Wellington seminars

I spent yesterday afternoon at a couple of policy-focused seminars in Wellington.

The first of them –  “Tax on Tuesdays: Time to Even it Up” – was hosted by Victoria University’s Institute for Governance and Policy Studies, in conjunction with (if I heard correctly) the PSA and something called the Tax Justice Network Aotearoa NZ.  So the orientation was fairly left-wing, and explicitly focused more on fairness than, say, efficiency or prosperity.  But there were some interesting speakers, even if they didn’t have much time each so couldn’t dot all the i’s, cross all the t’s etc.

The first was Andrea Black, former Treasury/IRD official, former independent expert adviser to the recent Tax Working Group, tax blogger (and occasional commenter here), who focused on taxation of capital income.  After repeating her support for a capital gains tax, her distinctive argument was for an increase in the company tax rate to match the maximum personal income tax rate.   The main arguments appeared to be that (a) the most assured way of being able to tax the incomes of rich people in New Zealand was to tax companies (since in closely-held companies much of profits are distributed by way of loans –  not taxable in the hands of recipients –  rather than as dividends), and (b) the old argument about cleanness, minimising avoidance etc in having the company tax rate, the trust rate, and the maximum personal tax rate aligned (there being plenty of evidence that people will do what they can to defer tax by being paid through companies etc where possible).

I wasn’t really persuaded.  With dividend imputation, the company tax rate in New Zealand bears much more heavily on foreign investors (none of whom needs to be here) than it does on domestic shareholders.  In a country with low rates of business investment and now relatively low rates of foreign investment, it seems cavalier to be calling for increases in company tax rates which the global trend is clearly downwards (at 33 per cent the company tax rate would be the second highest in the OECD).   In defence of her position, Andrea invoked some old IRD analysis that company tax cuts haven’t made much difference to investment –    IRD has a strong institutional bias towards a simple tax system and little real focus on productivity, economic performance or anything of the sort – while noting that “if you did care about foreign investors” –  there were various technical tweaks (I didn’t catch them, but perhaps thin capital rules?) that could be adjusted to compensate them at least in part.

As if to forestall a question, Andrea alluded to this chart I’ve used several times –  a version of which appeared in the TWG’s own background document last year.

corp tax 2017

Prima facie, it didn’t as though – by international standards – we were undertaxing business income.

Now, of course, there are some well-recognised caveats to this data.  First, it doesn’t take account of dividend imputation in New Zealand (and Australia, but not elsewhere), and the TWG suggested there were some issues around consistency of treatment of government-owned businesses.  On the other hand, in many countries lots of stocks are owned by long-term savings vehicles with much less onerous tax provisions than their peers in New Zealand would have, and our tax system (mercifully) has fewer deductions and “holes” in it.     In yesterday’s presentation Andrea suggested that in many other countries various classes of business income that would be incorporated –  and thus captured in the chart – here wouldn’t be treated the same way in other countries.

All that said, if anyone is seriously suggesting that the chart of OECD data is substantially misleading about the New Zealand position –  say that in truth we might be in the lower half of the chart on an apples-for-apples comparison, the onus is probably on them to demonstrate that more specifically.    The OECD data itself suggests we have taxed businesses quite heavily going back 50 years, to (for example) well before imputation was ever on the scene (chart in this post).  Perhaps it is just coincidence – and I’m certainly not suggesting it is the only factor –  that business investment as a share of GDP has been low by OECD standards throughout almost all that period.

The second speaker was inequality researcher Max Rashbrooke.  His focus was on taxing wealth.  He doesn’t like the idea of a land tax (partly because land is held more widely than most assets, partly because Maori land would have to be “omitted for justice”) or the risk-free rate of return deemed income method that has been proposed by various groups (including the McLeod tax report, and TOP) because he doesn’t believe it is right or politically feasible to include the family home.    His argument was for a wealth tax, levied at (say) 1 per cent per annum on net wealth, but applying only to those with net wealth in excess of (say) $1 million.  This was sold as something of a moneypot, with revenue estimates of $6 billion a year.

Based on what he told us yesterday, the ideas didn’t seem to have been advanced in much detail yet, including the question of how one might get annual valuations of unlisted companies.   I asked about what proportion of his estimated $6 billion of revenue would come from ordinary middle-aged and elderly Auckland homeowners (given his unease about taxing the family home), but he didn’t know.   Personally, I couldn’t help thinking that a better approach would be to fix the urban land market at source – kill off the regulatorily-induced artifical land values, and (a) the cause of justice and fairness more generally would be served, and (b) there would be nothing like $6 billion per annum of revenue on offer.

The third speaker was someone called Michael Fletcher, of IGPS, who was apparently an advisor to the Welfare Working Group.  He was mostly talking about the welfare system –  in lots of detail, but with a view of the place of the welfare system that was so different to my own that I’m not going to spend much time here on what he said.  There was the odd striking statistic, notably his suggestion that perhaps 100000 people may be entitled to the Accomodation Supplement but not getting it (and he highlighted how easy the Australian comparable entitlement is to access, if you are entitled to it, relative to New Zealand), but I was left unchanged in my view that so much could be done for the better, for those at the bottom, if only the urban land market were freed-up.  Rents, after all, should have dropped very substantially in real terms over the last decade –  in a functioning market that would be an expected corollary of steep falls in long-term real interest rates – and haven’t because central and local government rig the system against renters and new purchasers of dwellings.

For myself, on tax I remain tantalised by the idea of a progressive consumption tax. In the abstract, it gets around all the debates on capital gains taxes, realisations (or not), company taxes, gift or inheritance taxes or whatever, and has the appealing the feature of taxing people on what they consume not on what they produce.  Of course, no country runs such a system –  which does have formidable practical issues.   And if one wants to align company and personal rates – which has some appeal (although the Nordic model questions that), better to lower the personal income tax rates by 5 percentage points (max rate to 28 per cent) and add a Social Security Tax of 5 percentage points on labour income up to a certain threshold.  New Zealand and Australia are, as I understand it, the only OECD countries not to adopt some such model (we do it on a very small scale with ACC).

From Victoria University, it was up the street to The Treasury where Alan Bollard was billed as speaking on

“New Zealand as a Leaky Economy: Are We Responding to Changes in Globalisation?”

As Alan is a smart guy, has been one of the “great and the good” of the New Zealand establishment for decades –  chief executive of one body after another for more than 30 years – even as New Zealand’s economic performance has continued to languish, and has recently finished a stint as Executive Director of the APEC Secretariat, it should have been interesting and stimulating.  It wasn’t.

Here was the summary that drew me along

For the last few decades New Zealand’s general policy approach has been to pursue economic openness (with some protections), in order to get the benefit of international growth drivers. Some of the political and economic developments around globalisation today are challenging that traditional approach.

Traditionally we think of external economic balance as the current account. Dr Bollard’s approach would go much wider, exploring our patterns of merchandise trade flows, services trade, short term capital movements, outward direct investment, labour movements, economic migration, data movements, business mobility and other less tangible flows (e.g. intellectual property, human capital) across borders.

Much of the debate centres on our inflows. This seminar turns the spotlight on outflows. It questions whether we are leaking value internationally: losing talent, falling off the value chain, undervaluing services, losing businesses (including their ideas and their taxes) to overseas interests. Questions abound: do we really leak value, do we have any alternatives, and what might “sticky policies” look like?

But there just wasn’t very much there.

He talked under various headings.

On goods market trade, what he had to say seemed to boil down to the fact that distance really matters for New Zealand and that two-thirds of our exports are still commodities, noting the failure of the Fonterra value-added dream.    We draw on tangible and inflexible resources (natural resources) whereas places like Hong Kong or Singapore (or, one could add, major European or North American cities) don’t.

On services trade, there also wasn’t much there.  He noted that New Zealand had long been a net services importer, but beyond noting –  rather misleadingly – that tourism and export education had been doing well, there wasn’t much beyond noting various global trends and technologies.

On international capital markets, there also wasn’t much.  As he noted, we typically have current account deficits, have modest savings rates, and have a banking system mainly run by Australian banks.  The claim that markets internationally are “increasingly globalised” seemed odd, both against the backdrop of smaller global imbalances than were apparent last decade, and the rising tide of restrictions in various places on foreign investment (whether US restrictions on China, or New Zealand restrictions on purchases of houses or farm land –  both of which he noted).

Of the market in labour, there was (surprisingly) little or no mention of immigration policy, but quite a focus on the outward flow of New Zealanders (and the high skill levels of many New Zealanders).  His assertion is that “talent is increasingly mobile”, and yet across the board for New Zealand that also looks not really true –  it is harder for New Zealanders now to go to Australia than it was and, as a result, that net outflows of NZ citizens) are much smaller (share of population) than they were several decades ago, even as the productivity and income gaps have widened further.

In discussing the market for corporate control, Alan listed various facts and factoids, including the suggestion that one of the biggest assets now owned by foreign companies was “our data”, and the notion that New Zealand ideas leaked abroad (but then, as he had noted earlier, this is hardly new –  Glaxo having been founded in the 19th century New Zealand).

And then as he got to the end and turned to policy, he could only conclude that there were – in his view – ‘no easy answers’, including noting that we were constrained by various international agreements (he didn’t tell us what interventions he’d propose if we weren’t).  There was favourable mention of the student loans policy that bears more heavily on people if they leave than if they stay, repetition of an old (misleading) line that houses have become international financial assets, and really not much more.  And there was the old question of who do we make New Zealand policy for: New Zealand or New Zealanders, and who counts as New Zealanders in this context, but few or no attempts at answers.    The fact that New Zealanders would be crewing many of the America’s Cup yachts of other countries, and that some New Zealanders would be playing for other countries’ RWC teams was mentioned, but not in a way that left me any close to sensing that he was doing more than lamenting New Zealand’s continuing economic decline –  without, in the hallowed halls of Treasury, being so upfront as to mention it –  which sees able New Zealanders looking abroad for better returns to their talent (as able people from many middle income and poor countries do –  see African or Latin American players in European soccer leagues).

To his credit, Alan took a lot of questions.  In many cases, the questioners seemed to be attempting to get Alan to endorse their preferred line of argument or policy option.  Actually, that included his wife –  Jenny Morel –  who suggested that Alan was underplaying the success of our high-tech firms (citing the repeatedly spun and highly misleading TIN report), to which Alan returned to his theme that such companies can and do leave very quickly, and noting again the loss of able people (explicitly highlighting that the two Bollard children are now living and working abroad, apparently permanently).

A Treasury official asked Alan about the real exchange rate, noting that many conventional analyses (and, perhaps, unconventional ones like my own) stress the role of a persistently overvalued real exchange rate.  Alan was pretty dismissive of the issue, suggesting if there was an issue it was nothing more than cyclical.

Perhaps, but when the gap between productivity and income levels in New Zealand and the rest of advanced world has kept widening for decades, and yet the real exchange rate has been high and rising this century and the foreign trade shares (imports and exports) have been falling, it looks like an issue that might repay rather more attention.  In my experience, Alan always tended to treat the real exchange rate as a financial variable, whereas is generally better seen as a real phenomenon, the outcome of various domestic pressures and imbalances (the price of non-tradables –  driven by domestic forces –  relative to the global price of tradables).

Alan Bollard wasn’t purporting to offer some fully-developed story of New Zealand’s economic decline, so I won’t fault him for not doing so, but it ended up as a rather strange talk.  The subtext was of the failures –  and yet those declining trade shares were never mentioned, nor (for that matter) the productivity story –  and there was the mixed pride and regret of older parents whose children have joined, perhaps permanently, the diaspora.  It was as if he knew there were problems, perhaps even rather serious ones, but wasn’t able or willing to think hard, or talk openly, about causes and what aspects New Zealand authorities could so something about.  That’s a shame.

 

 

The bank capital insurance policy: update

In my post yesterday I played around with some illustrative scenarios on the costs and benefits of the “insurance policy” the Reserve Bank Governor is proposing to impose on us: higher capital requirements for locally-incorporated banks will, on the Bank’s own estimates, impose an annual cost in the form of a modestly lower level of GDP each and every year, while in exchange there is the hope of averting some GDP costs from a rare but fairly severe financial crisis (perhaps in the form of several failures of large banks).

I used the Bank’s own estimate of the GDP cost (“up to 0.3 per cent per annum” –  so used 0.25 per cent) and as a discount rate used either the current Treasury recommendation for regulatory proposals, or one a bit lower to take account of the sharp further fall in long-term interest rates this year.   And to simplify things, I looked at various scenarios for the GDP cost of a financial crisis 75 years hence (the policy is supposed to ensure that New Zealand isn’t exposed to a crisis more than once in 200 years, so I used a 150 year time horizon to think about what benefits we might secure if the policy is adopted).

On those scenarios, the Bank’s proposal simply did not stack up.  The costs far outweighed the benefits.  If so, the insurance premium was not worth purchasing.

Last night a commenter pointed out, correctly, that my simplification (focusing on a single date –  a crisis in 75 years time, halfway through the 150 years) probably wasn’t warranted, because the discount factor is non-linear.  As it happens, so is the GDP cost (since real GDP itself is assumed to rise by –  middle assumption –  2 per cent per annum.

There are two simple ways to overcome this.   The simplest to illustrate is this one.

The Reserve Bank tells us it thinks the annual costs (to GDP) are around 0.25 per cent.  And if, say, the GDP cost of the a crisis (three scenarios below, the third really as an illustrative extreme) once every 150 years is divided by 150, we get an estimated average annual GDP saving.

GDP effects per annum)
Costs (RB assumption) 0.25
Benefits: GDP saved
Equal annual probability of crisis over 150 years
10% 0.067
20% 0.133
30% 0.200

It would take averted crisis costs –  simply from the bank failures, not from the prior misallocation of resources in the poor lending/investing – well in excess of 30 per cent of  for the expected benefits to equal the expected costs.  Alternatively, the Bank’s estimate of the costs –  itself conservative in some respects –  would have to be revised down quite materially.

That particular approach isn’t dependent on an assumption about discount rates at all.  But to continue the approach in my post yesterday, here was the table (from that post) of the estimated present value of the costs of the policy (the 0.25 per cent per annum capitalised) on various trend growth and discount rate assumptions.

Present value cost ($bn), 150 years of 0.25% annual GDP loss
Real GDP growth
1.5 2.0 2.5
Real discount rate 5% 21.60 25.20 29.90
6% 16.90 19.10 21.80

The middle column is my baseline scenario (perhaps 1 per cent annual population growth and 1 per cent annual productivity growth).

So what if, instead of focusing on a crisis in 75 years time, we assign an equal probability of a crisis to each of the next 150 years, using that baseline scenario (2 per cent per annum real GDP growth)?

scenario 1

Or if we simply focus on the offical Treasury discount rate guidance (6 per cent) here is table of the savings under various trend growth and crisis loss assumptions.

Present value of GDP benefits of averting a crisis (probability spread evenly over 150 years) 6% disc rate
Trend GDP growth 10 20 30
1.5 4.5 9 13.5
2 5.1 10.2 15.3
2.5 5.8 11.6 17.5

In none of these scenarios do the savings equal the cost of the policy.  My own central scenario would be 2 per cent trend GDP growth and a 10 per cent GDP loss (perhaps 2 per cent a year over five years) purely from a financial crisis.  With a 6 per cent discount rate, the costs over 150 years are around $19 billion amd the benefits perhaps $5 billion.

And, as I noted yesterday, all this assumes the policy can be committed to for 150 years.   Realistically, the current Governor can’t commit much beyond his term, and the probability of severe crisis in the next decade or so looks –  on the Bank’s own analysis and stress tests –  very very low.

Of course, all of this is only illustrative, but in a sense that is the point.  We need the Reserve Bank to do what it has not yet done –  and tells us it won’t do until the final decision is made –  and lay out their assumptions, how sensitive their results are to various different assumptions, and some assessment of the reasonableness or otherwise of those assumptions.

One could play around with all sorts of additional assumptions (including weighting the savings –  in the midst of a period of difficult economic times) –  more highly than the costs.  But unless the Bank itself is materially overestimating the expected “insurance premium” it is hard to see how the benefits of what they propose are likely to exceed the costs.

And that, of course, was the gist of a recent paper, taking a quite different (and more high tech) approach and not focused on New Zealand, done by a group of experts at the BIS.

Revisiting an incredibly expensive insurance policy

The Reserve Bank’s radical bank capital proposals –  markedly increasing required capital for locally-incorporated banks, in a country with (a) a low demonstrated risk of financial crisis and (b) high effective capital ratios by international standards anyway –  hasn’t been much in the news lately.  The Governor –  unelected, but sole decisionmaker on this –  his own –  proposal has presumably retreated to his high tower to contemplate.   He hired some carefully selected overseas academics to review bits of the Bank’s analysis, and we might expect to see their reports shortly (but recall the tight constraints on what they were allowed to look at, who they were allowed to talk to etc).

I was doing an interview yesterday on various aspects of the proposal, including making the point that what the Governor is proposing can be seen as –  on the Bank’s own numbers – an incredibly expensive insurance policy, paid not by the Governor and his colleagues of course, but foisted on the people of New Zealand.      But I used a number in the course of the interview and when I got home I realised it didn’t sound quite right, so thought I should review the estimates.   I’d written a post on this some months ago.

There are various estimates around as to how much difference the proposed new capital requirements might make to real GDP.  I gather the ANZ has suggested anything up to a steady-state levels loss of 1 per cent (ie each and every year GDP is lower than otherwise by that amount).    Channels could include higher costs of credit and possible reductions in the availability of credit.

I wouldn’t completely rule out such numbers, but for my purposes I’m content to use the Reserve Bank’s own estimates.  In a speech in February the Deputy Governor told us the Bank thought the cost could be “up to 0.3 per cent per annum”.   So lets use 0.25 per cent  (if they really thought the effect would be no higher than 0.2 per cent, they’d have said “up to 0.2 per cent per annum”).

That might sound like quite a small number.  In fact is something like $750 million this year, and that cost is repeated each year.  And since the real economy is growing over time, the dollar value of the cost –  the annual insurance premium  –   only increases with time.

We can discount back to the present the value of all those annual insurance premia.  The answer, of course, depends in part on other assumptions.   Over the longer-term, real GDP growth will be largely a reflection of population growth and productivity growth.  In a New Zealand context, 1 per cent per annum each might seem a reasonable central estimate.   And then there is the discount rate: current Treasury guidance suggests using a real discount rate of 6 per cent for regulatory proposals, but of course long-term rates have fallen quite a long way since that guidance was issued, so I’ve also shown the numbers for a 5 per cent per annum real discount rate.

I’ve done the calculations for 150 years (recall that the Bank’s proposal is about having resilience to cope with a 1 in 200 year shock), but of course the bulk of the present value costs are borne in the first few decades.

Present value cost over 150 years ($bn)
Real GDP growth
1.5 2.0 2.5
Real discount rate 5% 21.60 25.20 29.90
6% 16.90 19.10 21.80

Recall that the output cost was the Bank’s own number, the discount rates are based off Treasury numbers, and that these are probably low-end estimates since (a) they take no account of transitional disruptions, which are front-loaded, and (b) being GDP focused they take no account of the additional income transferred to foreign shareholders in domestic banks (a very substantial sum on the estimates done by my former colleague Ian Harrison).

And what are we getting for our insurance premia?

You might recall that, waving his finger in the air, the Governor decreed that his proposals were conceived with the goal of ensuring that New Zealand didn’t have a financial crisis (probably, a succession of bank failures) more than once in 200 years.

So lets assume, just for the sake of argument, that the Bank’s proposals are implemented and they are sufficient to prevent one serious financial crisis that would otherwise have occurred every 150 years.  (Existing, quite high, capital ratios are assumed to prevent other smaller, more frequent crises).

We don’t know when in the 150 years that crisis might occur, so lets just assume it happens 75 years from now.

But then the key variable is what scale of output losses is saved.    The Bank likes to assumes very large losses, sometimes permanent ones (ie a financial crisis now itself reduces the level of GDP even 100 years hence).     I’ve argued that much of the analysis and discussion in this area is wrong and (when undertaken by regulatory agencies) self-serving.      Many of the output losses associated with (word chosen carefully) financial crises do not arise from the crisis itself (bank failure etc) but from the poor quality lending and investment decisions that happened in the years prior to the crisis, and which –  most likely –  would have happened anyway, regardless of the level of capital.   The segment of any apparent output losses than might be saved by higher capital requirements is some fraction –  probably a fairly small fraction –  of the total economic underperformance in the wake of the crisis.   As I’ve noted before, in my own analysis and that undertaken by William Cline at the Peterson Institute, actual differences in output growth between crisis and non-crisis countries (eg post 2007) are much smaller than the numbers the Reserve Bank and foreign regulators like to wave around.    And as I noted in my own submission to the Reserve Bank

Note also that the Cline methodology still overstates the amount that higher capital ratios alone might save, since his output path comparisons include (for the crisis countries) both kinds of losses – from the initial misallocation of resources, and the pure crises effects.   Only the latter should be relevant in assessing the costs and benefits of higher minimum capital ratios.

I reckon the most one might allow for a saving might be 10 per cent of GDP (eg annual GDP 2 per cent lower than otherwise for five years, purely as a result of the crisis, and despite best stabilisation estimates of macro policy).   But, for illustrative purposes, lets say the number is 20 per cent (something like the Cline estimates) or even –  heroically 30 per cent.    Remember that the crisis is happening 75 years from now, so that even though GDP then will be much bigger than it is now, we need to discount that saving back to today’s dollars, to compare against the present value of the insurance premium.

In this table I’m assuming real (potential) per capita GDP grows by 2 per cent per annum (the middle scenario above)

Present value of GDP benefits ($bn) of averting a crisis 75 years hence
Size of saving (% of GDP)
10 20 30
Real discount rate 5% 3.2 7.2 9.5
6% 1.5 3.5 4.5

My view of the likely savings would be represented by the first column: it doesn’t really matter which discount rate one uses and the present value of the benefits is derisory relative to the present value of the annual insurance premia  (in fact the benefit/cost ratio would look almost as bad as for –  say –  light rail in Wellington).   But even if you use the Cline numbers, even if you go beyond that and assume really huge savings 75 years hence from this one regulatory intervention, in no scenario do the benefits (this table) come even close to matching the cost (first table).

And all this on the Bank’s own view of the annual insurance premium.

To all of which one could add the reminder that while the Governor talks today of implementing policies which made generate a real saving decades hence, he has no commitment mechanism.  His own term is only five years.  He’ll probably get reappointed for another term, but even then the government is consulting on proposals that would mean he would no longer be the sole decisionmaker.  Regulatory tastes, fashions, and judgements change and there is almost no chance that a regime inaugurated today would last 50 or 100 years (long enough to generate real benefits, since no one thinks the New Zealand banking system is at serious risk of crisis right now).   If the regime only lasts 10 years, until some other decisionmakers change tack, we’ll have paid a present value of perhaps $6 billion (plus all the transitional costs and disruption) for no benefits at all.  Another way of looking at it is to put a 50 per cent chance on any regime being persisted with for multiple decades: the expected present value of benefits halve, but the present value of the annual costs is frontloaded.  The equation looks even worse for the Bank’s case.

Not all risks are worth insuring against (try introspection on the risks to your own life or finances, or that of any business).  On the Bank’s own estimates of the premium costs, the policy they are offering (well, planning to impose) simply isn’t worth it.

Of course, if we had a decent policy process in the first place, we’d have had cost-benefit analyses –  perhaps various approaches –  laid out by the Bank months and months ago.   Don’t get me wrong.  No cost-benefit analysis is ever perfect, or the definitive “right” answer, but laying out the assumptions and the sensitivites helps enable more critical scrutiny of what the regulator is proposing, and (if done well) may even enhance confidence in what they are proposing.  The Governor’s approach remains one of not showing us any serious cost-benefit analysis –  and not engaging with the perspectives others offer –  until he has made his final decision.  At that point, any cost-benefit analysis –  done by his own staff to support his own decision –  serves only decorative (or PR) purposes, not functional ones.

It isn’t good enough.

UPDATE: A commenter points out, correctly, that non-linearities mean that the simplification of just focusing on a shock halfway through the 150 year horizon isn’t really valid (skews the results against the proposal).    I extended the analysis, and checked that the conclusion didn’t change, in a separate post here.

 

The Bridges kowtow

In his Herald column last week Matthew Hooton offered some thoughts on what sort of Prime Minister Simon Bridges might be.   It seemed optimistic to me.  For example, according to Hooton.

Like Bolger, Bridges’ ambition is not just joining the prime ministerial club for its own sake, but to be one of the few to achieve genuine intergenerational change.

I racked my brains, dredging the recesses of my memory, and still struggled to think of anything –  whether in what he said as a minister in the previous government, or as Opposition leader in the last 18 months –  that would offer even a hint of such ambition, or of policy proposals that might bring about such change.   What sort of “intergenerational change” does Hooton have in mind I wonder?    Judging by the economics discussion document last week – which had some good, but not very ambitious, bits –  not something about reversing our decades of disappointing economic performance.

But one thing we have every reason to be “confident” of is that Simon Bridges as Prime Minister would be every bit as deferential to Beijing and its interests as Jacinda Ardern or John Key and Bill English before her.    All while, no doubt, trying to tell himself and us that somehow this shameful pandering is for our own good, in our interests.  The only interests it actually serves are (a) those of the PRC, (b) those of the political party fundraisers, and (c) a few exporting companies, including our universities, that made themselves (conscious choice to sup with the devil) too dependent on the PRC market, and thus exposed to the threats and pressures of the regime and Party.     Selling out the values of your people for a mess of potage never ends well.

It is only quite recently that Simon Bridges has been directly accountable for most of the National Party’s choices in this area.   Even in John Key’s final ministry, Bridges was only the 9th ranked minister, with internally-focused portfolios.   But by 2017, he’d climbed further up the Cabinet rankings and was Minister of Economic Development.  In that capacity, he was the minister who signed, on behalf of the New Zealand government, the memorandum of arrangement on the Belt and Road Initiative of the PRC.

I wrote about that document here.   I’m going to do Bridges the courtesy assuming that he (a) read, and (b) believed what he was signing.     Among those commitments was that the participants (Bridges’ government and the PRC) would promote a ‘fusion among civilisations”, and “coordinated economic, social and cultural development”.   There was also the commitment to advance “regional peace and development”, as if the PRC had any interest in such peace, except on its own terms (‘submit and you’ll be fine”).

Perhaps Bridges didn’t really mean it.  Perhaps the boss just told him to sign.  But there has never been any suggestion he didn’t mean it.  If he’d objected to this unsubtle attempt to suggest that the PRC system and our own are somehow equally valid options, I’m sure they could have found another minister to sign.  But Simon Bridges did.

Since then, of course, he has been elevated to the leadership.   Perhaps, as Hooton claims, the Bridges leadership style is a consensus one.  But things leaders care about tend to happen, and things leaders don’t care about don’t.     Perhaps as a mere minister, Bridges had known little or nothing about Jian Yang’s background in the Communist Party and in the PLA military intelligence system –  perhaps not even why he’d been moved out of the foreign affairs committee of Parliament –  but next week it will be two years since all that went public.   I’m sure Bridges back then didn’t know what Jian Yang has subsequently told us: that he misrepresented his past to get into New Zealand, and did so on the instructions of the PRC authorities.  But he has known it all for the entire time he has been leader.     Perhaps he didn’t know that serious figures –  not flame-thrower types –  would take the view that because of Jian Yang’s closeness to the PRC embassy it was important to be careful what was said in front of Jian Yang.   But he has now known that for a long time too.   Jian Yang sits in caucus meetings every week, and presumably Bridges is not particularly careful what he says.

Bridges didn’t control the National Party list in the 2017 election.  But he controls caucus rankings and responsibilities now.    And not only has he never expressed any public unease about the Jian Yang situation, only recently Jian Yang received a promotion (chair of Parliament’s Governance and Administration Committee) from Bridges, and this very week we learn that Jian Yang is part of the Simon Bridges/Gerry Brownlee official visit to the PRC.  No one really doubts that if Bridges had any serious concerns at all, not only would Jian Yang not be receiving these signs of favour, he wouldn’t even be in the caucus any longer.   (Of course, it is shameful that the other parties do nothing to call out the Jian Yang situation, but he is primarily the responsibility of the National Party, and of Simon Bridges in particular.)    Far too valuable as a fundraiser I guess, and if Bridges had said or done anything other regime-affiliated people and institutions might have looked on him with disfavour.  And he wouldn’t have wanted that would he?   Yikun Zhang, for example, mightn’t have invited him and Jami-Lee Ross to dinner.

Of course, the indications of how far gone Simon Bridges is in his deference to Beijing aren’t just about the Jian Yang situation.  No one heard him express any concern either about the ridiculous situation earlier in the year when regime-affiliated Labour MP Raymond Huo was going to chair the inquiry into foreign interference in our electoral processes etc.

And when a defence policy document uttered some mild, and pretty factual, statements about the PRC, what did we hear from Simon Bridges?  Not some support for a robust defence of New Zealand interests, values, and historical alliances, but rather complaints that the PRC might be upset.    There is no sign that he has reined in party president Peter Goodfellow’s enthusiasm for singing the praises of the PRC/CCP.   And when he senior MP, and close ally apparently, Todd McClay was defending the concentration camps in Xinjiang as “vocational training centres” and really nobody else’s concern, was there any apology, any distancing himself from McClay’s stance.  Not a bit of it.

When there were doubts about how ready the PRC were to invite the Prime Minister to visit, Simon Bridges was early into the fray to criticise –  not the PRC but –  the Prime Minister.  Can’t have Beijing being upset at all, ever, can we?  Not like a normal relationship.  For Bridges it appeared to be all about abasing ourselves (well, himself) and asking only “how high” when Beijing says jump.

Or, when the current government quietly (and embarrassedly) signed up the recent multi-country letter of protest about the Xinjiang concentration camps, did you see words in support from Simon Bridges or his senior spokespeople?  No, it was all quiet on the National Party front.  Nothing about supporting a robust stance on Huawei either.

Has anyone ever heard Simon Bridges utter a critical word about the regime in Beijing, even as ever-more evidence of its excesses (whether political, religious, civil, economic, or whatever) comes to light?  I haven’t.  And I’ve searched and found nothing.  And that despite the values of the regime being antithetical to what used to be the stated values of the National Party.   When something more than deals and donations mattered.  I still recall as a university student in 1980 Don McKinnon coming up to a lunchtime meeting on campus to defend the then National government’s stance discouraging New Zealand participation in the Moscow Olympics. I think we can imagine how Bridges (and McKinnon) would react to any suggestion that a New Zealand government might discourage participation in the next Winter Olympics, to be held in the PRC.   Are there any limits to National’s deference to Beijing?   None have been apparent under Bridges.

Oh, and then there are the donations.  There was the Yikun Zhang business last year, where Bridges was not exactly rushing to suggest that donations from a donor with strong regime-affiliations might “buy” another place on the National list (recall too Jian Ynag’s involvement in getting Yikun Zhang an official honour for –  in effect – services to Beijing).   All Bridges was reduced to was the claim that any donation wasn’t illegal.  Lots of things aren’t illegal, but it doesn’t make them right.   It was much the same story when the Todd McClay donation story came out just recently –  our foreign trade minister had been actively involved in securing a very large donation from a PRC billionaire, routed through a New Zealand registered company.  “It wasn’t illegal” was again the only Bridges line.   As if large donations from known donors don’t create expectations of future relationships etc –  nothing so crass as a specific policy purchase, but cast of mind and all that.

We’ve had no leadership at all from Bridges on the foreign donations issue more generally.  No suggestion that if you can’t vote here you shouldn’t be able to donate.  No suggestion –  proactively –  that the National Party would not seek, and would not accept, significant donations from anyone with close ties to a foreign government (although, of course, the PRC is the main issue).  Bridges seems quite happy to keep the current compromised regime, and the flow of tainted money to the party.

And then, of course, there is the current trip to the PRC.  The timing is pretty extraordinary, and perhaps telling of the National Party’s utter lack of interest in expressing any sort of moral dimension to our foreign policy.  1 October is the 70th anniversary of the Chinese Communist Party takeover.  The tyrants of the Party will no doubt be making great play of their accomplishment – holding onto near-absolute power for that long –  but why would anyone else, anyone of decency, associate themselves with the regime right now.  Do you forget the tens of millions who died in the Great Leap Forward, do they forget the Cultural Revolution, do they forget Tiananmen Square, do they prefer to ignore completely Xinjiang, do they prefer to pretend that the renewed suppression of any domestic dissent, the heightened persecution of religions of whatever stripe just isn’t happening, are they unbothered about the renewed threats to Taiwan, or in the East and South China Seas, or the state-sponsored intellectual property theft (called out by GCSB last year, with not a word from Bridges) just aren’t happening?  Or are no concern of ours, things we can simply walk by on the other side, and trade merrily with the repressors.

Perhaps we will be told quietly that in their meetings Bridges, Brownlee, and Jian Yang will have raised “human rights concerns”.  It is the standard official defence.  But it should be no defence at all.  Embarrassed shufflings and pro forma private comments count for nothing if you aren’t willing to say anything in public.   National doesn’t, and won’t (neither of course does the government, but this post is about the Opposition –  who are freer to talk, freer not to travel etc but who chose the path of deference and submission.  Not so different from vassaldom.    It is all the more extraordinary that they proceed with the trip just after the Todd McClay revelations.  Bridges has been blathering about seeking spiritual blessings on the India leg of the trip, but you can’t help thinking that making obeisance before Beijing and receiving their words of approbation isn’t more the point.

And then, not least, there is Hong Kong.   Freedom is dying by the day in Hong Kong, and there is no doubt that the PRC itself is calling the shots (see, for example, the Carrie Lam tape). Police brutality is rampant, and protestors –  who see only the prospect of complete absorption by the totalitarian PRC (whether now, in 2047, or some point in-between) –  have courageously taken to the streets week after week to stand up against the threat to  the sort of freedoms we take for granted, that National once claimed to stand for.  A decent and courageous political leader –  a man of faith, or morals, of a belief that freedom matters even when it costs –  would have recognised the climate and chosen to call off his trip to Beijing.  The PRC wouldn’t have liked it one bit.  Nor would MFAT.  Nor would Goodfellow and the party fundraisers.   But it is just an idle fantasy anyway, the idea of some leading political figure in New Zealand ever making a stand, be it ever so modest –  from the position of Opposition even.  And never more so, it seems, when Simon Bridges leads the National Party.  And Jian Yang –  CCP membership, misrepresented past and all – remains at his right hand.

Are there any limits?

(And, to repeat, Jacinda Ardern is quite as bad, but this post is about National.)

 

Immigration and NZ economic performance

Geoff Simmons, the economist who is leader of The Opportunities Party (TOP), invited me to come along to their monthly Wellington event to talk about my views on New Zealand’s immigration and the likely connections between high target rates of non-citizen immigration, extreme remoteness, and New Zealand’s long-running productivity underperformance.    Geoff has run a series of these conversations –  including one fairly recently with Arthur Grimes on the “wellbeing Budget”, and another on aspects of the tax system with Andrew Coleman.   They seem to be the party of policy wonks  (TOP’s own immigration policy –  much of which I’m fairly sympathetic to – is here).

Monday evening’s conversation with Geoff, and the follow-up Q&A session, was recorded and is now available (the title is their own –  I rather winced when I saw it this morning)

I haven’t listened to it again so am not sure how the story comes across in this format.  Like, I’m sure, almost every speaker ever I came away conscious of lines that could have been run better, or useful analogies that I forgot to include.  But for anyone interested, there it is.

I’ve done various presentations, articles, and so on on elements of my story, tailored for different audiences.  Some of those from recent years are

speeches

Links to all those are available here.

For the gist of the story, here are the last couple of paragraphs of one of those speeches.

40 years ago, Sir Robert Muldoon, Bill Birch and the rest of that government launched the series of incredibly costly energy projects known as Think Big.  It was, with the best will in the world, an utter disaster.  But it came to end after only a few years.   By contrast, our immigration programme, which has now run this way for almost 30 years is really much more deserving of the label Think Big: it is bigger, has skewed the economy more, has lasted longer, and has done much more to damage the prospects of New Zealanders living here.  There has been a central planners’ conceit that we can simply ignore what NZers are doing –  leaving, typically in large numbers –  and bring in lots of (modestly skilled) foreigners, and concentrate them in Auckland.  Do so, so the implicit story goes, and new highly rewarding industries and opportunities will arise –  the wonders of what economists call agglomeration.   It has proved to be an incredibly flawed strategy.  In successful big cities abroad, GDP per capita far exceeds that in the rest of the respective countries, and the gaps are growing.  Think London, or Paris or Shanghai, or San Francisco or Amsterdam.  But just don’t think Auckland.  Despite really rapid population growth over decades, Auckland’s GDP per capita exceeds the New Zealand average by only a modest margin.  And worse, for the 15 years for which we have data, that gap has been shrinking, not widening.    British exports are London-based, but it is hard to think of a material export industry that is based in Auckland (or Wellington).

We need to start taking more seriously the terrible disadvantages our distant location imposes.  That means it is time to give up the big (population) ambitions that have guided –  probably subconsciously –  most political leaders since at least Julius Vogel, and instead make the most of the strengths we already have: smart and energetic people and strong institutions.  Perhaps one day we’ll have exceptional productivity growth, and so many opportunities here that we simply can’t make the most of with the people we have.  For decades, it hasn’t been that way.  It isn’t now.  So we should stop the mythmaking, and revert to being a normal country –  one that makes its own prosperity, with its own people –  rather than endlessly hankering (as our officials and ministers constantly seem to) after some better class of people over the water who, if only we could get them, in enough numbers, might finally reverse our century of decline.  It simply won’t happen.  We need to change course.

Where there is no vision

Each year, as a disillusioned voter (pondering being a non-voter, for the absence of credible options) I go to the effort of tracking down the conference speeches of the main party leaders.  What party leaders choose to emphasise, in one of their most-covered speeches of the year, can be telling.  As, of course, can what they choose to omit.  When Labour was in Opposition I never took very seriously talk (eg from Phil Twyford) about  fixing land use regulation and thus materially lowering the cost of housing because the leader never mentioned the issue, including in conference speeches (Jacinda Ardern still doesn’t, in conference speeches or elsewhere).  Of course, there are other speeches and interviews in the course of a year, but the conference speech isn’t just for geeks (see, eg Q&A interviews) or specialist audiences.  Things leaders care about, highlight, and spend reputational capital on tend to be things that get done.  Others things, not so much.

What, then, did Simon Bridges have to say in his conference speech on Sunday?  There was lots of rather sickly shtick –  his wonderful wife, his lively children etc.   And there was a rather strained attempt to suggest that somehow he’d overcome deprivation and disadvantage himself

Because it is the National Party that has shown that a young Ngāti Maniapoto boy from West Auckland, who talks like a boy from West Auckland, the son of a Baptist preacher and a teacher, can grow up to become the first Māori leader of a mainstream party in New Zealand, and the first Māori Prime Minister of our great country.

(I struggle to take seriously that sort of line because “son of Baptist preacher and a teacher” exactly describes me –  our fathers were ministers in suburban Auckland at the same time –  and I’ve never once felt any disadvantage.)

Perhaps he has conveniently forgotten that one of his recent predecessors –  Don Brash –  was the son of a Presbyterian “preacher” and of a mother who left school before high school, or that the first National Party Prime Minister was the grandson of a Yorkshire farm labourer. Or, frankly, that as far as I can see not a single Labour or National Prime Minister has come from any economically-privileged background.  Perhaps there are people in politics born with the silver spoon in their mouth –  the National Party president most notably at present – but that hasn’t been the background of any modern Prime Minister (or major party leader).

There are even some things in the speech that did resonate with me, including many of his criticisms of the current government.  But the centrepiece was, of course, cancer care.  I don’t have a view on the substantive merits of the specific initiative National is proposing, which looks like smart tactical politics, but perhaps rather small beer.   I’m inclined to think health is underfunded (there is a chart and some thoughts in this pre-election post, and the Budget estimate of health spending of 6.1 per cent of GDP this year is pretty much in line with what Labour was envisaging then) even on the basis of our current economic performance) but that wasn’t really his case.

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing –  not a word –  to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments –  led only by National and Labour –  have presided over.    There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) –  and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

What do I have in mind.  Well, of course, there is the shrinking – sideways at best –  share of foreign trade (exports and imports) in GDP, even though successful economies –  ones catching up on the leaders – are almost always marked by a rising foreign trade share.

ex and im

But the simplest starkest chart is the one showing labour productivity growth (or lack of it).

GDP phw mar 19

No labour productivity growth at all for four years now, and barely any for seven or eight (perhaps 1 per cent total growth since 2011/12).     Mediocre or worse as I think the current government is, these failures –  stark even in international comparison (and this isn’t a great decade for global productivity growth) didn’t start with Ardern and Robertson.   Now, sure, National people like to quote growth in per capita GDP but (a) even that was much lower over National’s term than in the previous nine years (lower again now) and (b) to the extent it was respectable for several years this decade, that mostly had to do with reabsorbing workers displaced in the last recession (the unemployment rate falling from about 6.5 per cent to about 4.7 per cent when National left office).  To repeat, as the chart illustrates, there has been barely any productivity growth, and although the unemployment rate probably should be pushed lower (see Reserve Bank underperformance), it is only productivity growth that will underpin sustained growth in material living standards.

National is promising a discussion document on economic policy later in the year.  I’ll look forward to that, and will study it carefully, but at present there is nothing in what they are saying –  and nothing in the Bridges speech –  suggesting that they really envisage anything different from what they did in the previous nine years, the period in which the structural economic indicators languished, even as a pretty muted cyclical recovery was playing itself out.     Some of the specifics Bridges mentions may even make some sense, but (individually or collectively) they aren’t the stuff of a transformational lift in economic performance, of the sort New Zealand –  including our ability to fund cancer treatments –  really needs.  It isn’t clear National has such a vision, let alone any real ideas about how to bring such a transformation about.

Sadly, of course, that does not mark them out from the current government, where we regularly hear about building a more “productive and sustainable” economy, but see nothing specific that might make a credible and useful substantial difference.

Emissions and immigration policy

Just listened to an RNZ interview with National’s climate change spokesman Todd Muller, around the silly question of whether or not a “climate emergency” should be declared.  Muller called it symbolism, but symbols have a place –  it is much worse than that, just empty feel-good virtue signalling  (whether or not you think our governments should be more aggressive in doing something to lower New Zealand emissions).

But Muller introduced his comments referring back to a sense as early as 1990 that something needed to be done.  And it reminded me of the single worst policy National and Labour have presided over for the last 30 years, in terms of boosting emissions from New Zealand: immigration policy.

New Zealand’s population in 1990 was about 3.3 million.  Today it is almost five million.  And here is a chart, using official data (which has some weaknesses, but the broad picture is reliable) of the cumulative inflow of non-New Zealand citizens since 1990.

PLT 2019

That data series was dumped last year, but you can add another 60000 or so people in the year since then.    Almost all of them needed explicit prior approval from New Zealand governments –  more than 1.1 million of them.

Over such a long period, the cumulative inflow becomes a little misleading.   It understates the impact.  Of course, over 30 years some of the migrants will have died, but many more will have had children (or even grandchildren).  Those children will (mostly) be New Zealand citizens, but that doesn’t change the fact that their presence –  and their emissions (resulting from their life and economic activity) – results from explicit immigration policy choices.

Those who are made uncomfortable by all this but simply wish to dismiss it will say “oh, but emissions and climate change are a global problem, and it doesn’t really matter where the people are”.  Strangely, this is not usually an argument the same people invoke when they favour (say) New Zealand oil and gas exploration bans, or other New Zealand specific actions that will have either no impact on global emissions, or only a trivial impact.

As you will no doubt recall, it is not as if New Zealand is already some low-emissions nirvana.  Per unit of GDP (average) emissions in New Zealand are among the very highest, and per capita (average) emissions are also in the top handful of OECD countries.    The typical migrant to New Zealand is not coming from a country that has higher emissions than we do.    Rather the reverse.  Of course, it isn’t easy to distinguish (empirically) the marginal and average emissions, but it is simply silly to suggest that the policy-driven rapid population growth has not had a material impact in boosting total New Zealand emissions –  migrants drive cars and fly, migrants live and work in buildings (that often use concrete), migrants have even helped maintain the economics of the dairy industry.  On a cross-country basis, I showed in an earlier post the largely unsurprising relationship betwen population growth and change in emissions over decades.  New Zealand’s experience was not an outlier (except perhaps in the sense of much faster –  policy-driven –  population growth, reflected in the emissions growth numbers.  If anything, and at the margin, New Zealand’s immigration policy has probably increased global emissions.

Of course, there would be a reasonable counter-argument to all this if it could be confidently shown that the high rates of immigration –  highest in the OECD for planned immigration of non-citizens over the period since, say, 1990 – had substantially boosted average productivity in New Zealand.  Then the additional emissions, and associated abatement costs (not small), would simply have to be weighed against the permanent gains in material living standards from the immigration itself.  But even the staunchest defenders of high –  or higher still – rates of immigration can’t show those sorts of productivity gains and (since demonstrating it would be a tall order) can’t even come up with a compelling narrative in which large productivity gains from immigration go hand in hand with the continued decline in our productivity performance relative to other advanced economies.

If the government (or the National Party) were serious about “doing our bit” (or just “being seen to do our bit”) about emissions and climate change, and if –  at the same time –  they really cared much about living standards of New Zealanders (‘wellbeing’ if you must), they would be taking immediate steps to cut permanent immigration approvals very substantially.  Not only would that lower population growth and emissions growth relatively directly, but it would result in a materially lower real exchange rate, which would greatly ease the burden on competitiveness that other anti-emissions measures are likely to impose over the next few years, would ease pressures on the domestic environment (and might even, thinking of my post earlier this week, ease the economic pressures on the dairy industry, while providing margins to deal directly with the environmental issues around that industry).

For the country as a whole –  New Zealanders –  it would be a win-win.   That isn’t to pretend there would not be some individual losers –  we’d need fewer houses, potentially developable land would be less valuable, and some industries (particularly non-tradables ones) that have come to rely on migrant labour would face some adjustments.  But, and lets face it, there is no sign the existing model –  in place in some form or another for several decades –  has worked well for the average New Zealander –  the productivity performance has been lamentable, and we’ve created a large rod for our own back on the emissions front.

But our political parties – every single one in Parliament, based on words and on their records in government –  would prefer to pretend otherwise, and keep on with the failed, corrosive, immigration policy, which hasn’t worked for us, is unlikely to ever do so (given our remoteness etc) and is so far out of step with what the bulk of advanced countries do.