An alternative perspective on emissions and immigration

I’ve now got off my chest my annoyance at some of the “playing distraction” rhetoric David Hall used in his Newsroom piece responding to my column urging that the Productivity Commission inquiry into a transition to a low-emissions economy should at least consider the potential role of immigration (in boosting emissions in the past, and perhaps in offering a lower-cost abatement tool in future). But I wanted to come back to some of the more substantive issues Hall raises.

Bear in mind that my column was based on a submission to the inquiry the government asked the Productivity Commission to undertake.  The terms of reference which the Commission is operating under are focused on New Zealand’s own policy responses, and how to (maximise the benefits and) minimise the costs of meeting the target which the government has set.    The focus is –  rightly in my view – on national interests (costs and benefits to New Zealanders) now that the New Zealand government has already factored in its response to the (actual and perceived) global imperatives, in establishing an emissions reduction target under the Paris climate agreement.    Having determined how much reduction in emissions we will aim for, and made those commitments to other countries in an international context, the challenge now is how best to adjust, and what mix of policy instruments might enable us to deliver on those commitments.

Hall argues that “what matters from the perspective of Earth’s atmosphere is what people emit, not where they emit it”.  Maybe so, but the New Zealand government is not now making policy for the “Earth’s atmosphere”, but around an emissions reduction target it has signed up to for New Zealand.  In that context, where the emissions happen matters.

My submission was firmly set within that sort of framework –  one set by the government and recognised by the Commission.  In fact, in the Terms of Reference the three ministers were using exactly the same sort of analytical framework I was.

New Zealand’s domestic response to climate change is, and will be in the future, fundamentally shaped by its position as a small, globally connected and trade-dependent country.  New Zealand’s response also needs to reflect such features as its hjgh level of emissions from agriculture, its abundant forestry resources, and its largely decarbonised electricity sector, as well as any future demographic changes (including immigration).

The focus of my submission was, in many respects, that the Commission had simply ignored that last phrase.  Population growth matters to emissions, all else being equal, and in New Zealand –  where non-citizen immigration is so (a) important, and (b) fully within government control –  population growth can, via immigration policy, and should be considered as an instrument to reduce emissions.    It might be uncomfortable for MBIE (champions of immigration), or for the Ministry for the Environment, but the point of Productivity Commission inquiries isn’t to make life comfortable for established interests.

Hall is clearly uncomfortable with the idea –  the pretty basic fact –  that increased populations increase emissions, all else equal.   But again, discomfort doesn’t change the stylised facts.  As he acknowledges, “road transport emissions have increased by 78 per cent since 1990”, but…..

But the fault here lies with New Zealand’s over-reliance on private vehicles. Migrants (and citizens) contribute to road traffic by necessity, because alternative means of transport are less available, indeed far less so than many migrants are used to, coming from places where travel by trains, trams, cycles and footpaths is not unusual. If low-carbon alternatives in places like Auckland were more serviceable, migrants would doubtlessly utilise them, as indeed would citizens. And if the excuse for underinvestment is the lack of markets of sufficient scale, then population increase and cultural change will drive progress.

In other words, if governments and people did things differently than they actually did, emissions would have been lower.  No doubt, but that isn’t really the point.   Each of the alternatives Hall proposes would have had both public and private costs –  and the point of the exercise is to keep those costs to a minimum.  Perhaps he’d prefer a world of light rail and trains.  Most citizens don’t seem to, at least when confronted with real world costs –  and the economics of such proposals in New Zealand is generally shocking.    Actual transport emissions would have been a lot lower than they are now if, at the extreme, the population had been constant since 1990.  And if –  and it is a proposition for debate –  the immigration that so substantially boosted the population had few, no, or even negative productivity gains for New Zealanders, those emissions reductions could have been achieved at little or no economic cost at all.    There are plenty of ways to reduce emissions, but the challenge is to find the most cost-effective ones or –  in markets –  to set up the instruments in a way that allows private agents to identify the most cost-effective means of adjustment.

In my column and submission I had noted that it is generally accepted that New Zealand typically faces quite high marginal abatement costs to reduce emissions, relative to those faced by most other advanced economies.  When I wrote that, I wasn’t even thinking of it as a controversial proposition.  But Hall wasn’t happy with the claim.

This contradicts Reddell’s claim that “all informed observers recognise that the marginal abatement costs in New Zealand, through conventional means, are high”. I’ve written for Pure Advantage about the potential of forests – both production and permanent forests – to offset agricultural emissions in a way that isn’t only cost-effective but potentially profitable. This is corroborated by other “informed observers”, such as the Royal Society of New Zealand, the Parliamentary Commissioner for the Environment and Vivid Economics. The latter’s Net Zero in New Zealand report highlights other low-cost opportunities in energy efficiency, heating technologies, agricultural efficiency, and technological advances in methane vaccines and cheaper electric vehicles.

I’m happy to alter “all informed observers” to “most observers”, but I’m not resiling from the basic point.   Warwick McKibbin of ANU, who has done a lot of modelling on climate change and emissions abatement first produced estimates 20 years ago showing that that the “marginal abatement cost in New Zealand amongst the highest in the world”.  I’ve heard him repeat the point in various seminars and lectures over the years.    Why are the costs higher here?  Among other things, because a very large chunk of our emissions are agricultural, and there aren’t yet good technologies for reducing the emissions while keeping the animals.  And because our power generation is already largely hydro-based, so can’t easily be switched to alternative fuels to reduce carbon emissions.   This is an expensive place to reduce emissions –  an equal marginal cost approach would see us adopt a less aggressive emissions reduction target than most countries.    There are papers on the web from government agencies making exactly this point.

The Productivity Commission themselves recognise these points. For example, from their issues paper, on animal emissions.

Moderate emissions cuts are possible from certain agricultural technologies (eg, low-emission feds). However, a low-cost technology that delivers dramatic reductions in biological emissions appears far off, and may not emerge. While a methane vaccine could reduce CH4 emissions by up to 40%, no successful trials of such a vaccine have so far occurred.

Actually, for all the talk of alternative technologies, the Vivid Economics paper Hall links to makes much the same point about the sorts of constraints New Zealand faces.  Here is text from the Executive Summary (of a report funded by various MPS, foreign embassies and other donors).

In meeting this challenge, New Zealand is distinctive in at least three respects: its significantly decarbonised energy sector; its large share of difficult-to-reduce land sector emissions; and its large forestry sector. Elsewhere in the world, more focus has been devoted to reducing emissions from the electricity sector than from any other sector. Huge efforts and costs are now beginning to translate into progress. But for New Zealand, these challenges are of less significance. Its power sector consists primarily of hydroelectric and geothermal resources, providing firm, reliable capacity. Even with the challenge of decarbonising other parts of the energy sector (transport fuels, heat), the resulting relatively low-carbon energy mix provides the country with a considerable competitive advantage in a world that is placing increasing constraints on emissions. Yet, at the same time, the importance of the pastoral agriculture sector to the economy and social fabric of the country creates a huge challenge, although one that is laced with opportunity. Biological emissions from agriculture account for almost half of New Zealand’s gross emissions, a higher proportion than in any other developed country. While other developed countries may choose to not prioritise reducing these emissions in the short term, following suit would have important repercussions for New Zealand in meeting future targets.

Wishing it were otherwise does not make it so.  Marginal abatement costs are typically higher here than in other countries.  Those costs may well be falling –  as eg new battery technologies for example open up new options re transport emissions –  but those technologies are available to other countries too. They don’t change the specific challenges New Zealand faces relative to other advanced countries.   The emissions target we’ve committed to, whether through belief or interest, represent a new constraint on economic performance, and that constraint is more severe for New Zealand than for most, in a country with a long-term history of real economic underperformance.

Against that backdrop it would be irresponsible to simply wave our hands and pretend that immigration isn’t an issue (for us, as New Zealand, and our governments), ploughing on oblivious to the potential real economic costs of doing so.     Immigration policy needs to be considered as one strand in thinking about how best to design a New Zealand policy response, to minimise the net adjustment costs to New Zealanders.

I’d simply taken for granted what seemed like a fairly obvious point (even Hall reluctantly acknowledged it) that increased populations will have tended to increase emissions, all else equal. But until now I hadn’t had a look at the cross-country data to see if the relationship was actually there in the data.  It might not have been –  after all, countries might have responded to the rising populations by finding techniques and market instruments to lower per capita emissions sufficiently that there was no relationship left in the observed data.

Fortunately, we have quite detailed data on gross emissions for almost all OECD countries from 1990 to 2015.  In a few cases, the data are only up to 2013 or 2014, and in all the scatter plots that follow I’ve lined up the population changes with the emissons data (eg if for a country there is emissions data for 1990 to 2014, I’ve used percentage population change over that period).  But for 30 countries there is full data for all the variables I looked at.

None of these relationships are particularly tight –  these are simple bivariate relationships, and lots else was going on in each of these countries (eg in the former Soviet bloc countries, production processes had been extremely inefficiently energy-intensive).

I start with transport emissions (actually to 2015 despite the label). As Hall noted, transport emissions in New Zealand have increased a lot, as has our population.

transport emissions

Unsurprisingly, the relationship is upward sloping.

What about manufacturing and construction emissions?

manuf emissions

(That outlier up the top is Korea, which has still been massively industrialising.)

Total gross emissions?

total emissions

Hall seemed particularly perplexed, or perhaps outraged, by my points about agriculture

As I understand him, he argues that New Zealand’s high living standards depend upon dairy exports, which makes it politically infeasible to impose costs for environmental damages. The greater the population, the greater this reliance upon the dairy sector, and so the greater the reluctance to make polluters pay.

Again it seemed pretty descriptively accurate to me (whether it is an outcome he –  or I –  like or not). But even though agricultural emissions are much more of an issue for New Zealand than for most OECD countries, I was curious as to whether there was a relationship (across countries) between population growth and growth in agricultural emissions.  I didn’t have a prior expectation, but in fact this is what I found.

ag emissions

It is actually one of the tighter relationships, so I’ll repeat the proposition from my submission/column: with fewer people it seems quite plausible that we’d have had (tighter environmental regulation and) fewer cows and fewer emissions.

I could go on showing you charts all day, but I won’t try your patience.   Somewhat to my surprise there is actually even a (weak) positive relationship between population growth and per capita emissions and emissions per unit of GDP.  I’m not quite sure why that would be, although in New Zealand (and Australia’s) case, the migrants are moving to some of the OECD countries with, already, the highest emissions per capita and per unit of GDP.

The bottom line for New Zealand is that our immigration policy, which has very substantially boosted our population, has also substantially boosted our emissions over the last 25 years.   Our experience doesn’t look out of line with that of the rest of the OECD: growing populations are associated with more emissions, whether in transport, agriculture or just in total.   Given that marginal abatement costs, even if falling, are still high here relative to those in other advanced countries, it would frankly be irresponsible for any government, concerned primarily about the interests of New Zealanders, not to have the levers of immigration policy considered when assessing the best approach for New Zealand to take to meet its commitments.   The Productivity Commission should be doing so.

In the end, though, I suspect that the real difference between me and David Hall isn’t about any of these numbers.   He concluded his article

Because when it comes to global warming, it’s the carbon intensive economy, stupid. The only genuine solution is to transform the world’s high-emissions economies into low-emissions economies, so that anyone entering them by way of birth or migration can lead a prosperous low-carbon life. Our national emissions targets are a means to this global end. Focusing on peripheral issues like migration only distracts from the work that needs to be done. But that’s what happens when you tell the story of a global problem through a nationalist lens.

But all policy is national, and there is (fortunately) no supra-national government.  We’ve played our part in the international process with our emissions reduction commitments, which are ambitious given the high marginal abatement costs here.  But Hall’s approach suggests he doesn’t really care if there are cheaper, less costly, ways for New Zealand to meet its commitments, and thus reduce costs to New Zealanders (residents and voters); what he cares about is the global.  It is certainly one perspective, but it isn’t the one the government used in setting up the Productivity Commission inquiry.  In practice, it almost certainly isn’t the one New Zealand residents and voters will be using in assessing how governments handle these issues over the next 20 years and beyond.

My own column ended this way

The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”. It isn’t to signal our virtue either. Rather, the aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible. Lowering the immigration target looks like an instrument that needs to be seriously considered –  including by the Productivity Commission – if that goal is to be successfully pursued.

I’m probably less idealistic than David Hall. Perhaps 30 years as a bureaucrat does that to one.  But in responding to a comment on my earlier post today I noted

My take is that, as a high cost abater, we should impose as little cost on NZers as possible to be seen by friends and trading partners to be making our token contribution (because obviously in global terms it is only token).

Giving serious consideration to cutting our (unusually large) immigration targets looks as though it  should be good economic policy and good (national) emissions-reduction policy.

 

 

 

A researcher responds to Reddell on emissions and immigration

I’m sitting here a bit puzzled at what approach to contesting or debating policy they now teach and model at Oxford University, or practice at Auckland University of Technology.

A few weeks ago, I posted here a submission I’d made to the Productivity Commission’s inquiry into how New Zealand might make a transition to a low-emissions economy, and arguing that immigration policy should at least be considered by the Commission as one material influence on total New Zealand emissions, and as a potential tool to facilitate a cost-effective pursuit of the goverment’s emissions target.   Late last week, Newsroom published a column of mine based on that submission.       In that column I noted that

New Zealand has committed to a fairly ambitious emissions reduction target as part of the Paris climate agreement.  Of course, some political parties think the target isn’t ambitious enough, but New Zealand faces an unusual set of factors that affect our ability to reduce emissions here at moderate cost.  Appropriate policy responses, and the choice of the mix of instruments we choose to deploy, need to take account of that distinctive mix.

and concluded

The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”. It isn’t to signal our virtue either. Rather, the aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible. Lowering the immigration target looks like an instrument that needs to be seriously considered –  including by the Productivity Commission – if that goal is to be successfully pursued.

The backdrop of course –  and a point made in both the submission and my column – was the arguments I have been running for some years now suggesting that immigration policy itself been damaging to our economic performance, and thus has come at some net economic cost to New Zealanders.

But one academic reader decided that rather than engage primarily on the substance of the arguments I’d made –  the bottom line of which, after all, was simply that the Productivity Commission shouldn’t just ignore the issue –  he’d try to muddy the waters with some slurs.

David Hall is a young academic researcher at AUT, having returned to New Zealand relatively recently after doing a D. Phil at Oxford.   While he was in the UK he, for a time, had a regular Listener column.   His academic background appears to be in politics rather than economics, but he has been writing about climate change policy and was the editor of the recently-published BWB Texts book Fair Borders? Migration Policy in the Twenty-First Century, a collection primarily about aspects of New Zealand’s approach to and experience of immigration.  I’ve written previously about a couple of chapters in the book (here and here).  As I noted in the latter of those posts

As much as I can, I try to read and engage with material that is supportive of New Zealand’s unusually open immigration policy.   One should learn by doing so, and in any case there is nothing gained by responding to straw men, or the weakest arguments people on the other side are making.

Newsroom has published a response by Hall to my column (they even illustrated it with a photo of my own suburb, Island Bay).    There are some points of substance in Hall’s response, and I want to come back to them in a separate post.

But it was these two paragraphs that really annoyed me

What’s striking about all this is not only Reddell’s argument is from the perspective of climate change, but also economics. He resists the orthodox view that migration has a modest positive impact on national GDP. I’m no enemy of disciplinary iconoclasm, but it does beg for robust positive arguments. Reddell’s appeals to uncertainty (economists cannot prove definitively that migration increases GDP, therefore it might not be true) do not count. Climate scientists are all too familiar with this kind of denial.

So if economic evidence cannot always carry his arguments, one can only conclude that non-economic reasons are doing some of the work. To Reddell’s credit, he is explicit about his concerns for cultural cohesion, or that “Islam is a threat to the West, and a threat to the church wherever it is found”. These are real reasons for wanting to reduce immigration, but should be debated on their ethical and sociological merits, not couched in an idiosyncratic take on climate policy.

This is frankly pretty scurrilous stuff.

Apparently, when it comes to the economics of immigration, all I’m doing is “appealing to uncertainty” not advancing any “robust positive arguments”.  This is, so he claims, the economics equivalent of “climate change denial”.

First, lets look at what I’d actually said in my column

Of course, if there were clear and material economic benefits to New Zealanders from the high target rate of non-citizen immigration (the centrepiece of which is the 45,000 per annum residence approvals “target”) it might well be cheaper (less costly to New Zealanders) to cut emissions in other ways, using other instruments. But those sort of  gains –  lifts in productivity – can’t simply be taken for granted in New Zealand. Despite claims from various lobby groups that the economic gains (to natives) of immigration are clear in the economics literature, little empirical research specific to New Zealand has been undertaken. And there is good reason – notably our remoteness – to leave open the possibility that any gains from immigration may be much smaller here than they might be in, say, a country closer to the global centres of economic activity, whether in Europe, Asia, or North America.

Even many of those who are broadly supportive of New Zealand’s past approach to immigration policy will now generally acknowledge that any gains to New Zealanders may be quite small. And for some years now, I’ve been arguing for a more far-reaching interpretation of modern New Zealand economic history: that our persistently high rates of (non-citizen) immigration have held back our productivity performance (i.e. come at a net economic cost to New Zealanders).

It isn’t controversial to suggest that there has been little empirical research specific to New Zealand on the contribution of immigration policy to New Zealand’s economic performance.  It is simply an accepted fact –  and the chair of the strongly pro-immigration New Zealand Initiative accepted as much in an exchange here last year.   I also don’t think it is controversial to suggest that any economic gains to New Zealanders may be quite small –  it was, as I recall, the conclusion of Hayden Glass and Julie Fry (both generally pro-immigration) in their BWB Texts book last year.   Remoteness is generally accepted as an issue in New Zealand’s economic performance –  even if reasonable people differ on the implications and appropriate policy responses.

And then there was the reference to “and for some years now I’ve been arguing”.  Since the point of the emissions/immigration column was to argue that the connection should be considered, not to attempt to demonstrate that immigration has been economically costly, I didn’t elaborate in that column.  But it would, to most readers, have been a hint that there was a bit more to the argument than “appealing to uncertainty”.  If Hall himself hadn’t been familiar with my arguments, Google would willingly have helped.   There are, I see, 140 posts on this blog tagged with “immigration”, and there are plenty of speeches and papers, and a lengthy commentary on the New Zealand Initiative’s major piece earlier this year making the case for New Zealand’s immigration policy.  Only last week, in a post where I outlined some specific alternative immigration policy proposals, I linked to a recent speech outlining the economic case –  specific to New Zealand –  for rather lower target rates of non-citizen immigration.  People might disagree with my economic arguments and reading of New Zealand’s economic history, but none of those arguments is a mystery to anyone interested.

(In – very  – short, (a) extreme remoteness makes if very difficult to build many high productivity businesses here that aren’t natural resource based, and (b) in a country with modest savings rates, rapid population growth has resulted in a combination of high real interest rates and a high real exchange rate, discouraging business investment and particularly that in the tradables –  internationally competitive – sectors, on which small successful economies typically depend. I add to the mix how unusually large our immigration target is and how, despite the official rhetoric, the skill levels of the average and marginal migrants are not particularly high.)

But Hall’s rhetorical strategy rests on making as if none of this extensive body of argumentation and analysis exists, that I’m playing distraction, and then falling back on the “Muslim card”.

In parallel to this blog, I maintain a little-read (and these days, little written) blog where I occasionally write on matters of religious faith and practice, and sometimes on a Christian perspective on public policy issues.  If there is a target audience it is fellow Christians and in writing there I take for granted the authority of the Bible, and of church teaching and tradition over 2000 years.  I very rarely link to it here, as there is typically little overlap in subject matter and I know that most of the readers of this blog don’t share those presuppositions.

A couple of years ago, I wrote a couple of posts about refugee policy, prompted by some domestic commentary on the possible economic case for taking more refugees (in particular from Syria).   On this blog, I wrote something fairly short and narrowly focused on the economics, noting that there were unlikely to be net economic benefits to New Zealanders.  I concluded that

None of which is an argument for not taking refugees.  Doing so is mainly a humanitarian choice, not something we do because we benefit from doing so.  I don’t have a strong view on how many refugees New Zealand should take, but I don’t think possible economic benefits to us should be a factor one way or the other.

We do good because it is right to do so, not for what it might do for us.  Whether “doing good” in this case involves taking more refugees, or donating more money to cost-effectively assist in refugee support in the region, is a more open question.

A day or so later I wrote a longer post on my Christian blog on the refugee issue through the lens of the gospel, and included a link to that post at the end of the “economics of refugees” post.   At the end of quite a long post, aimed at Christian readers (and none of which I would resile from now) I included the phrase Hall now seeks to highlight.  Here is the full text

Islam is a threat to the West, and a threat to the church wherever it is found.  Political authorities in the West were right, and well-advised, to resist in the past, and at the Battle of Tours, at Lepanto, and at the gates of Vienna, to begin to turn the tide.    We owe it to the next generations of our own people to resist the creeping inroads of Islam.  If New Zealanders convert to that faith, there is of course little we can do, but neither compassion nor common sense requires, or suggests it would be prudent, for Western countries with any sense of their own identity to take in large numbers of Syrian refugees or migrants.

Frankly, I was a bit puzzled as to how Hall –  an apparently secular academic – was aware of this obscure post, with perhaps 100 readers in total, but not of the substance of my economic arguments.  But in an email exchange overnight, he tells me that he is actually familiar with this blog, and presumably with its economic arguments, and found the Christian post on refugees through this blog.   At least that answered that question, even if it doesn’t explain his attempt to pretend that I’m not raising substantive, or developed, economic arguments.

And as he acknowledges that he is familiar with this blog, perhaps he might have considered looking at the material I’ve posted here on the issues around culture, diversity etc.      There was, for example, this address to a Goethe Institute event on diversity etc.   Or a post earlier this year where I explicitly laid out some thoughts on culture and identity issues in response to one chapter of the New Zealand Initiative’s report.

I began the post by making the point I often use

My focus has tended to be on economic issues –  and thus to be largely indifferent on that count whether the migrants came from Brighton, Bangalore, Beijing, Brisbane or Bogota.  Almost all of my concerns about the economic impact of New Zealand’s immigration programme would remain equally valid if all, or almost all, our immigrants were coming from the United Kingdom –  as was the case for many decades.

Nonetheless, I noted that there were many groups of people who I would not have welcomed large number of migrants from

So long as we vote our culture out of existence the Initiative apparently has no problem.  Process appears to trump substance.  For me, I wouldn’t have wanted a million Afrikaners in the 1980s, even if they were only going to vote for an apartheid system, not breaking the law to do so.  I wouldn’t have wanted a million white US Southerners in the 1960s, even if they were only going to vote for an apartheid system, and not break the law to do so.  And there are plenty of other obvious examples elsewhere –  not necessarily about people bringing an agenda, but bringing a culture and a set of cultural preferences that are different than those that have prevailed here (not even necessarily antithetical, but perhaps orthogonal, or just not that well-aligned).

I went on, talking about the Initiative

They take too lightly what it means to maintain a stable democratic society, or even to preserve the interests and values of those who had already formed a commuity here.    I don’t want stoning for adultery, even if it was adopted by democratic preference.  And I don’t want a political system as flawed as Italy’s,even if evolved by law and practice.   We have something very good in New Zealand, and we should nurture and cherish it.  It mightn’t be –  it isn’t –  perfect, but it is ours, and has evolved through our own choices and beliefs.  For me, as a Christian, I’m not even sure how hospitable the country/community any longer is to my sorts of beliefs – the prevalent “religion” here is now secularism, with all its beliefs and priorities and taboos – but we should deal with those challenges as New Zealanders – not having politicians and bureaucrats imposing their preferences on future population composition/structure.

But the New Zealand Initiative report seems to concerned about nothing much more than the risk of terrorism.

A commonly cited concern in the immigration debate is of extremism. The fear of importing extremism through the migration channel is not unreasonable. The bombing of the Brussels Airport in 2016, in which 32 people were killed, or the Bataclan theatre attack in Paris where 90 people were murdered, shows just how real the risk is.

The report devotes several pages to attempting to argue that (a) the risk is small in New Zealand because we do such a good job of integrating immigrants, and (b) that the immigration system isn’t very relevant to this risk anyway.

The point they simply never mention is that in many respects New Zealand has been fortunate.  For all the huge number of migrants we’ve taken over the years, only a rather small proportion have been Muslim.

I went on

They highlight Germany –  perhaps reflecting the Director’s background –  where integration of Turkish migrants hasn’t worked particularly well over the decades, while barely mentioning the United Kingdom which is generally regarding as having done a much better job, and yet where middle class second generation terrorists and ISIS fighters have been a real and serious threat.  Here is the Guardian’s report on comments just the other day from a leading UK official –  the independent reviewer of terrorism legislation –  that the UK now faces a level of threat not seen since the IRA in the 1970s.  Four Lions was hilarious, but it only made sense in a context where the issue –  the terror threat –  is real.

But the Initiative argues that few terrorists are first generation immigrants, and some come on tourist or student visas (eg the 9/11 attackers) and so the immigration system isn’t to blame, or the source of a solution.  I’d largely agree when it comes to tourists, and perhaps even to students –  although why our government continues to pursue students from Saudi Arabia, at least one of whom subsequently went rogue having become apparently become radicalised in New Zealand, is another question.   But there are no second generation people if there is no first generation immigration of people from countries/religions with backgrounds that create a possibility of that risk.  Of course the numbers are small, and most people –  Islamic or not –  are horrified at the prospect of terrorism, or of their children taking their path.  But no non-citizens have a right to settle in New Zealand, and we can reduce one risk  –  avoiding problems that even Australia faces – by continuing to avoid material Muslim migration.

Having said that, I remain unconvinced that terrorism is the biggest issue.  Terrorists don’t pose a national security risk.  Whatever their cause, they typically kill a modest number of people, in attacks that are shocking at the time, and devastating to those killed.  But they simply don’t threaten the state –  be it France, Belgium, Netherlands, the US, or Europe.  Perhaps what they do is indirectly threaten our freedoms –  the surveillance state has become ever more pervasive, even here in New Zealand, supposedly (and perhaps even practically) in our own interests.

The bigger issue is simply that people from different cultures don’t leave those cultures (and the embedded priors) behind when they move to another country –  even if, in principle, they are moving because of what appeals about the new country.  In small numbers, none of it matters much.  Assimilation typically absorbs the new arrivals.  In large numbers, from quite different cultures, it is something quite different.  A million French people here might offer some good and some bad features.  Same goes for a million Chinese or Filipinos.  But the culture –  the code of how things are done here, here they work here –  is changed in the process.

So, Dr Hall, despite your attempts to suggest otherwise, basically none of my concerns about New Zealand’s immigration policy have anything to do with Islam at all.  Very few of the huge number of migrants we’ve taken over the years have been from Muslim backgrounds. It simply isn’t an issue New Zealand has faced (unlike, say, Australia).   As I’ve said previously, my economic arguments are blind to which country, or religious background, immigrants have come from.  We’ve taken lots and lots of people, from wherever, and the numbers are –  on my argument –  the issue, not the origins.   Those arguments apply as strongly to the post-war decades –  when most of the immigration was from the UK –  as they do in the last couple of decades.    And – to revert to the emissions/immigration connection, all those migrants –  wherever they’ve come from –  have added to New Zealand’s greenhouse gas emissions.

(To be clear, I would be uneasy about large scale Muslim immigration, on non-economic grounds.  But I’m quite sure I wouldn’t be alone in that –  in an exchange on his blog earlier in the year, even strongly pro-immigration New Zealand Initiative Chief Economist Eric Crampton noted that his one area of concern might be migrants who would undermine our democratic norms.  Eric seems to be quite strongly anti-Christian (and probably anti all religions) but he acknowledged that large numbers of Wahhabi Saudi immigrants –  not in prospect –  would be a serious concern.)

In reading some more of Hall’s own views on immigration, I found an interview with him in which he notes

But we also need to redistribute power and especially to give Maori greater influence over the ends and means of migration policy. I support Tahu and Arama’s call for tangata whenua to exercise greater influence on border policy as part of an emboldened tino rangatiratanga, not least because Māori have the most to lose from unfair migration.

I don’t agree with him on that, but my own thoughts on the implications of immigration policy for the Maori place in New Zealand are in the Goethe Institute piece linked to earlier and in a fairly-read post here earlier in the year, again prompted partly by the Initiative’s report.  In it I raised, for a general audience, concerns perhaps not a million miles from some of his own.

But don’t try to pretend that (a) there are not serious economic questions to be answered about the impact of our large-scale immigration programme, or (b) that I have not posed them, almost ad nauseum.   I’ll come back to some of the specifics around population and emissions targets, and the place of national policy in a wider world, in a separate post.

Exporting to a large communist state

One of the things that seems to worry establishment people in New Zealand is a belief that our economy is somehow very vulnerable to anything that disrupts the trade of New Zealand firms with China.  It is a more-than-slightly puzzling concern, since only around 20 per cent of our exports go to China, and exports themselves aren’t an overly large share of GDP in New Zealand.   For the firms involved –  even if not the wider economy –  there are clearly somewhat greater risks, since China has a demonstrated track record of being willing to use targeted trade sanctions for “punishment”.   Those are the risks you take, as a private company, when you choose to play in that particular sandpit.

For the world economy, of course, any serious dislocation of China’s economy is a significant risk.  With interest rates in most of the world not much above zero, any serious downturn in one of the world’s two largest economies could be quite problematic (as the US recession/financial crisis in 2008/09 was).      But such downturns generally do even more damage to the economy at the centre of the problems than to everyone else.  We all have a stake in a better-managed Chinese economy, even if the Chinese authorities are showing increasingly autarckic tendencies, and even if China isn’t anywhere near as internationally connected as the major Western economies are.  But that interest isn’t a good reason to orient foreign policy around deference to China, or to refuse to have an open debate about Chinese government interference in the domestic affairs of other countries.

One case study that sometimes get mentioned when people talk about the vulnerabilities of trade with China is Finland.   After a rather difficult time in World War Two –  gallantly losing to the Soviet Union in 1939/40, and then ending up on Germany’s side –  Finland spent the post-war decades in an awkward position.  A new word was added to the international vocabulary: Finlandization

the process by which one powerful country makes a smaller neighboring country abide by the former’s foreign policy rules, while allowing it to keep its nominal independence and its own political system.  The term literally means “to become like Finland” referring to the influence of the Soviet Union on Finland’s policies during the Cold War.

And largely, no doubt, just because of geography, much of Finland’s foreign trade was with the Soviet Union during those decades (it was a highly managed and regulated trade).  Eyeballing a long-term chart, over the post-war decades to 1990 around 20 per cent of Finland’s exports were to the Soviet Union. And in the 1970s and 1980s, total exports as a share of GDP averaged just over 25 per cent in Finland.   In other words, exports to the Soviet Union were averaging about 5 per cent of Finland’s GDP, pretty similar to New Zealand exports to China today.  (A century ago, by contrast, New Zealand exports to the United Kingdom in the 1920s were 20-25 per cent of our GDP.)

The Soviet Union ended messily, at least in economic terms.   Here is a chart, using Maddison data, of real per capita GDP in the (once and former) Soviet Union.

USSR GDP

In the slump, and associated disarray, imports plummeted, including those from Finland. In fact, in 1992 Finnish exports to Russia (the largest chunk of the former Soviet Union) were less than 1 per cent of Finnish GDP.

At the time, Finland itself was going through one of more wrenching recessions seen until then in post-war advanced economies.  The unemployment rate rose from 3 per cent to over 17 per cent in just three years, and real per capita GDP fell by 11 per cent from 1990 to 1993.

The collapse of the Soviet Union wasn’t the only thing going on at the time.  There were recessions in many western economies (including New Zealand and Australia) around 1991, but Finland’s experience was particularly savage (and also worse than the experiences around the same time of other Nordic countries).

One distinctive was house prices.

finland real house prices

Real house prices rose by about two thirds (across the country) in just a couple of years, and then more than fully reversed the increase.  The 50 per cent fall in real house prices involved a very sharp fall in nominal house prices, only matched in recent times in Ireland.

To some New Zealand readers it will all seem like just the sort of stuff they worry about.  Isn’t our economy heavily dependent on trade with China, which could easily but cut off or otherwise implode, and aren’t house prices extraordinarily high?  Isn’t the great Finnish recession exactly the sort of thing Graeme Wheeler and the Reserve Bank were warning of?

No doubt there are some similarities in what they were warning about.  But if Finland offers lessons for us, they aren’t about who our firms trade with, nor even really about house prices and housing lending exposures.  Instead, they are the (now) age-old lesson about the risks of severely overvalued exchange rates, with an overlay of a warning about the transitional risks of financial liberalisation (readers will recall that New Zealand and Australia also had a tough time in that transition in the late 1980s).

Finland had had quite high inflation even by the standards of many other European countries during the great inflation of the 1970s.    Persistently high inflation, in a fixed exchange rate system, is typically accompanied by a succession of devaluations.  We went through almost 20 years of something similar in New Zealand.   But in Finland in the 1980s they decided to break the cycle, and set out to maintain a “hard markka” –  the fixed exchange rate holding down imported inflation and, supposedly, imposing domestic disciplines that would lower domestically-sourced inflation.    Much of the advanced world was disinflating at the same time, and so for a while the approach looked pretty successful.  Core inflation was 12 per cent in 1980, and not much above 3 per cent by 1986.

But the Nordic economies, including Finland, were also liberalising their domestic financial systems in the 1980s.  And a necessary corollary of a fixed exchange rate system is that, with an open capital accounts, your country’s interest rates are heavily influenced by those abroad.   And German interest rates, which had been 7.5 per cent in 1980, just kept on falling –  the Bundesbank’s discount rate was 2.5 per cent by 1988.

In process –  fixed exchange rate, falling global interest rates – what followed was a massive speculative credit and investment boom in Finland. Lending and asset prices surged.  Inflation picked up, and Finnish industry became increasingly uncompetitive internationally.  That in turn created doubts about the stability of the exchange rate peg, prompting increases in domestic interest rates.

Here is what happened to the real exchange rate

fin rer

And a measure of real short-term interest rates

fin int rates

Real interest rates didn’t peak until well into 1992, two years after the recession began.  Why? Not because inflation was a particular problem –  it was back down to not much above 3 per cent in 1992 and falling fast –  but because of the extreme reluctance of the authorities to float the exchange rate.   There had been grudging periodic adjustments under pressure, but it wasn’t until September 1992 that the markka was finally allowed to float.

In the process –  the boom over the late 80s and the subsequent bust, both heavily linked to the fixed exchange rate  –  the Finns managed to bring on themselves a very severe domestic financial crisis.   And there had been huge shifts in the shares of various components of the economy.  Here was the export share of GDP.

exports finland

Investment as a share of GDP fell from around 30 per cent at the end of the boom, to around 19 per cent at the trough.

Floating exchange rates can be messy, but unless you economy is very closely aligned to –  and integrated with –  the currency of some other country, they are usually better than the alternative.  That was certainly Finland’s experience over the crisis of the early 1990s.

And what of the financial crisis?  Surely with house prices falling by that much, residential mortage losses must have been a big part of the story?  In fact, the overwhelming bulk of the problem loans were to businesses and although many residential borrowers did get into trouble –  rapid increases in unemployment and rising real interest rates in combination can be a toxic brew –   in the end only 1 per cent of household loans were written off.   That isn’t particularly surprising, is a point made in numerous studies, and is consistent with a survey of financial crises done a few years ago by the Norwegian central bank.  As they put it

We look at a wide range of national and international crises to identify banks’ exposures to losses during banking crises. We find that banks generally sustain greater losses on corporate loans than on household loans. Even after sharp falls in house prices, losses on household loans were often moderate. The most prominent exception is the losses incurred in US banks during the 2008 financial crisis . In most of the crises we study, the main cause of bank losses appears to have been propertyrelated corporate lending, particularly commercial property loans.

And thus it was in Finland (and neighbouring Sweden for that matter).  It is a point I’ve been making about New Zealand: when severe adverse shocks hit, provided your exchange rate is floating, not only does the exchange rate fall, but interest rates typically do too.  Those are typically very powerful buffers, especially in the case of an adverse shock that isn’t global in nature.

And what of the role of the collapse in Finnish exports to the (now) former Soviet Union.  I found various books and articles on my shelves about the Finnish experience –  it was one of the handful of defining post-war crises.  None of them regard that sudden drop as a particularly important part in the Finnish recessionary story.  For anyone interested, there is an interesting recent paper by a couple of Finnish researchers.  Their summary is as follows

It is shown that empirically, the strong credit expansion resulting from the simultaneous liberalization of the domestic financial markets and international capital movements has played the most important role in explaining the changes in real economic activity in Finland during the time period analyzed. In fact, over a longer time period (1980-2005) exports to Russia emerge as a countercyclical variable: slightly contractionary after the crazy years, and expansionary during the following depression [exports to Russia recovered somewhat after the first chaotic year or two].

Exporters were fairly soon able to find alternative markets for their products, helped –  after 1992 –  by the much lower real exchange rate.

And what of the overall Finnish economy itself?  After freeing the exchange rate and allowing real interest rates to drop sharply, the economy itself rebounded quite rapidly.  By 1997, real per capita GDP was already 4 per cent above somewhat flattering boom-exaggerated 1990 levels.

finland real pc GDP  And consistent with a story I’ve run here in various posts over the years, through all that disruption and dislocation, here is the path of Finnish real labour productivity (real GDP per hour worked).

fin real gdp phw

As was the case with the numerous US financial crises in the 19th and early 20th centuries, there isn’t much sign of any enduring damage to productivity (levels or growth) from the Finnish crisis.  That’s reassuring, if not terribly surprising.

(Finland’s economic performance in the last decade has been pretty shockingly bad, including a productivity performance that –  like the UK’s –  is even worse than New Zealand’s over that period.  But that is a story for another day.)

 

Some Australian perspectives on PRC influence-seeking

For those interested in the activities of the People’s Republic of China and the Chinese Communist Party in this part of the world, Professor Anne-Marie Brady’s paper remains essential reading.   The material Professor Brady lays out on the New Zealand is deeply troubling, as is the near-complete subsequent silence from most of our political leaders.

But if New Zealand remains somewhat unique in having a Communist Party member and former member of the Chinese intelligence services –  who has never disavowed his past and remains very close to the People’s Republic of China embassy –  as a serving member of Parliament, the issues around PRC influence-seeking, pressure on the Chinese diaspora, and direct meddling in the domestic affairs of other countries aren’t unique to New Zealand. In yesterday’s post, I highlighted several links to contribution to the open and active debate on these issues in Australia.

But today a new collection of 22 articles, speeches etc on the issue of PRC activities in Australia (“The Giant Awakens” ) has been released by Vision Times, one of the relatively small number of remaining independent Chinese media in Australia (as in New Zealand, most of the Chinese media in Australia are now apparently under the effective control of the PRC).  More than half the authors are themselves ethnic Chinese, including a former PRC diplomat to Australia who defected a decade or so ago.

I haven’t read the entire collection, but of those I have read almost every piece struck a chord in one way or another, with so much of what is written about raising similar issues and concerns to those Professor Brady alerts us to in New Zealand.   I’d commend it to anyone interested in the subject, both because Australia (a) matters to us, and (b) seems to have very similar issues to us, and because…..well….sadly there is nothing similar in New Zealand.   The near-complete cone of silence still appears to hold.

I’d particularly commend the first paper in the collection by Professor Rory Medcalf, who is currently the Head of National Security College at the Australian National University.   It is an easy read –  only three pages – but an uncomfortable one.

A few extracts

Here in Australia we have seen the Chinese Communist Party involved in what appears to be multi-faceted campaign to influence our politics and independent policymaking. This includes propaganda and censorship in much of this nation’s Chinese-language media as well as channels of interference through intimidation of dissident voices and the establishment and mobilisation of pro-Beijing organisations on Australian soil. There is also the troubling question of political donations and their motives.

On political donations –  recall the magnitude of some of the disclosed donations here

It has also been reported recently that Australia’s main political parties have received close to $6 million in donations over the last few years from individuals associated with the Australian Council for the Promotion of the Peaceful Reunification of China. The Council, in turn, is reported to have connections to the United Front Work Department, an organisation which reports to the Central Committee of the Communist Party of China.

But whatever the mix of motives, one thing is clear. The donations were enough for the Director-General of the Australian Security Intelligence Organisation (ASIO) to take the highly unusual step of directly warning the major parties that they and Australia’s national security could be compromised by such donations. For the head of ASIO to take such a step suggests he was genuinely worried, from a national security and national interest point of view. Security agencies cannot take effective action on any of this because it has been entirely legal – all they can do is raise the alarm. It is now up to the political class to decide whether there is, within Australian democracy, enough self-respect to function without money linked to the Chinese Communist Party. This, after all, is a massive, secretive, self-interested and foreign organisation, with interests that can sometimes clash directly with Australia’s.

These issues are at least as much about the interests of ethnic Chinese New Zealanders and Australians

Indeed, much of the worry about such influence is within this country’s diverse Chinese communities. If, as a nation, we chose to ignore such concerns, we would be effectively treating such dissenting voices among our Chinese-Australian population as second-class Australians, whose freedom of thought and freedom of expression do not warrant protection.

So the issue of foreign interference needs to be addressed in a context of respect for the rights of Chinese Australians. That means this needs to be an issue that is seized and owned by the moderate, bipartisan centre of Australian politics. This way, the issue cannot be captured by extreme voices or be distorted, misconstrued or falsely portrayed as one of xenophobia.

One of the points I’ve been making in a New Zealand context is that our economic dependence on China is (often) much-exaggerated.

The risk is that we will buy the story that our economy is so comprehensively dependent on China that Australia cannot afford to cause China much difficulty on security and political issues, even when our interests diverge. Indeed, perceptions of Australia’s vulnerability to Chinese economic pressure are exaggerated. Economic pressure from China that would have the biggest impact on Australia – most notably through iron ore trade – would also impose restrictive costs on Beijing. Privately or publicly, Beijing criticises or complains to Canberra frequently over multiple issues. But the accompanying threats tend to be implicit or general – that the bilateral relationship will suffer some unspecified deterioration if Australia does not heed China’s wishes.

…..If Beijing felt it needed to send an economic signal to reinforce its displeasure, its initial response would likely involve non-tariff barriers over quarantine and safety standards, or making life difficult for businesses operating in China, with limited long-term economic impact on itself or Australia.

Beijing has adopted this approach towards South Korean business interests, yet has not succeeded in its goal of changing Seoul’s stance on missile defence cooperation with the United States. Economic vulnerability is often as much about perception as reality – and it is in China’s interests for Australia to imagine itself highly vulnerable. Already, some voices in business, academia and the media focus on the possible economic impacts of annoying China. The perception of economic harm can have an outsized effect on domestic interests, creating pressure for rapid political compromise. If we overreact to any Chinese economic threats and self-censor on issues perceived to be problematic for Beijing, it will not protect Australia from further pressure – it will signal that such pressure works.

And finally

Foreign interference in Australia is not solely a national security issue. It is a fundamental test of Australian social inclusiveness, cohesion, equity and democracy that we ensure all in this country have freedom of expression, freedom from fear and protection from untoward intervention by a foreign power.

It is a paper, part of a collection, that should be widely read in New Zealand.

In my post yesterday afternoon, I linked to an article published in the AFR by Peter Drysdale and John Denton, attempting to play down the issue of Chinese influence and suggesting that critics are “demonising” the People’s Republic, or indeed Chinese-Australians.   There is a nice, accessible, response to that article by John Fitzgerald, another Australian academic.

…for Australia, the issue at stake is not whether Leninism and liberal democracy can work happily and co-operatively in their separate jurisdictions but whether it is possible for a democracy to maintain jurisdictional separation in a dependent relationship with a Leninist state without adjusting its everyday modes of operation. Whatever we may think of authoritarian Leninist states, of which contemporary China is clearly one, they are founded on an ‘enemy mentality,’ and they have immense difficulty recognising the territorial and jurisdictional limits of their overweening hierarchical authority. How is a liberal Australia to deal with a Leninist China as that country becomes more assertive beyond its borders?

A bold free press is one of the few instruments a democracy has at its disposal to check the encroachment of a Leninist state into its jurisdiction. An open, respectful, and evidence-based conversation on this encroachment in the media is essential to getting Australia’s relationship with China right.

It is not demonising China to report what the Chinese government says about itself: that it is a wealthy and powerful Communist Party state that has no time for democratic accountable government, no independent courts, security, or media, that denies universal adult political participation, that offers no protection for the exercise of fundamental rights of freedom of speech, religion or assembly. In China this is called guoqing. There are no plans to change anytime soon. Similarly, querying the behaviour of a few named and alleged influence peddlers from China no more tarnishes the reputation of all Chinese Australians than querying the conduct of Putin’s agents in Washington impugns the loyalty of all Russian Americans.

Meanwhile, here in New Zealand the final election results will be declared tomorrow.  A self-confessed member of the Chinese Communist Party, former member of the Chinese intelligence services –  both facts hidden fron voters for years, and partially hidden from the New Zealand immigration and citizenship authorities “because that is what the Chinese authorities told us to do” – will once again be confirmed as a member of Parliament.  That alone –  the tip of the iceberg in the issues Professor Brady raises –  should be deeply troubling.  But our establishment elites seem unbothered.  Nothing is heard from the Prime Minister. Nothing is heard from the Leader of the Opposition.  Nothing is heard from the Green Party.  Nothing is heard from the Minister of Foreign Affairs.  And when last heard from, the Attorney-General and minister responsible for several of the intelligence services resorted to simply making stuff up.

“That was a Newsroom article, timed to damage the man politically.  I’m not going to respond to any of the allegations that have been made about/against him. I think it is disgraceful that a whole class of people have been singled out for racial abuse.  As for Professor Brady, I don’t think she likes any foreigners at all.”

The best response to erroneous claims is the facts. As far as I’m aware, nothing in the original Financial Times/Newsroom articles, nothing in Professor Brady’s paper, and nothing in yesterday New York Times article has been refuted.  I’ve not even seen anyone try.  Some mix of embarrassed silence, and brazening through, in the hope that the issue will just go away seems to be what our “leaders” now count as responsible leadership.

Deposit insurance wouldn’t put credit ratings at risk

There was a curious paragraph in an article by Alex Tarrant on interest.co.nz last week on post-election positioning .  Tarrant was writing about, in particular, fiscal positioning and the possibility that whichever party leads the next government could find its fiscal commitments put under pretty severe pressure because of the policy exepctations of the minor parties (New Zealand First on its own, or in conjunction with the Greens).  He argues that if Labour ends up back in opposition

It will also allow Labour to imply that National must have offered more to Peters on big-spending policies than Labour was prepared to. The hope for Ardern and Grant Robertson would be that National suddenly finds itself being attacked on throwing fiscal responsibility out the window with a set of coalition bribes. And this after the entire campaign was fought by National on sound management of the government’s books and plans to repay government debt to 10% of GDP, from about 23% now.

This could be a huge boost for a resurgent Labour Party even if it does go back into opposition. “We wanted to form a responsible government, but couldn’t get NZ First to agree to responsible spending.”

Labour might even be able to point to how certain policies might have put the government’s credit rating at risk – my understanding is that NZ First’s and the Green’s bank deposit insurance schemes could fit this argument.

The government’s credit rating currently benefits from ratings agencies placing less weight on that government would bail out a failed bank here, with the Reserve Bank’s open bank resolution policy and there being no government deposit guarantee/insurance in New Zealand. If introducing one means rating agencies rethink this position, the argument would be that a lower credit score would lead to higher government borrowing costs. (Peters’ policy on deposit insurance regards majority-owned NZ-registered banks; the Greens want a broader scheme.)

The main bit of the argument didn’t strike me as terribly persuasive –  the warm feeling of fiscal virtue would surely be of little solace to most Labour people on the dark winter nights if they did end up back in opposition for another three years.

But what had really caught my eye was the specific suggestion that New Zealand First or Greens preferences for some sort of deposit insurance scheme might imperil the government’s credit rating.  I’d made a mental note to come back to it, but yesterday someone asked my view on the suggestion, which is the prompt for this morning’s post.

The New Zealand government’s credit ratings are very strong.   There are foreign currency and local currency credit ratings, but for New Zealand only the latter now matter (there is little or no foreign currency debt, and no apparent plans to raise more).  Of the three main ratings agencies, one gives the New Zealand government a AAA rating –  the best there is –  and the other two give the government an AA+ rating, just one notch down.   That makes sense.   We not only have a low level of government debt (per cent of GDP) but successive governments have proved to have the willingness and capacity to keep debt in check when bad stuff happens.  The last time the New Zealand government defaulted on its debt was in 1933 –  and we had lots of company then.

Relatedly, our banking system has been strong and pretty well-managed.  There were some pretty serious problems in the late 1980s, immediately post-liberalisation, particularly with financial institutions that had been wholly government-owned (Rural Bank, DFC, and BNZ).   But since then –  and before that period for that matter –  banks have been pretty strongly-capitalised, and appear to have done a pretty good job of making credit decisions.  Banks took too many risks (were too complacent) in the 2000s around funding liquidity –  and needed a lot of official support on that score during the 2008/09 international crisis period.  But despite a really big credit boom in the 2000s, even a severe recession and quite a slow recovery –  and levels of income (servicing capacity) typically quite a bit below what would previously have been expected –  led to no serious systemwide impairment of the banks’ assets.  Loan losses rose, as they do in every recession, but to quite a manageable extent.   It was a similar story in Australia, Canada and quite a few other advanced countries.  The government put itself on the hook for some finance company failures (through the deposit guarantee scheme) and the ill-advised AMI bailout.  But that was it.

And these days, almost a decade on, pretty demanding stress tests on banks’ loan portfolios suggest that even a savage recession and a very severe fall in house prices would not be enough to topple any of the banks, let alone the system as a whole.  That isn’t grounds for complacency –  in the wrong circumstances lending standards can deteriorate quite rapidly –  but on the sort of lending the banks have been doing over the last decade or two, the banking system itself looks pretty sound.

Rating agencies still worry a bit about the large negative net international investment position of New Zealand (the net claims of foreigners –  debt and equity –  on all New Zealand entities).  Personally, I think that is an overstated concern: the NIIP position has been large for 30 years, but hasn’t (as a share of GDP) been getting any larger.  Mostly it is the net offshore funding of the banking system.   What matters then, from a credit perspective, is the quality of the assets on bank balance sheets (see above).   In my reading of the literature, big increases in banks’ reliance on foreign funding have often been a warning sign (internationally).  That hasn’t been the story here for a long time.

New Zealand is the only OECD country now that does not have a deposit insurance system.   The official rhetoric for a long time has been that depositors need to recognise that they can, and will, lose their money if their bank fails.  It is supposed to promote market discipline.  The Open Bank Resolution tool was devised to try to buttress that “no bailouts” message –  or at least to give ministers options in a crisis.  The OBR is designed to ensure that a bank can be reopened immediately after it fails (thus keeping basic payments services going). It does so through a mechanism that involves “haircutting” the claims of creditors –  the size of the haircut designed to be larger than the plausible, but still unknown actual losses –  while providing public sector liquidity support and a government guarantee to the remaning claims.  Without such a guarantee, rational creditors would mostly withdraw the remaining funds they did have access to as soon as the failed bank reopened.  In practice, since in a small system with quite similar banks all banks are likely to face quite similar shocks, such a guarantee might well need to be extended to the other banks (although I’m not aware that this latter point has ever been conceded by authorities).

It is no secret that governments tend to bail-out failed banks, and often end up offering a degree of protection that goes beyond anything in formal deposit insurance system rules.  That is particular so for retail depositors, but in the last major crisis of 2008/09 it was often true of wholesale creditors too (eg extreme pressure was brought to bear on the Irish government, by other governments and EU entities, not to allow wholesale creditors to lose money when Irish banks failed).

The practice might, in some abstract world, be undesirable, but it happens.    There are some signs now that authorities are putting more effort into trying to build regimes that make it more feasible for wholesale creditors to be allowed to lose money, while not disrupting the continuity of payments systems etc.  But there is no sign of such movement as far as retail depositors are concerned.

And despite the rhetoric, New Zealand’s track record hasn’t been so very different.  Governments twice bailed out the BNZ in the late 80s and early 90s.  The temporary retail deposit guarantee scheme was introduced with bipartisan support in the midst of the 2008/09 crisis.  And AMI –  an insurance company, not even a bank –  was bailed out, on official advice, only a few years ago.    Of course, many small finance companies also failed, and there was no bailout to those depositors.   But a rational retail creditor of a significant retail bank is quite likely to assume that if there is a bank failure, he or she will in the end be protected by the government.

Rational ratings agencies know this too.   In their ratings –  or banks and of sovereigns –  they take account of the probability of official government support.     It is likely to be a matter of serious concern in a shonky banking system, and in a country with high pre-existing levels of government debt.  It isn’t likely to be of much concern in a country with a good track record of stable banking, a low level of government debt, and a good track of reining in fiscal pressures.  And that is true whether or not there is a formal deposit insurance scheme in place.

For a long time I was staunchly opposed to deposit insurance –  like pretty much everyone at the Reserve Bank.  But I changed my mind probably a decade ago.  I’m not so worried by the question of whether it is “fair” or not for ordinary depositors to face the risk of losing money –  there are plenty of other areas where such uncompensated losses happen (eg house prices fall back, or the value of one’s labour market skills drops) –  as by realpolitik considerations:

  • at point of failure, governments are almost certain, whatever they say now, to bail out retail depositors of major core institutions, and
  • a pre-specificed deposit insurance arrangement increases the chances of OBR itself being able to work, and thus of being able to impose losses on wholesale creditors (notably offshore ones).

In an earlier post I outlined a scenario:

Suppose a big bank is on the brink of failure.  Purely illustrative, let’s assume that one day some years hence the ANZ boards in New Zealand and Australia approach the respective governments and regulators, announcing “we are bust”.

Perhaps the Reserve Bank will favour adopting OBR for the New Zealand subsidiary (since the parent is also failing they can’t get the parent to stump up more capital to solve the problem that way).    But why would the Minister of Finance agree?

First, Australia doesn’t have a system like OBR and no one I’m aware of thinks it is remotely likely that an Australia government would simply let one of their big banks fail.  But in the very unlikely event they did, not only is there a statutory preference for Australian depositors over other creditors, but Australia has a deposit insurance scheme.

I’m not sure of the precise numbers, but as ANZ is our largest bank, perhaps a third of all New Zealanders will have deposits at ANZ.

So, if the New Zealand Minister of Finance is considering using OBR he has to weigh up:

  • the headlines, in which ANZ depositors in Australia would be protected, but ANZ depositors in New Zealand would immediately lose a large chunk of their money (an OBR ‘haircut’ of 30 per cent is perfectly plausible),
  • and, even with OBR, it is generally accepted (it is mentioned in the Bulletin) that the government would need to guarantee all the remaining deposits of the failed bank (otherwise depositors would rationally remove those funds ASAP from the failed bank)
  • and I’ve long  thought it likely that once the remaining funds of the failed bank are guaranteed, the government might also have to guarantee the deposits of the other banks in the system.  Banks rarely fail in isolation, and faced with the failure of a major banks, depositors might quite rationally prefer to shift their funds to the bank that now has the government guarantee.

And all this is before considering the huge pressure that would be likely to come on the New Zealand government, from the Australian government, to bail-out the combined ANZ group.  The damage to the overall ANZ brand, from allowing one very subsidiary to fail, would be quite large.  And Australian governments can play hardball.

So, the Minister of Finance (and PM) could apply OBR, but only by upsetting a huge number of voters (and voters’ families), upsetting the government of the foreign country most important to New Zealand, and still being left with large, fairly open-ended, guarantees on the books.

Or, they could simply write a cheque –  perhaps in some (superficially) harmonious trans-Tasman deal to jointly bail out parent and subsidiary  (the haggling would no doubt be quite acrimonious).  After all, our government accounts are in pretty reasonable shape by international standards.

And the real losses –  the bad loans –  have already happened.  It is just a question of who bears them.  And if one third of the population is bearing them –  in an institution that the Reserve Bank was supposed to have been supervising –  well, why not just spread them over all taxpayers?    And how reasonable is it to think that an 80 year pensioner, with $100000 in our largest bank, should have been expected to have been exercising more scrutiny and market discipline than our expert professional regulator (the Reserve Bank) succeeded in doing?  Or so will go the argument –  and it will get a lot of sympathy.

So quite probably there would be some sort of joint NZ/Australian government bailout of the Australian banks and their New Zealand subsidiaries.  The political incentives –  domestic and international –  are just too great to seriously envisage an alternative outcome.

But let’s suppose the Australian government was willing to jettison the New Zealand subsidiary and leave it entirely to us what to do.  The domestic political pressures to protect retail deposits will still be just as real.  In those circumstances, a pre-established deposit insurance scheme (eg for retail deposits up to perhaps $100000 per depositor) would make it more feasible for a Minister of Finance to (a) cap the government’s support, and (b) allow the OBR tool to be applied, under which wholesale creditors would be allowed to lose money.   It still might never happen –  there will still be unease about ongoing access to foreign funding markets for the other banks –  but the option is more feasible than at present (with no deposit insurance in place).  From a fiscal perspective, a pre-specified credible deposit insurance scheme –  funded by a levy, and backed by a credible bank supervision regime –  could actually reduce the fiscal risks associated with a banking crisis, rather than increase them.

Finally, it is worth keeping the numbers in some perspective.  At present, properly defined net Crown debt is about 9 per cent of GDP.    Total (book) equity of all our banks is currently around $37 billion.   Savage stress tests at present suggest little risk of a severe shakeout making material inroads on that buffer.    Banking systems tend not to lose much money on housing-dominated portfolios, when those loans are put in place in floating exchange rate systems without much government interference in the housing finance market.  But lets assume a really savage scenario, in which across the banking system all the equity is wiped out, and 50 per cent more, and the government chooses to recapitalise the banking system.  That would involve  the government assuming additional gross debt of around 20 per cent of GDP.  But much of that would be “backed” by the remaining good assets of the banking system (in time the recapitalised bank could be sold off again) –  it is only the amount the government injects that is beyond replacing existing equity that represents a net loss to the taxpayer.  That amount would be less than 10 per cent of GDP, even on these extremely pessimistic scenarios.   You’ll remember a recent post in which I cited some earlier New Zealand research suggesting that an increase in government debt of that sort of magnitude might raise bond yields by just a few basis points.

Of course, if New Zealand ever did face a really severe shakeout of this sort there would probably be many other problems –  including fiscal ones (tax revenues fall when economies shrink).  The sovereign credit ratings might well be cut.  Not only would there have been huge real losses of wealth within the community, but something very bad would have been revealed about the quality of our banking institutions, our private borrowers, and of our official regulators.  But, again, whether or not we had a formal deposit insurance scheme would almost certainly be a third-order issue in the midst of such a disaster.

At present, with very robust government finances, and a banking system which, to all appearances, is also extremely sound, the choice to introduce a well-structured deposit insurance scheme would be very unlikely to affect the government’s credit rating.   There is an argument that some observers –  rating agencies even? –  might see it as a refreshing dose of realism about how banking crises actually play out, establishing institutions that better respect that realism –  and which charge depositors (through a levy on protected deposits) for the insurance they will, almost inevitably, be provided with.  Priced insurance –  even if imperfectly priced –  is almost always better than unpriced insurance.

And in case anyone thinks deposit insurance is some sort of weird “out there” policy, not only does almost every other advanced country have such a scheme, but a few years ago Minister of Finance Bill English was quite happy to concede, in responding to parliamentary questions from Winston Peters, that there are reasonable arguments to be made for such a scheme (particularly in view of the quite different regimes operating in Australia and New Zealand for many of the same banks).  And he didn’t appear to worry that deposit insurance might threaten the government’s credit rating.

(I’ve argued here that a proper deposit insurance regime increases the chances of OBR being able to be used, especially for wholesale creditors.   My long-held view about OBR hasn’t really changed: it is mainly a tool that could prove quite useful in handling the failure of a small retail bank (eg TSB or SBS), at least if the relevant parliamentary seats (New Plymouth or Invercargill) were not, at the time of failure, held by the governing party.)

The kowtow

EARLY IN the morning of 14 September 1793, George, Lord Macartney, the first British ambassador ever to visit the Chinese court, entered the imperial tent in Jehol, the Manchu capital, to see the emperor Qianlong.

As one, a thousand demonstrated their submission to the Son of Heaven by performing the ceremony of the kowtow. Three times they fell to their knees, and three times on each occasion they touched their foreheads to the ground. Macartney, however, refused to kowtow. He would bend one knee, he said, to his sovereign; both knees he would bend only to his God. Three times, with the greatest politeness, he went down on one knee. And three times, in the course of each genuflexion, in rhythm with the mandarins, he respectfully bowed his head. But he flatly refused to touch his forehead to the ground.

(from this)

There is a good article today in the New York Times today on the Jian Yang affair –  or non-issue as the National Party, and most other parties, and most of our establishment appear to believe (and want us to believe).   As the article notes

While New Zealand is a small country, it is a member of the “Five Eyes” intelligence sharing partnership along with the United States, Britain, Canada and Australia. And so vulnerabilities in New Zealand’s government could have wider import.

Curiously, not being particularly well-connected, I’ve had several people mention in the past few days private talk among our traditional allies of possibly ending New Zealand participation in Five Eyes over our government’s growing deference to China.   Whether that possibility would bother a majority of New Zealanders is questionable, but it should.

The article goes on

Chinese-language news media outlets in New Zealand reported that Mr. Yang had presented awards in April to members of the New Zealand Veterans General Federation, a group made up of former Chinese military or police officers now living in New Zealand. The awards were reportedly for members’ activities during a visit to New Zealand by Premier Li Keqiang of China, when they blocked the banners of anti-Chinese government protesters and sang military songs.

Chen Weijian, a member of the pro-democracy group New Zealand Values Alliance and the editor of a Chinese-language magazine, Beijing Spring, said Mr. Yang was “very, very active” in New Zealand’s Chinese community.

“When he speaks, he speaks more as a Chinese government representative, instead of a New Zealand lawmaker,” Mr. Chen said.

And this is how New Zealand now appears in yet another impeccably liberal part of the global press?

There are several organisations in New Zealand, partly or wholly government-funded that serve, in effect, as fronts to advance the establishment perspective on China.   There is the Asia Foundation, the Contemporary China Research Centre, and the New Zealand China Council.   The Council is chaired by a former National deputy prime minister, and includes a former National Prime Minister (who holds various positions in the gift of the Chinese government, and other Chinese directorships), the chief executive of the Ministry of Foreign Affairs, the chairman of Fonterra, and other mostly less well-known figures.  The Executive Director is Stephen Jacobi, a former diplomat and industry advocate (with a past focus on North America).

At the People’s Republic of China (PRC) national day celebrations last week, the Consul-General invited Jacobi to speak.  He posted the text of his remarks on the Council’s website.  Those brief remarks were both extraordinary and banal.   Extraordinary for the degree of deference to the PRC, and the indifference to any concerns around Yang and Raymond Huo, and yet probably just what one has come to expect from an establishment whose considered approach appears to be never, ever, openly say anything that anyone could possibly construe as critical of the PRC.   National day celebrations aren’t the time to gratuitously offend people, but with normal countries it is quite appropriate to recognise differences of values, interests, and perspectives.  We and the United States, or the UK, don’t always see eye-to-eye, as you’d expect with two different countries.  With China, per Jacobi, it is as if our hearts are at one –  or at least our minds are well-trained to pretend so.

It is an honour for me to be with you this evening and to convey the warmest greetings and congratulations of the New Zealand China Council on the 68th anniversary of the founding of the People’s Republic of China.

Toasting the founding of a regime that has brought forth so much evil…..it turns one’s stomach.  He goes on to describe it as an “auspicious day”.

The relationship is going from strength to strength, building on the firm foundation of mutual respect, shared interests and a history of co-operation.

As one observer of China noted, it is “Party-speak” (and not of the cocktail variety).

As we have watched China emerge as a major global power, we have continued Rewi’s pioneering spirit as we have built a Comprehensive Strategic Partnership based on expanding trade, investment and people to people links.

From the earliest days in the history of our country we have welcomed Chinese immigrants, thereby increasing the vitality and diversity of our nation.

And, so on the one hand we simply rewrite our own history –  Chinese migrants weren’t exactly welcome in the 19th century –  and on the other we blithely celebrate the emergence of a global power that simply flouts international law (South China Sea) and its own international commmitments (including around the WTO).  For a country –  New Zealand –  supposedly committed to a rules-based international order, it is extraordinary obseisance.

And then unadorned congratulations.

I would also like to congratulate Dr Jian Yang MP and Raymond Huo MP and the other MPs with us this evening on their re-election to Parliament.

If anyone close to the Council is remotely troubled by Yang’s past –  hidden from the electorate for years – or the wider arguments advanced by Professor Brady, they are obviously keeping very quiet.    As with Charles Finny the other day, this is the establishment falling right in behind the position of these questionable figures –  particularly Yang in our Parliament.

While we have achieved much together, I believe there is more to come.

For now, though, it gives me great pleasure to propose a toast to the health and prosperity of the great Chinese people and to the relationship between New Zealand and the People’s Republic of China.

It is almost as if Jacobi and the Council believe that the PRC has any concern with advancing the interests of New Zealand and New Zealanders.    And thus he concludes with his toast to a regime that has been responsible for the deaths of tens of millions of its own people (and tens of millions more unborn), that is increasingly repressive of its own people, is actively engaged in subverting the political process and values of countries like New Zealand, and which is an increasing expansionist threat to other countries in its neighbourhood.

Perhaps you might charitably think this is just stuff he had to say.  You sell your soul, and you pay the price.

But then earlier this week, Jacobi was tweeting his endorsement (“message in here for us kiwis too”) for a piece in the Australia Financial Review,  in which the authors –  an academic and a business figures –  push back, by very heavy use of straw men, against any concerns about the PRC and its activities in, in this case, Australia.  Nothing to worry about apparently, China no different from any other country, and foreign donations are just a “fact of life”.  And this in a country where earlier this year an Opposition Senator had to resign his shadow frontbench position over claims he’d been backing China’s position on the South China Sea in exchange for money.

At least there seems to be a serious debate occurring openly in Australia.   Denton and Drysdale can make their case for the defence in the AFR.  But others are considerably more sceptical.  There was an excellent sceptical piece in the Australian cultural, political, and literary monthly, Quadrant  by a former senior China analyst in the Australian Office of National Assessments and a former Australian ambassador to the Koreas.    And perhaps more powerful was a short article yesterday by a former senior Australian diplomat and deputy secretary in the Australian DPMC, “The China-Australia free trade agreement meets the all-controlling state”.

Philosophically, Australia and China occupy different solitudes regarding trade and investment. These days, not always, the underpinning attitude for Australia is free enterprise capitalism: commercially motivated, profit-driven, private sector enterprise, pursued within a clear legal framework. Beijing’s version is state capitalism, plus an underpinning of autarky: investment at home and abroad directed to national priorities, improving China’s competitive advantage (often using subsidies). The aim is to enhance China’s economic power and sovereignty.

and

At a societal level, President Xi has been emphatically reasserting the centrality of the Communist Party. Controls over China’s citizenry are being tightened—for example, by the ‘great firewall’ scrutinising and limiting access to the internet, and by closer monitoring of all citizenry for a ‘social credit score’.

and

The recurrent experience of foreigners seeking to invest in China has been that they are pressured to provide information on their secrets and systems as part of the price on entry. One fears for Cochlear and CSL. This is now being taken a step further. According to a recent Angus Grigg article in the Australian Financial Review, in future all foreign companies operating in China will be forced to hand over sensitive commercial data to Beijing under a system directed at generating a ‘social credit score’ for commercial enterprises as well as individuals.

More generally, while foreign investment in China is encouraged in cutting-edge industrial sectors, foreign firms are squeezed out once they reach maturity, with their key technologies secured. Writing some months ago in the Australian, Rowan Callick noted that China opened its mining industry to foreign investors about 20 years ago. At the peak, in 2009, there were 300 foreign mining operations in China. The number is now down to a handful. ‘Through a range of contrivances their services have been dispensed with.’

I presume Fonterra is well aware of all this, although one wonders if their farmer shareholders are.

There are other examples  (or here) of a robust debate in Australia, and serious open scrutiny of the way in which the PRC is attempting to exert influence in Australia.  Reasonable people might differ on the conclusions and appropriate policy responses, but in New Zealand any discussion or debate seems to be regarded as some sort of lese-majeste.    And yet this is the government of our country we are talking about.

One of the issues that needs to be tackled is our political donations laws.

In the Charles Finny defence of Jian Yang I linked to the other day, there was this line

It is my understanding that Dr Yang has become one of National’s most successful fundraisers, in much the same way Raymond Huo is important for the Labour Party’s fundraising efforts.

I dug out Barry Gustafson’s history of the National Party, published only thirty years ago.  There Gustafson’s records the active efforts of the party stalwarts to raise funds, while noting that

“An unwriten  but scruplously observed rule has always been that no MP should be placed in the position of seeking, receiving, or even being made aware of money collected on behalf of the party”

No doubt the culture change is not just of relevance to ethnic Chinese MPs or candidates.  MPs –  legislating in the interests of all New Zealanders –  shouldn’t be known for their fundraising prowess. But, more particularly, we shouldn’t be running a system where the largest known donor to the governing party is a foreign-owned company with quite modest New Zealand operations.

How has New Zealand come to this?   Where even the debate is almost disallowed, where neither the politicians nor the local media seem to have any interest in pursuing the issues (whether specific-  Yang –  or general, those raised by Brady).    When did we become the sort of country where the Financial Times and the New York Times  –  worthy outlets both –  are the ones raising more searching questions about New Zealand’s polity, and its relationship with a hostile foreign regime than our own media and our own political figures (past or present)?

What makes our establishment so willing to perform what amounts, in effect, to today’s full kowtow?

Debating immigration

Someone yesterday sent me a link to a column from a Canadian newspaper in which a prominent Canadia academic was calling for a five-year pause in Canada’s high target rate of non-citizen immigration, to let housing (and other infrastructure) catch up to the population-driven increase in demand.  I can see the case when it comes to infrastructure, but I suspect that in Vancouver as in New Zealand the housing issues are mostly about land.  If the land use regulations aren’t fixed then a temporary pause in immigration for just a few years won’t make more than a temporary difference.   And in New Zealand, at least, the real economic problems associated with rapid immigration –  plenty of jobs, but few good economic opportunities to enable us all to really prosper –  have to do with the average level of immigration we target over time, not with the peaks and troughs in individual years.

But in reading that column, my eye lit on another article on the same site, “How to debate immigration without distorting facts and foes” .  It began

Canada is one of the few advanced countries that can’t seem to hold an authentic public discussion about immigration policy.

Canadian boosters of high immigration and those who oppose it are mutually contemptuous. Their verbal boxing matches are dominated by sloganeering and name-calling.

If Ottawa is ever going to take seriously public opinion to fine-tune its immigration policies, the combatants need to follow a few rules. They may need a referee, who acts fairly when others are losing their heads.

I’m not so sure that Canada is that different than other countries, including New Zealand and Australia.  But the article was about a new column by Andrew Griffith, a former senior official in Canada’s immigration bureacracy, who took early retirement, to undergo cancer treatment, and now has a interesting-looking blog Multicultural Meanderings  which touches on issues of culture, immigration, identity and so on.  I get the impression that he is generally rather sympathetic to Canada’s fairly liberal approach to immigration.   But what interested the journalist, and me, was the piece Griffith had written recently for a public policy forum on “How to debate immigration issues in Canada” .

Griffith begins

Given the polarization between those who advocate for more immigration and those who advocate for less, we need guidelines to facilitate more respectful and informative debates. I also suggest some alternative language for both viewpoints, to provoke reflection.

And he summarises his suggestions in two tables, one for those favouring more immigration –  apparently a live option in Canada at present –  but presumably also applicable to those defending the quite high rates of non-citizen immigration Canada already promotes.

and one for immigration critics

Not all of it is directly relevant to New Zealand debates, but much of it probably is.  I’d add, for both sides, “focus on the specifics of your own country’s experiences and constraints, even when informed –  as you should be –  by overseas experiences”.  These are important issues –  about economic performance, but also about culture and society –  and if all sorts of important issues often excite emotion (on both sides of any issue), it is likely to be more productive if the emotions and the analysis can be separated, to allow civil reflection on the arguments and evidence various people bring to the debates.  On the other hand, of course, political discourse and popular debate are never likely to proceed like some idealised academic seminar (and I stress the word “idealised” here).

On a more immediate note, Newsroom has a piece this morning on concerns in some industries about how they will/would cope if immigration to New Zealand was to be cut back.     The focus is particularly on a few industries that have made themselves very heavily reliant on immigrant labour.    If the rules make it relatively easy to recruit labour to particular occupations, and such labour is available from relatively poor countries, it is hardly surprising that the industry concerned will gravitate to a production model in which (a) wages in that sector are pretty low by New Zealand standards, and (b) a large proportion of the workforce is foreign.  New Zealanders become reluctant to seek work in the sector because there are better opportunities in other sectors.  It isn’t a state of nature, or something inevitable, just a product of the regulatory environment –  the rules.

The aged care/rest-home sector seems to be a prime example of this sort of phenomenon.  It is a growing sector –  ageing population and all that –  heavily reliant on government subsidies (and thus cost-restraint pressures), and is a totally domestically-focused sector.

As I’ve noted here previously, if overall immigration flows were sharply cut back, there would be short-term adverse effects on some sectors that have become particularly reliant on immigrant labour.  But there would also be a reallocation of labour within the economy: demand for labour would fall markedly in sectors (often not particularly reliant on immigrant labour, like construction) that depend heavily on population growth, and those workers would need to find work elsewhere.   In sectors like dairy farming and tourism –  previously heavy employers of immigrant labour – employers would be looking for locals to replace the immigrant labour they could no longer hire.   People might be reluctant to take those jobs, in which case employers might have to offer higher wages.  But because the exchange rate would fall –  probably quite a lot –  if immigration was cut back substantially, those employers could afford to pay higher wages.  Business activities in the tradables sector would be more profitable, and in relatively short-order the labour market would adjust (it would take time, and I’ve never suggested changing the rules overnight).

But the rest-home sector is different.  Cut back their access to immigrant labour, and they might have to offer more to attract New Zealanders to do the jobs.   New Zealanders will do the jobs, at a price.  30 or 40 years ago when my grandmothers were in aged-care homes, the bulk of the employers will have been New Zealanders.  The question is likely to be largely one of price (ie wage rates).

But rest homes may not have a lot of pricing power.  They are typically heavily reliant on fixed government subsidies, and if immigration is cut back they can’t suddenly turn themselves into an export industry.  There is no more income to support higher costs.

The industry pushes back in the Newsroom article

“It’s a big issue for us because we are facing over the next 10 years a real spike in the ageing demographic and estimations from the work that we’ve done … is that we’ll need 1000 extra workers a year between now and 2027.”

The notion that the industry could just hire New Zealanders to fill the positions was unrealistic, as caregiving was now a much more highly-skilled position and there were simply not enough locals willing to do the work.

1000 new workers a year –  in an industry that apparently employs 22000 people –  just doesn’t seem that much (there will always be fast-growing and slow-growing industries) and people will do jobs for a price.  In fact, whatever one makes of the recent pay-equity settlement – which seems to have loaded additional net costs on the rest-home sector –  it is likely to increase the number of people willing to do the work.

(And while I won’t rely on anecdotes, as Griffith notes they do sometimes contain insights.  And so the suggestion that care-giving was now “much more highly-skilled” rang a bit hollow when a staff member in a home a relative of mine lives in was trying recently to encourage a room full of dementia patients to vote.)

New Zealand is in rather desperate need of a lower long-term real exchange rate.  That means raising the prices of tradables relative to those of non-tradables, increasing the relative attractiveness of investing in tradables sector firms.  A much lower immigration target is one way to bring about such an adjustment.  For many non-tradable firms, such an adjustment would mean a much lower level – or path of growth for –  demand.   Those sorts of firms would become relatively smaller.   But there are some areas within the non-tradables part of the economy –  and the aged-care sector is a prime example –  where demand wouldn’t be materially affected, and costs might well rise somewhat (and, of course, the value of their extensive land holdings might fall).   There is no point pretending such pressure points won’t exist, but we shouldn’t be orienting a key strand of economic policy around the needs of a highly-regulated heavily subsidised industry, even if it is one that cares for many New Zealanders (our parents or grandparents) in their declining years.   An appropriate rebalancing probably would involve some increased costs for residents and families and some increased costs for the government.   But over time, the stronger productivity path that would be likely to ensue from abandoning the “big New Zealand” strategy, would enable New Zealanders as a whole to be made (considerably) better off.

As Andrew Griffith noted in his tables, sometimes opponents of the status quo feel free to attack what is happening at present without advancing specific alternative approaches that can themselves be scrutinised and challenged.   I’ve previously tried to meet that challenge and be relatively specific in what I’m putting forward as an alternative to our current (package of rules that make up) immigration policy.

Some specifics of how I would overhaul New Zealand’s immigration policy:

1. Cut the residence approvals planning range to an annual 10000 to 15000, perhaps phased in over two or three years.

2. Discontinue the various Pacific access categories that provide preferential access to residence approvals to people who would not otherwise qualify.

3. Allow residence approvals for parents only where the New Zealand citizen children have purchased an insurance policy from a robust insurance company that will cover future superannuation, health and rest home costs.

4. Amend the points system to:

a. Remove the additional points offered for jobs outside Auckland

b. Remove the additional points allowed for New Zealand academic qualifications

5. Remove the existing rights of foreign students to work in New Zealand while studying here. An exception might be made for Masters or PhD students doing tutoring.

6. Institute work visa provisions that are:

a. Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).

b. Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

More of the associated story for why such changes are needed is in this recent address.

(And as I quoted from a Newsroom story in this post, this is probably the point to disclose that I have recently entered an arrangement with Newsroom in which they will be paying me for occasional columns.  Those pieces will usually be variants of material that has appeared here first.  It will not change my willingness to disagree with other material they run, but in the interests of transparency, I thought I should disclose it.)