to 1986 the New Zealand data are estimates, but good enough to be used by the OECD).  I have taken account of the revised data Statistics New Zealand published earlier this week.

u rates back to 60s

Our unemployment rate has been below that of Australia most years since 1967.  Only on two occasions was our unemployment rate higher – the first episode was in the wake of the post-1976 share and commercial property crash, and the second was in the couple of years after 2009 when Australian commodity prices –  and the associated business investment boom – were at their peak.  We should, of course, welcome the fact that our labour market typically generates less unemployment than Australia’s does, but it is worth mentioning that the gap in our favour is smaller than it was pre-liberalization.

No doubt our economy is rather more “dynamic” than it was –  although it is fair to wonder quite what that words mean specifically –  but it isn’t obviously much more successful., not even relative to Australia.  Compared with the late 70s, both countries now have low and stable inflation –  but their inflation rate is nearer target than ours.  Both countries have low levels of public debt, but in flow terms at present our government accounts are roughly balanced while theirs are still in deficit.    We have a slightly larger reliance on foreign capital (larger net IIP position as a share of GDP) than Australia does, but perhaps they have a slightly more compelling story about the new business investment (tradables sector) that capital has financed.  Both countries have seriously dysfunctional housing markets – it is hard to tell which of two bad performers is worse.  Oh, and New Zealanders are still (net) moving to Australia, not coming home again.

It is election day in Australia.  I was amused when Malcolm Turnbull became Prime Minister and talked about wanting to emulate New Zealand’s approach to economic reform.  In the intervening period, there hasn’t been much sign of reform in Australia –  any more than there had been in New Zealand –  but for all Australia’s challenges, it has still managed more productivity growth in recent years than New Zealand has.

real gdp phw nz and aus

As I noted earlier, the United Kingdom has hardly been a top-of-class performer in Europe in recent decades.  The sobering thing is that over the last few decades, Australia –  with all its newly developed mineral wealth –  has managed to do no better on the productivity front than just about keep pace with the UK.  New Zealand, of course, couldn’t even manage that.

real gdp phw nz aus uk

If Britain is searching for lessons and models in a post-referendum world, New Zealand might offer a model of good intentions.  As for outcomes, not so much.








The End of Alchemy?

I’ve been reading recently a couple of books by former officials, the common theme of which is probably “avoiding the next collapse”.

Mohammed El-Erian spent much of his career at the IMF, and at one stage was even touted as an outside possibility to become Managing Director of the Fund (being Egyptian when people were trying to break the European lock on the job).  These days he works for Allianz, the big German insurance and asset management company, and previously ran PIMCO, a major subsidiary of Allianz.   I’ve always been a bit skeptical of El-Erian but picked up his book The Only Game in Town –  which a reader had kindly passed on  – with interest.   His key idea is that there has been too much reliance on central banks in the last decade to stimulate activity, and that countries need a wider range of policy responses, better targeted at the underlying issues, to get us back on a more sustainable path.

Initially it sounded plausible, and there is some interesting material in the book, but I came away unconvinced that El-Erian really had much of significance to add to the current debate.   A key part of his argument rests on the not-uncommon line that global monetary policy is incredibly stimulatory (the same line Graeme Wheeler runs here), which gives little weight to the idea that the neutral or natural rate of interest might have changed (fallen) quite substantially.  The fact that advanced country inflation is so low, despite the low interest rates, suggests there isn’t very much stimulation going on.  And there are external reasons to think that neutral interest rates have fallen –  notably the falling rates of population growth (involving less need for new capital) and the declining rate of productivity growth (also likely to associated with a reduced demand for new capital).  If so, central banks haven’t been the heroes of the last few years (as El-Erian’s tale has it), but rather bureaucrats sluggishly recognizing and reluctantly adjusting to the changing external conditions –  often enough champing at the bit to take interest rates back up to levels that might have been appropriate a decade ago, but simply aren’t now.

And yet in the index to  El-Erian’s book there are no references to neutral or natural interest rates (let alone Wicksell), and no references to demography or population growth rates.  In the text there are many more references to PIMCO than to productivity.

Of course, markets have often also been slow to recognize what has been going on  –  and probably no one has a fully convincing answer –  but most central banks deserve little of the praise El-Erian bestows on them.

Of course, his praise of central banks is partly a rhetorical device – a stick with which to beat governments, most of whom have done little in the way of structural reform in recent years.  But he doesn’t actually have much specific to offer on boosting productivity growth. And I’m also more than a little sceptical because of El-Erian’s enthusiasm for multilateral solutions (“the world needs to return to the wisdom of strong multilateralism’) –  perhaps a not unexpected enthusiasm from a former senior IMF official and quintessential internationalist.  In a book published only a few months ago, El-Erian laments the seeming inability of the EU to deliver on their “ever closer political union”: perhaps he might lament it, but few citizens of European countries seem to.  He can’t seem to face the alternative –  that the process might actually be about to head in reverse.    Perhaps even less relevantly, he calls for reforms of the IMF as key part of his list of desirable changes.  Whatever the answers to the current problems ailing the world, I find it difficult to see that:

  • giving the IMF more money
  • giving China more say
  • removing the European lock on the MD job, and
  • strengthening the ability of the Fund “to name and shame countries”

is a material part of the answer.  What legitimacy, one might reasonably wonder, might the IMF have?  What interests does it pursue?  And even if it had legitimacy, none of those measures are ever likely to materially change economic outcomes for the better.

But the main point of this post was to write about The End of Alchemy, by Mervyn King, the former Governor of the Bank of England.  It is a book prompted by the financial crisis of 2008/09, but it isn’t directly about that crisis.  It isn’t a memoir. King suggests that such books are “usually partial and self-serving” –  no doubt, but surely readers can compare and contrast and reach their own judgements (for example, I found his former boss, Alistair Darling’s account of the crisis very useful) – and reckons that future historians can have his account “when the twenty-year rule permits their release”.  Of course, British taxpayers can’t force former Governors to write a memoir, but when a longstanding Governor (including through the biggest crisis in modern times) of considerable intellect and capacity with the pen retires laden with state honours (Knight of the Garter and peer of the realm –  Lord King of Lothbury)  perhaps it wouldn’t have been unreasonable to have hoped for a bit more accounting for the crisis and his role in it.  Ben Bernanke’s book won’t be the last word on the US crisis, but the debate is better for it having been written.

Following the end of his Bank of England term, King visited New Zealand a couple of years ago, and I had the opportunity to participate in a couple of roundtable discussions with him at the Reserve Bank.  I wasn’t the only person who came away from those sessions struck by his reluctance to acknowledge any mistakes whatsoever.  Even tactically, after such a costly banking crisis and disruptive few years, one might have expected some minor concessions, but there was nothing. Senior people tend to look better, more credible and authoritative, for being seen to recognise that all humans –  even them –  make mistakes, even if just small ones.  It was, for example, no secret that in the years prior to the crisis King had had little or no interest in the financial stability functions on the Bank of England.

In many ways King’s book is much more ambitious than any memoir, and it is a stimulating contribution to a different debate: how should we best organize banking systems and financial regulation to produce the best long-term outcomes for the countries of the world.  It is quite ambitious in its reach –  both in the material he covers, and in audience he aims at.  It is explicitly not a book aimed just at economists, but at “the reader with no formal training in economics but an interest in the issues”.  I suspect the book will stretch such readers, but mostly in a good way –  even if I disagree with him in a number of areas, I’d recommend it.  There is a lot of context and background material that is often taken for granted (as well as fascinating bits of obscure history such as the monetary arrangements of French overseas territories in WWII), and King writes fluently and authoritatively.  The downside, perhaps, is that there is so much background, that King devotes less space to fleshing out the case for his alternative perspective than might have been desirable.

There is a lot of stuff in the book that I like.  King is very skeptical of central banks’ forecasting capabilities –  which, of course, didn’t stop him presiding over the development of the current forecast-based system at the Bank of England –  and has long been recognized as a sceptic of the euro.  He is one of the few senior (establishment) people in Europe willing to openly discuss –  and not deplore – the possibility of a break-up of the euro.

And some of his practical policy suggestions seem very much along the right lines.  Higher capital ratios for banks, with an important role for a more constraining leverage ratio (a tool used by most bank regulators, but eschewed by our own Reserve Bank), are appropriate responses to the high (demonstrated) risk that governments will bail-out failing banks, and to the limited ability of apparently-sophisticated capital models to truly capture the changing nature of the risks around complex credit exposures.  Higher required capital ratios, especially for large banks, come at little or no efficiency cost, especially in jurisdictions where the tax system treats debt and equity reasonably neutrally.    And higher liquidity requirements are a prudent part of any system in which, come a crisis, a central bank will act as lender-of-last-resort in the face of intense liquidity pressures.  Requiring banks to hold a larger proportion of liquid assets, so that they can’t just “force” central banks to lend on assets that are highly illiquid even in good times (which is what happened, including in New Zealand, in 2008/09), is a step in the right direction.  Most central banks have moved this way since the 2008/09 crisis, and market pressures have (for now) worked in the same direction.  King suggests that what has been done already is not enough.

But I’m still left uneasy about some key aspects of his argument.

For example, he puts a lot emphasis on the point that credit to GDP ratios are a lot higher than they were a few decades ago (although in places like New Zealand and Australia data suggest they may still be lower than they were in the 1920s).  In this context he discusses the possible contributions of falling real interest rates and a liberalization of domestic and international financial systems.  But in many countries, the largest single component of domestic credit is lending for housing.  And in many countries –  the UK and New Zealand among them –  it is now widely recognized that planning restrictions have created artificial scarcity in urban land supply, bidding the prices of urban land and houses.  Younger generations purchasing houses need to borrow more to buy such houses (in effect, borrowing from the older generations, including –  indirectly –  the sellers),  That raises the level of gross credit in an economy, and perhaps even erodes the financial stability of the system, but it is best understood as an endogenous response to the binding planning restrictions (especially in combination with population growth pressures), not as something driven out of the banking system.  And yet in a book of almost 370 pages there is no mention of this factor at all.    Perhaps banks have aided and abetted the rigging of urban land markets by governments, but the fault surely largely rests with governments not banks.

His historical account of the evolution of central banks, and particualry of the Federal Reserve, is entirely conventional, in playing up the number and severity of  the crises the pre-Fed United States experienced. But he doesn’t seriously engage with either the argument that the crises were themselves partly the outcome of the extensive regulatory restrictions the US had in place in those pre-Fed decades, nor with the experience of some other countries –  notably Canada – which operated for decades with no central bank and no systemic crises.  This isn’t the opportunity to review all the arguments and evidence on those issues, but on my reading King comes down far too readily on the side of the instability of the system –  perhaps with some of the zeal of a convert.

In many ways, Britain itself is a good illustration of the point. Prior to 2008/09, the last really serious systemic financial crisis in the United Kingdom was that prompted by the outbreak of World War One (an episode King discusses, and which is more fully dealt with here).  That crisis wasn’t really the result of any systemic weaknesses in the financial system –  rather governments suddenly changed the rules of the game, having more pressing geopolitical concerns in mind.  Even the crisis in the United Kingdom in 2008/09 was primarily the result of the troubled banks’ exposure to offshore markets –  loan losses on UK domestic banking books never posed a systemic threat.  The key offshore market, the US, was one that was highly distorted by other regulations.

King concludes his book thus

A long-term programme for the reform of money and banking and the institutions of the global economy will be driven only by an intellectual revolution. Much of that will have to be the task of the next generation. But we must not use that as an excuse to postpone reform. It is the young of today who will suffer from the next crisis –  and without reform the costs of that crisis will be bigger than last time.

But I simply didn’t find persuasive the claim that the costs of the next crisis will inevitably be bigger than the last one.  After all, in most countries the experience of the 2008/09 recession was much less severe than that of the Great Depression –  the last really big common advanced country crisis.  Perhaps this points to one of the other issues that King didn’t really address.  If the extent to which GDP per capita and productivity measures are today so far below the pre-crisis trend level is all down to the financial crisis itself, and the associated failings of the financial system, then perhaps King’s case gets stronger.  But he doesn’t make the case for that claim, and since the productivity slowdown was already underway well before the financial crisis, it isn’t necessarily an easy case to make successfully.

Since I got to the end of the book, the title itself has been troubling me.  King is careful to define his “alchemy”

By alchemy I mean the belief that all paper money can be turned into an intrinsically valuable commodity, such as gold, on demand and that money kept in banks can be taken out whenever depositors ask for it.  The truth is that money, in all forms, depends on trust in its issuer…..For centuries, alchemy has been the basis of our system of money and banking.

No one, surely, disputes the importance of trust in a market economy. But if there are distinctive characteristics of  the issue as it affects money and banking, the issues around trust aren’t unique to money and banking.  I trust that the food on sale at the supermarket hasn’t been poisoned.  If ever widespread doubt arises about the validity of that assumption, there will be serious economic disruption.   Perhaps we could prosper with a different banking system –  most practical alternative suggestions seem to me unlikely to make very much difference –  but the West has done quite astonishingly well with the one it has (notwithstanding the current mediocre decade).

And King simply does not seriously engage with the question of how government, bureaucracies, and “government failure” have given risen to some of the distinctive challenges around the banking system.  If, for example, a tendency to bail-out failing banks is a feature of the political system, if regulators tend too easily to see things from the perspective of the regulated, and so on, how confident can we be in the robustness of alternative policy models, which depend on the active ongoing decisions of a new generation of policymakers and officials?  I think King is partly right to describe the last crisis as not primarily the fault of particular individuals –  many of whom were responding to the incentives they faced –  but have the political and bureaucratic and market incentives really changed that much?     Would, for example, Gordon Brown (keen on promoting the City of London as a global banking centre) have appointed Mervyn King as Governor in 2003 if Mervyn King had been known to be all over the issue of financial stability and actively making the case for much tighter controls on banks and the banking system?   What is it that means those same incentives and constraints won’t be at work again as the memory of the last crisis fades?

King devotes some space to the debate as to whether monetary policy should be used to lean against asset price booms and the build-up of credit (or just focus on the inflation target, in the upswing, and after any bust).  This was a major debate at the Bank of England –  including at the Monetary Policy Committee level –  as far back as the late 1990s.  King seems to hanker for the “do something” camp –  that perhaps “doing something” with monetary policy might have led people to reassess their future income prospects earlier, and limited the extent of the imbalances that built up. Of course, as he recognizes there were problems. In a world of national policymaking, a central bank that tried to lean against the boom would tend to see a higher exchange rate, and in some respects a more unbalanced economy.

I’ve always thought that the other problem was that –  thankfully –  central banks typically have a rather constrained form of independence.  Had the Fed or the Bank of England –  or the RBNZ for that matter – tightened monetary policy materially more aggressively during the boom, the pressures on policymakers to change the target –  or the powers of the central bank –  would have been great.  In Britain, the inflation target is set each year by the Chancellor –  I find it scarcely credible that Gordon Brown would have welcomed a years-long undershooting of the inflation target he himself had set, and not just as a result of “forecasting errors”, but as a matter of deliberate policy choice.  Perhaps there is something in the old line about the job of the central bank being to remove the punchbowl just as the party is getting into full swing, but the actually the waiter can really only remove the punchbowl with the consent of the partygoers.  In the last boom, there was simply no appetite anywhere for materially tougher policies –  and no one knew the future, and many credit booms (even those of 00s) haven’t ended badly.  King rightly stresses the importance of “radical uncertainty”, but central banks and financial regulators are no more gifted with insight or fine judgement than the rest of society.  And they face institutional incentives, for good and ill, as the rest of us do.

King is clearly uneasy about the current low level of world interest rates. And in one sense, he is right to be so –  we all want to better understand the underlying forces that have delivered such interest rates (not just policy rates, but the extraordinarily low bond yields).   And it is also, clearly, correct that monetary policy is not an instrument that can generate the sort of faster long-term productivity growth that most countries would now welcome.  But to suggest, even if only implicitly, that somehow things would have been materially  better if only policy rates had not been held so low for so long seems more like wishful thinking than hard-headed analysis.  If he has such analysis, it didn’t make it into the book.

It is an interesting and stimulating book, well worth reading.  In a way it is shame that he overreaches.  His mostly-sensible actual policy recommendations do not, to me, seem to represent anything like the sort of transformation his title implies.  But nor, I suspect, is such a transformation needed.

Is NZ less receptive to immigrants than Australia?

Tyler Cowen had an interesting and thoughtful piece on Marginal Revolution yesterday, headed Why Brexit happened and what it means. He summarises his answer as “ultimately the vote was about preserving the English nation” –  on this telling, primarily about immigration. And despite his own pro-immigration inclinations, he runs a sympathetic interpretation of why a majority of British voters might reasonably have voted as they did.

He runs a story in which there is something distinctly different about Britain (along with Japan and Denmark)

One way to understand the English vote is to compare it to other areas, especially with regard to immigration.  If you read Frank Fukuyama, he correctly portrays Japan and Denmark, as, along with England, being the two other truly developed, mature nation states in earlier times, well before the Industrial Revolution.  And what do we see about these countries?  Relative to their other demographics, they are especially opposed to very high levels of immigration.  England, in a sense, was the region “out on a limb,” when it comes to taking in foreigners, and now it has decided to pull back and be more like Denmark and Japan.

The regularity here is that the coherent, longstanding nation states are most protective of their core identities.  Should that come as a huge surprise?  The contrast with Belgium, where I am writing this, is noteworthy.  The actual practical problems with immigration are much greater here in Brussels, but the country is much further from “doing anything about it,” whether prudently or not, and indeed to this day Belgium is not actually a mature nation-state and it may splinter yet.  That England did something is one reflection of the fact that England is a better-run region than Belgium, even if you feel as I do that the vote was a big mistake.

I’m not sure I’m totally persuaded by the idea that immigration was the main factor explaining the British vote.  One of a package of issues no doubt, but whether it is the main story is another question.  After all, Lord Ashcroft’s poll asked thousands of people why they had voted as they did.  Here were the results

Leave vs Remain podium rankings

  • Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

Among both Labour or Tory voters the biggest single reason for voting Leave was, on respondents’ own accounts, “the principle that decisions about the UK should be taken in the UK”.    If governments are going to do something as silly as ban powerful vacuum cleaners, at least it should be our own government that does it.

Perhaps voters were reluctant to own up to concerns about immigration as the most important factor?  And perhaps immigration and the changing character of the country was important beneath the surface –  as the economic underperformance of the last nine years has probably been.  But it isn’t an open and shut case that this was mostly an immigration referendum.  After all, stories – accurate or not –  about the EU wanting to ban bendy bananas, or force people to use metric units, have had considerable traction in Britain for decades.

And if you were British you might reasonably think you would be at least as well off having your own government makes the choices for you.  Things might seem different in the rest of Europe where, for example,

  • in 1970, Spain, Portugal and Greece were under authoritarian dictatorships,
  • in 1980, the Baltic states didn’t exist as recognized entities, and Poland, Rumania. Bulgaria, the Czech Republic, Slovakia, Slovenia, Croatia and Hungary were all under failing Communist rule (and four of those countries didn’t even exist independently),
  • Finland Ireland, and Norway (the latter not in the EU, only the EEA) weren’t independent countries as recently as 1900,
  • Germany had its unsavoury 20th century history (accompanied by Austrians cheering for the Anschluss),
  • Denmark, Belgium, Netherlands and Luxembourg were all occupied by Germany for several years,
  • Having been defeated by Germany in 1871, and narrowly  (and at vast cost) winning World War One, France then endured the shame of German occupation in World War Two, the collaborationist Vichy regime, and the crisis of 1958,
  • Malta’s 40 years between independence and joining the EU was the historically abnormal self-rule phase.

It doesn’t leave many countries where citizens can look back over the last 150 years and say “yep, we ran ourselves over long periods of time pretty well really”.   But Britain did. Now, as we know, there is plenty of anti-EU sentiment in much of the rest of Europe as well, but it seems quite readily understandable, just in terms of their own country’s history, that UK voters would prefer their own governments to make decisions for them.    And it doesn’t take a huge political and bureaucratic edifice to establish a free trade area, or a mutual external defence arrangement (such as NATO).

Having said all that, what really prompted me to write this post was this line in Cowen’s post.

Of course, USA and Canada and a few others are mature nation states based on the very idea of immigration, so they do not face the same dilemma that England does.  By the way, the most English of the colonies — New Zealand — has never been quite as welcoming of foreign immigrants, compared to say Australia.

I’m at a loss to know what he is basing that final sentence on.  For better or worse –  and given the economic opportunities here, I think it has been mostly for the worse –  that proposition seems to be defied by the data.

At times, I’ve had people run the line to me that since in 1500 the non-indigenous populations of New Zealand, Australia, Canada and the United States were all, essentially, zero, and since New Zealand has by far the smallest population of any of those countries we must have been less open to immigration.  But those other places started European settlement and immigration earlier than we did –  and were closer to Europe, at times when travel costs (mostly elapsed time) mattered hugely.

I’m going to start my comparisons from 1870.  That is partly because I was using the Maddison database and its first annual New Zealand population numbers are for 1870.  But it also seems reasonable on other grounds. In both New Zealand and Australia the influxes (and outflows) associated with the respective gold rushes were over by then, and by 1870 the New Zealand Land Wars were winding down –  never thereafter was there any serious question about settler control of the North Island.  The large scale Vogel immigration and public works programme began shortly thereafter.

Here is a chart showing the total populations of New Zealand and Australia since 1870, both normalized to 100 in 1870, and done in logs so that readers can see changes in growth rates over time.

aus and nz popn since 1870.png

Over the full period –  145 years – New Zealand’s population has grown materially more rapidly than Australia’s.  Of course, the largest differences were in the first decade, but the gap hasn’t narrowed since.

I’ve often run the argument that New Zealand’s post-WWII immigration policy was materially misguided, at least on economic grounds, given the absence of new favourable productivity shocks or technological opportunities that would support top tier incomes for a rapidly growing number of people in these distant islands

Here is same chart starting from 1945.

aus and nz popn since 1945


You can see the period from the mid 1970s to the late 1980s when New Zealand had very low rates of net immigration, but over the full period New Zealand’s population growth has still modestly exceeded that of Australia.

And here is the most recent period since 1991 –  which uses official New Zealand population data, and ties in quite well with the change in immigration approach in New Zealand that largely prevails to today.

aus and nz popn growth since 1991

Again, our population growth has been a bit faster than that of Australia.

Now it is perfectly true that in the immediate post World War Two period, Australia was much keener on taking continental European migrants than we were.  Then again, in the 1960s and 70s we had large inflows of Pacific Island migrants, and there was nothing comparable in Australia.

But, and here is my other key point, we’ve had faster population growth than Australia even though we’ve had huge outflows (net) of New Zealand citizens, that swamp any outflow from Australia of Australian citizens.

Here are the numbers on the total net outflows of New Zealand citizens for each decades since the 1950s

Net PLT outflow of NZ citizens (March years)
1950-59 -2494
1960-69 -34,057
1970-79 -161,231
1980-89 -229,874
1990-99 -146,229
2000-09 -263,651
2010-16 -138,705

That is a total of 976000 people, from a country which at the start of the period had only 2 million people and now has around 4.6 million people.

Some of the people who left will have died by now, but official estimates reported by Statistics New Zealand suggest 600000 New Zealand born people living abroad (and perhaps 1 million New Zealand citizens living abroad).     Australia has five times the population of New Zealand, and yet estimates of the total number of Australians living abroad are around one million.

Yes, there are differences in rates of natural increase from time to time, but the big story of recent decades in particular has been one in which New Zealand has taken materially more non-citizen migrants (per capita) than Australia has, reflected in the slightly faster population growth we’ve had despite the huge continuing outflow of New Zealanders.

In fact, you can see this in the respective policy-controlled bits of the immigration programmes.   This chart is cobbled together using data since the late 1990s on Australian permanent migration approvals under their Migration stream and Humanitarian stream, and New Zealand data on residence approvals. To the Australian numbers I’ve added the net inflow of New Zealand citizens to Australia, and to the New Zealand numbers the (much smaller) net number of Australian citizens moving to New Zealand.

migration rates nz and aus

Most years, the rate of permanent immigration of non-citizens to New Zealand has been higher  –  often materially higher – than that to Australia.  And the Australian numbers have dropped back since the end of this chart as the flow of New Zealanders moving to Australia has fallen back.

Perhaps Cowen had some less numerical basis in mind for thinking that New Zealanders have been less welcoming of immigrants than Australia.  But I’m not quite sure what it could be (although there is always this site).  And given our continuing economic underperformance, it is quite remarkable how receptive New Zealanders have been to such high rates of immigration (roughly three times per capita the size of net non-citizen inflows to the US and UK) –  especially as the programme is repeatedly sold as an economic-based measure, a “critical economic enabler” in the words of the government department responsible for immigration policy matters.





More states or fewer?

I was going to write something today about monetary economics, the 2008/09 crisis, and reform options for financial systems and economies, but….the Brexit aftermath is pretty much all-absorbing, at least to a politics/economics/geopolitics junkie.   So far, it is difficult to see why anyone would be very surprised about what has happened since Friday, but of course it is very early days.  Media coverage seems dominated by perspectives from those –  including the journalists writing the stories – almost personally affronted that the populace of a major, quintessentially moderate, country could have voted as they did. The stories highlight, without really needing to try, the disconnect between what might be loosely described as a metropolitan urban liberal mindset that downplays the local in favour of a network of internationalist rule-setting, and what might loosely be described as a more small-c conservative mindset that puts a greater emphasis on the local and the national as the basis for rule-setting and governance.  Peter Hitchens highlights this contrast in his column here – highlighting how detached the majority of MPs of both main UK parties have become from the views and attitudes/priorities of very large shares of their voters.  The situation probably isn’t much different in a whole variety of advanced countries.

But what got me particularly interested over the weekend was talk of the United Kingdom itself breaking up.  Of course, that started a long time ago.  The Irish Free State (as it was then called) became independent in 1922.  If Northern Ireland should eventually reunite with the Republic of Ireland –  and frankly I would be surprised if it happens in the next few decades, given the risk of reigniting the decades-long civil conflict – it would only be the culmination of the Home Rule movement that was convulsing British politics as far back as the 1880s, and which saw Britain facing the possibility of an army mutiny and civil war on the eve of World War One.

The chances of Scotland becoming independent seem somewhat higher –  after all, the Out vote got 45 per cent in the last referendum only two years ago.  If the headline-grabbing opportunity to push for a new referendum is the desire to stay in the EU –  and for all the hype, even 38 per cent of Scots wanted out –  they had better hope there is still an EU to belong to a decade hence.  But even if not, is the idea of Scottish independence so different from that of Irish independence –  which we all now take for granted, even if (at the time) it probably came at a considerable economic cost?  Scotland had been independent for hundreds of years, and if it did well economically from the Union and its people played a huge role in the British Empire, who could begrudge them the right to govern themselves?

After all, although it wasn’t always so, the people of England and Wales make up 90 per cent of the population of today’s United Kingdom.   Even without Scotland and Northern Ireland, England and Wales would be the fourth most populous country in Europe, just a little behind Italy.

But then I got thinking about other countries.  Hasn’t a move towards more countries been underway for some considerable time?  The unification of Germany and of Italy were huge developments in the mid 19th century, but they were largely completed by 1870.   Our own Land Wars finished around the same time, securing a single state entity on these islands. The US grew hugely (in territory) during the 19th century, but had largely reached its current size with purchase of Alaska (from another large state) in 1867.  Even the acquisition of Hawaii was almost 120 years ago now.

I found a list of countries ordered by population in 1900.  Here was the 25 largest:

China 415,001,488
Indian Empire 280,912,000
Russia 119,546,234
USA 75,994,575
Germany 56,000,000
Austria-Hungary 51,356,465
Dutch East Indies 45,500,000
Japan 42,000,000
United Kingdom 38,000,000
France 38,000,000
Italy 32,000,000
Ottoman Empire 30,860,000
Spain 20,750,000
Brazil 17,000,000
Mexico 12,050,000
Korea 12,000,000
Northern Nigeria 8,500,000
Egypt 8,000,000
Morocco 8,000,000
Philippines 8,000,000
Southern Nigeria 7,500,000
Siam 7,200,000
Persia 7,000,000
Romania 6,630,000
Belgium 6,136,000

Of these, the two parts of Nigeria (both then administered by the UK) are now one country.  Quite a few of the other countries are much the same as they were then, subject to some (mostly relatively minor) border adjustments (eg the return of Alsace-Lorraine to France).

But the bigger story surely is the break-ups.   What was the United Kingdom is now two countries, the UK and Ireland.  What was Korea is now –  at least for the time being –  two countries, North and South Korea.  India as it was is now Sri Lanka, India, Pakistan, Bangladesh and (depending where the boundary lines were drawn) Burma.  And the erstwhile Russian, Austro-Hungarian, and Ottoman Empires have split into dozens of new independent countries between them.

What of today’s 25 most populous countries?

China 1,376,048,943
India 1,311,050,527
USA 321,773,631
Indonesia 257,563,815
Brazil 207,847,528
Pakistan 188,924,874
Nigeria 182,201,962
Bangladesh 160,995,642
Russia 143,456,918
Mexico 127,017,224
Japan 126,573,481
Philippines 100,699,395
Ethiopia 99,390,750
Vietnam 93,447,601
Egypt 91,508,084
Germany 80,688,545
Iran 79,109,272
DR Congo 77,266,814
Turkey 78,665,830
Thailand 67,959,359
United Kingdom 64,715,810
France 64,395,345
Italy 59,797,685
Tanzania 53,470,420
South Africa 54,490,406

Of these countries, only the last two comprise what were smaller entities in 1900 –  and neither is, perhaps, an advert for the cause of ever-larger unions.   Tanzania was previously the colony of Tanganyika and the protectorate of Zanzibar (ruled by a Sultan, under British oversight).  Zanzibar was granted independence in 1963, but this was quickly followed by a bloody revolution, at the end of which Zanzibar was absorbed (semi-autonomously) into the new Tanzania.  And, of course, South Africa in its current legal form was the fruit of the Boer War, essentially a war of conquest in which –  at great cost –  the British Empire and the British colonies beat the Afrikaaner states.

Have there been other mergers attempted?  Well, yes, after World War One the artificial state of Yugoslavia was created by the powers.  That has now long gone.  Czechoslovakia also emerged from that settlement –  also (peacefully and successfully) gone.  In the 1950s there was political union between Egypt and Syria: it last for all of three years.  The British created the Federation of Rhodesia and Nyasaland in the 1950s, and it was also gone a decade later.

Can one think of exceptions?  No doubt.  Various colonial enclaves have been reabsorbed by the surrounding power, peacefully or otherwise –  Goa, Hong Kong, Macau.    But there isn’t much else for more than 100 years, and none that I can think of where the voluntary choice of the respective populaces has led to the formation of larger states from smaller states (happy to hear if I have forgotten any).  Germany reunited –  but then it never separated voluntarily, and indeed in 1945 the intention was never two separate states.

None of this should really be very surprising.  The other great trend of the last couple of hundred years has been towards democratic government. People clearly  seem to want to rule themselves with – and be governed by  – people with whom they feel some significant sense of common identity and shared perspectives (which might be ethnic, or religious, or linguistic, or simply historical).  Little really –  in the scheme of things –  divides New Zealand and Australia, and yet there is no great appetite for the two to become one.   The metropolitan elites might wish it were otherwise –  and might even believe quite genuinely that everyone could be better off it only things were done their way –  but the citizens of the world show little sign of being convinced by their story.  Are the people of the world poorer as a result?  Possibly –  despite the huge volumes of cross-border trade –  but some things seem to matter more to most of them.

And it isn’t as if the trend towards more and smaller states looks like having run its course.  Even in Western Europe, there is Scotland, demands from Catalans for independence, and the ever-present question of what unites Belgium other than, say, a football team.

In that light I was quite puzzled by Wolfgang Munchau’s FT column today. In many ways it was a hardheaded piece, noting that the risk from the UK referendum for the rest of Europe may be greater than those for the UK.  Highlighting Italian risks in particular –  and Italian stocks fell savagely on Friday –  he ends

To prevent such a calamity, EU leaders should seriously consider doing what they have failed to do since 2008: resolve the union’s multiple crises rather than muddle through. And that will have to involve a plan for the political union of the eurozone countries.

How he imagines that the citizens of the Eurozone countries will ever agree to political union, especially now, is beyond me.    I guess the traditional European elite approach is not to give them a say.

UPDATE: For anyone wanting a more systematic treatment of some of these issues, see Alesina and Spolaore The Size of Nations (my copy of which I finally found on my shelves).  They devote an entire chapter to the EU.  In a book published in 2005 – with an expanding EU, and the general contentment with the early years of the euro –  they seem (perhaps understandably) slightly  uncomfortable with how the EU fits with their general model in which lower trade barriers and fewer wars would typically result in more states, not fewer.  But they conclude their EU chapter boldly: “Quite simply, it is not possible for Europe to become a federal state”.