Uncategorized

A Victoria University professor on New Zealand immigration

Michael Reddell Immigration, New Zealand economic history, Uncategorized

By the end of World War Two there hadn’t been much net migration to New Zealand for 20 years.

net-migration-20s-to-50s

There had been a big wave of assisted migration in the first half of the 1920s –  almost all those moving to New Zealand then were substantially financially assisted, initially largely by the British government, keen to assist ex-servicemen to resettle in the dominions, and then by the New Zealand government.  Financial assistance to migrants had long been a feature of New Zealand (provincial and central) government policy –  compared with the option of moving to Canada or the US (or even just staying in the UK), moving to New Zealand was expensive (time lost as well as fares).  But inflows to New Zealand dropped off after the mid 1920s and government assistance to migrants was largely discontinued from around 1927.  Over the twenty years, 1927 to 1946, annual net migration to New Zealand averaged less than 0.1 per cent of the population.  Not surprisingly, there was little movement during the war, and in the 1930s the outflows of the first half of the decade –  the UK was much less badly affected by the Great Depression than New Zealand was – largely balanced out the moderate inflows later in the decade.

At the end of World War Two, there was considerable angst about population prospects.  Birth rates around the advanced world, including New Zealand, had been low, and in many countries there was unease about what a flat or falling population might mean.  And the war itself had brought to the fore the idea that a lightly populated country might be unnecessarily prone to invasion threats.

There were no legal obstacles to immigration to New Zealand from Britain (or the other Dominions): as New Zealanders could move freely to Britain, so Britons could freely move here (as they could until the 1970s).  But in 1947, the government restarted the assisted migration programme – initially those selected had to contribute £10, but within a couple of years that requirement had been dropped.  Even though life in post-war Britain was pretty tough, and the gap in material living standards then was probably as large as it ever was, the government didn’t find it that easy to fill the number of free places it was offering.  But total immigrant numbers did pick up sharply and (as illustrated in the chart above) by 1952, the net inflow of immigrants had almost reached the sorts of levels soon in the first half of the 1920s.  And despite earlier worries about the birth rate, the “baby boom” happened here too.  In 1952, the total population increased by 2.5 per cent –  an even larger increase than we’ve experienced over the last year or so.

In 1952, Professor Horace Belshaw, an immigrant (as a child) himself, former student of Keynes at Cambridge, and by then McCarthy Professor of Economics at Victoria University and one of the most widely-published New Zealand academic economists of his day, turned his attention to the question of immigration to New Zealand.  In his short (32 page) booklet, Immigration: Problems and Policies, Professor Belshaw discussed some of the economic (and other) effects of high rates of immigration.

I’m going to reproduce here some of Belshaw’s material.  Regular readers will probably note a certain similarity with the economic analysis I have been presented about more recent New Zealand immigration policy (although I only found the Belshaw material a few years ago).

In beginning his discussion, Belshaw notes

In considering the volume of immigration which is in “the best interests” of New Zealand, it is necessary to distinguish between the “absorption capacity” at any particular time and what is desirable over the longer period…..we must compare the effects of a given growth of population with the effects of the larger population resulting from this growth.

…for example, the long run position will be affected by whether or not more intensive production in agriculture will yield a lower return per head with a somewhat larger population, whether the supply of electric power can be economically expanded to satisfy not only the increased use of electricity per head of population, but also the larger number of heads.  And the answer in both cases may be affected by technical discoveries not yet made.

Belshaw discusses a number of the transitional issues

Cultural absorption.  As he notes, most of the migrants at the time were from the UK and Northern Europe, and so

There will be personal misfits enough and the need to give assistance in orienting to the New Zealand way of life, but the cultures they bring with them at sufficiently close to our own to raise no special difficulty of absorption, and there are no social or political reasons to fear the growth of minority problems among groups which preserve a separate identity, such as have plagued the United States. On the other hand, migrants bring with them new skills, different accomplishments, and ways of looking at things which should prove economically advantageous and culturally enriching.

Immigration and the Labour Shortage

At the time when there are more vacancies than workers, it is natural to assume that immigration will relieve the labour shortage. This however, is a superficial view.  The immigrants are not only producers but also consumers. To relieve the shortage of labour it would be necessary for more to be contributed to the production of consumer goods or of export commodities used to buy imported goods than the increased numbers withdraw in consumption.  That is unlikely….[and] there will be some temporary net additional pressure on consumption.

Immigration and Capital Needs

Of much greater importance is the fact that each immigrant requires substantial additional capital investment, not in money but in real things.  Houses and additional accommodation in schools and hospitals will be needed. In order to maintain existing production and services, and even more to maximize production per head, there must be more investment in manufacturing and farming, transport, hydro-electric power, municipal amenities and so on.

To anticipate a little, immigration is not likely to ease the labour shortage while it is occurring, and is more likely to increase it because although additional consumers are brought in, more labour than they provide must be diverted to creating capital if the ratio of capital to production is to be maintained.  So the unsatisfied demand for consumers’ goods and therefore for labour to produce them will not be met.

…the fact remains that while it is occurring a population increase of the order under consideration will reduce the volume of capital per head, and for the time being cause production per head to increase slower than with a smaller rate of population increase. Immigration must be assessed in relation to its contribution to this situation.

The expansion of population of itself will increase inflationary pressures, for the net effect is to create additional purchasing power to finance capital creation without producing an equivalent volume of consumers’ goods and services.  This is another way of reiterating the point that it will not reduce labour shortages….. A sufficiently austere fiscal and financial policy might curb the inflationary effects, but not the necessity for capital formation nor the reduction for the time being in living standards.

As capital formation proceeds, the contribution of increased population to consumption will grow, and after five or six years may exceed current consumption per head. Meanwhile, however, each successive increase in population exerts inflationary pressures until such time as the aggregate increase in production from a larger population exceeds the annual capital formation needed by the growing population,  This would take a very long time.

He summarises his conclusions “in respects of current effects of immigration and population increase”.  Extracts:

2. Immigration of the scale contemplated is likely to increase inflation pressures and of itself increase rather than reduce the shortage of labour.

3. It will also increase the balance of payments problem and the need for credit controls, higher interest rates or import controls.

6. While it is occurring and for some time thereafter immigration on the scale contemplated is likely to lower living standards, either by reducing the supply of manufactured consumers’ goods or of facilities and amenities such as school and hospital accommodation, or by imposing additional strains on existing private and public capital.

My general conclusion is that the effects of such a volume of immigration on the New Zealand economy while it is occurring at the present time , are on balance prejudicial.

From the effects of immigration while it is occurring (and for several years afterwards), Professor Belshaw then turned more briefly to consider the effects of a larger population, once any transitional challenges had washed through.

Is it in the interests of New Zealand that the population should double in, say, 28 years (ie increase at a rate of about 2.5 per cent per year) and that immigration of a scale necessary to bring this about by supplementing natural increase should be arranged?  We reiterate that the problem is posed in these terms because immigration and natural increase have many similar effects.

He briefly looks at some non-economic factors

Strategic considerations.  In some quarters increased immigration is supported for strategic reasons. I have seen no analysis of the real issues by the proponents of this view, and in the absence of such a study confess to some reluctance to attach much weight to it in modifying opinions arrived at on other grounds.     ….a more likely strategy [than invasion] would be to blockade us into submission or ineffectiveness. The contribution of any conceivable immigration to New Zealand’s manpower then seems likely to make little difference.

Humanitarian Aspects of Immigration.  Presumably the immigrants will be better off than in their own countries, and the New Zealand community might be prepared to incur some sacrifices, if these prove necessary, to satisfy such a humanitarian impulse; but any possible volume of immigration will have a very small effect in relieving pressures in the home countries of the migrants.

Belshaw goes on to note that our then, in effect, “white New Zealand” immigration policy was unlikely to command much international admiration no matter how many migrants we took.

Cultural and Economic Enrichment.  Regarded from New Zealand’s own interests, a sizeable volume of immigration should prove advantageous in more ways than one…..The New Zealander who returns home after some time abroad [as Belshaw recently had] is often depressed at the unnecessary drabness and uniformity in the New Zealand way of life, and at the paucity and low level of achievement in many of the arts and crafts.  New blood may perhaps weaken the complacency with which these are accepted, and add spice and variety.  And there is no reason why these should be gained at the expense of those conditions and those national qualities which still make New Zealand so pleasant a place to live.  Is it really necessary, for example, that even in our main cities, our restaurants should be so reminiscent of the pioneering epoch (flies and all), and that the best food in the world should be so cavalierly treated?

As he notes, before turning back to economic considerations

this general line of argument supports the case for immigration, but not for any particular figure.

In commencing his economic discussion, Belshaw notes that

Presumably we should like to see such a trend of growth of population as is conducive to the maximum real income per head

while acknowledging that the answers and his opinions “must be very largely conjectural”.

He notes

it is a reasonable assumption that over the longer period immigrants will contribute much the same to both production and consumption per family as the general population. So we need not distinguish between immigrants and indigenous population when considering the effects of larger size, except insofar as the immigrants have brought new stimuli, arts and crafts, which we might otherwise lack.

Belshaw notes that there are some genuine economies from a larger population

As population becomes larger we should expect a variety of economies to result, increasing the effectiveness of labour applied to a given volume of capital.  The transport system would probably be more effectively utilized as the volume of traffic reduced overhead per unit of transport service…..There seems no reason why the machinery of government need increase pari passu with population apart from the extension in the range of government functions.

I believe these advantages to be real; but there is another side to the story.

….Here the capital requirements for population growth come into the picture. Previous discussion will have indicated that in my view these requirements are of such dimension as to greatly retard the increase in capital per head of population  Failure to increase, or even maintain capital per head will in large measure offset the benefits from a bigger population, increase the problem of bottlenecks, such as in relation to power, and by virtue of inflationary pressures distort the economy.  It seems unlikely that the annual increase in the production of consumers’  goods facilitated by a bigger population will offset the transfer of production to capital formation required by an increasing population. I fear that with a population increase of 2.5 per cent, we shall be faced with continued incentives to controls, primarily as a check on inflation…. Such controls may actually discourage enterprise. On these grounds I should consider that a smaller dose of inflation –  and therefore a smaller rate of population increase –  would be preferable.

Belshaw also discussed the scope for growth in exports, having devoted a considerable portion of his career to agricultural economics

The trend of external demand seems likely to be buoyant for farm products, though there may be recessions from time to time. Currently there are shortages in forestry products; but I have insufficient information to offer a judgement on prospective world demand some years hence. On the other hand, diversion of production to capital formation and the consequent internal inflationary pressure will adversely affect internal costs [in other words, raising the real exchange rate ] and divert labour away from farming and so impede expansion.  My view is that in consequence there will be less expansion in farming with a 2.5 per cent increase in population than with a smaller increase.

…I anticipated that we shall derive an expanded real income from overseas as a result of improvements in the terms of trade and of expanded exports; but reiterate that this expansion is likely to be larger with a smaller population increase….Hence on this score also we should expect a larger income per head with a lower population  increase.

Belshaw concludes his paper thus

Some probable developments favour immigration and others are unfavourable. But it is those elements favourable to the case for population increase which are most conjectural and uncertain. The current recurring disadvantages of a large population increase, and therefore of a large volume of immigration, seem to be more clearly demonstrable than the advantages of the larger settled population which would result from them.

The economy, and particularly the policy structure around it, in 1952 was different than it is now, and so not all the language easily translates into current discussions.  We don’t have exchange controls or (many) direct credit controls, and on the other hand, interest rates are much more variable, as are the nominal and real exchange rates.  But the essence of Belshaw’s story, almost 65 years ago, is really very similar to the lines I’ve been running about New Zealand.  Rapid population growth, now driven largely by immigration policy, almost inevitably puts considerable pressure on domestic resources, skewing resources away from production for consumption or exports to simply keep up with the capital requirements of a larger population.  Immigration doesn’t ease labour shortages, and if anything exacerbates them (at any economywide level).

Although I agreed with his conclusions, I didn’t find Belshaw’s analysis of the implication of a larger population as persuasive as his analysis of the transitional (multi-year) pressures.  But we know that there is no evidence that larger countries have achieved faster growth than smaller countries.  And I’d emphasise some different points than Belshaw does, especially the apparent constraints of distance/location, which would have been much less apparent in 1952, when agricultural and pastoral exports alone still produced top tier incomes for a small distant population.

But it is just a shame that successive governments in the 1950s and 1960s –  and again since the late 1980s –  have paid more attention to plaintive short-term cries from employers of “skill shortages, skill shortages” (only ever apparently relieved by recessions) than to the lack of good analysis and evidence that high rates of immigration actually make New Zealanders better off. Perhaps high immigration benefits native populations in some places and at some times –  I’m quite open to that possibility – but there is little sign they have in the past, or are now doing so, in post World War Two New Zealand.

After all, when Belshaw wrote, New Zealand had probably the third highest material living standards in the world.  Now, depending on the list you consult, we are no better than about 30th.  Other things have contributed to that glaring failure, but the repeated pursuit of a larger population (as a matter of policy) certainly shows no sign of having helped.  It was bad enough that the cautions of Belshaw –  and other economists –  were ignored back then. It is much worse now when for decades there has been a steady net outflow of New Zealanders, dispassionately assessing the prospects for themselves and their families in the country they know best, and deciding to leave.

RBNZ Board: not doing the job Parliament gave them

Michael Reddell Reserve Bank, Uncategorized

The Reserve Bank of New Zealand’s Board published its Annual Report last week.  It didn’t attract any coverage, but then it was hard to find –  buried inside the Bank’s own large glossy (expensive?) report, and with no accompanying press release (not even a mention in the Governor’s own press release).    And it didn’t say much anyway.

The Board isn’t part of the decision-making structure of the Reserve Bank.  Unlike a typical corporate or Crown entity, all the powers Parliament has given to the Bank rest with the Governor personally.  The Board are agents for the public and the Minister in holding the Governor to account, and so need to be –  and to be seen to be –  at arms-length from management.   I’ve criticized the Board previously for not publishing its report separately, and not even insisting that it is separately visible on the Bank’s website.  The Board must have noticed that criticism because in this year’s report they claim that they are “specifically tasked…with publishing its annual assessment within the Bank’s Annual Report”.   Unfortunately, even on this small detail they are wrong.  The Reserve Bank Act allows the Board’s Annual Report to be published with the Bank’s report if the Board agrees, but it certainly does not require the Board to agree or mandate the way the Board report is buried inside the Bank’s report.   It is a small detail, but perhaps one again suggestive of a Board that too often sees itself as part of the Bank, working hand-in-glove with management, rather than as a fairly independent entity, charged with challenge and review of the Governor’s stewardship.  As I’ve noted previously, the practice until now of having a former staff member chair the Board seems to have been a part of that identification with management.

It is a hard job for the Board to do well.  Typically Board members aren’t experts in the areas the Bank is responsible for.  And they don’t spend much time on the issues either –  they aren’t paid that much, and the current and former chairs have both had demanding fulltime chief executive positions of their own.   The Board has no resources: there is no independent budget, no staff.  And not only is the Governor himself still a member of the Board, but the Board secretary is a member of the Bank’s senior management group.   The Board can ask for (but not compel) papers to be provided, but the Governor has total control over what they get back, even though it is the Governor’s performance they are charged with monitoring and evaluating.

So it is a deeply flawed model.  In no other area of public life I can think of has a review body been set up that is so close to, and so dependent on, the entity/person it is charged with reviewing.   Like so much of the rest of the Reserve Bank governance model, the role and structure of the Board is overdue for reform –  the more so as the Reserve Bank has chosen to exercise more and more discretionary powers.

Cynics might think that problems were deliberately built into the legislation, and that there was never any intention of the Board playing a serious role in holding the Governor to account.  The cynics are wrong.  As I’ve explained previously, the original conception of the Reserve Bank’s role was a fairly mechanical one, and even the first Governor thought of accountability as pretty mechanical –  if (core) inflation was outside the target range he would lose his job.   So there were genuine good intentions when the Act was written in 1989, and when it was amended in 2003, to require the Board to publish an Annual Report.  But good intentions haven’t produced good results.  Poor structures make serious review and accountability more difficult than it should be, but the individuals successive Ministers have appointed to the Board haven’t done much about doing the best with the flawed structure they operate within.  That is something those individuals –  all no doubt capable and competent people in their own fields –  need to take responsibility for.

This year’s Board Annual Report spans eight pages of text.  That might sound moderately promising, except that almost all of the text is descriptive material: lengthy lists of meetings held, topics discussed, and so on.  If you went to the Report looking to get a sense of the Board’s views  –  as might befit a body established by Parliament, paid with public money –  it would be pretty thin pickings.  As far as I could see, the only judgements were as follows:

  • “the Board’s overall assessment is that the Bank continues to perform its functions to a high standard….and contributes to New Zealand’s stability and prosperity”, which is interesting, but comes out of the blue with no supporting analysis or evidence.
  • “on the basis of the information and advice available to the Governor at the time of his decisions, the Board assessed that the four MPSs and the intervening OCR reviews met the requirements laid out in section 15 of the Reserve Bank Act”.  These are quite formal technical judgements, made at the time of each OCR decision, not ex post reviews of the conduct of policy, (and, in terms of attention to detail, section 15 of the Act deals only with MPSs, not with other monetary policy adjustments or OCR reviews).
  • “the Board agreed that the November 2015 and May 2016 Financial Stability Reports met the requirements contained in  section 165A(2)(a) and (b) of the Reserve Bank Act.
  • “the Board reviewed the Bank’s health and safety policies in the context of the new legislation and advised that these should be reviewed annually and be externally audited”, and
  • “the Board….endorsed the decision taken by the Governor to cease pre-announcement media lock-ups”.  I presume we shouldn’t interpret this as meaning that they disagreed with canning the pre-release analyst lock-ups.

Which is all very well, but in none of these occasions does the Board offer any basis for their judgements.  There is no sign in the text that they had thought about any alternative models, engaged with any alternative perspectives, or anything of the sort.  To the extent there is any analytical discussion at all in the Board’s Report (and it is brief), it could have been lifted straight from the Governor’s own report.  If the Board genuinely believes that the Governor has been doing a good job, even with the benefit of hindsight, that is certainly an option open to them, but surely they owe us  – the stakeholders –  rather more evidence of having engaged with the issues and alternative perspectives than is on display again in this report?  If there is one thing everyone recognizes about things like monetary policy, it is that reasonable people can interpret the same material differently, even given a pre-specified target like the PTA. But there is no sign of that at all in this report.   And is the Governor really so perfect that the Board could find nothing in the entire year about which it was willing to express concern?  I suppose it is possible, but I’m sure even the Governor would recognize that he is –  like all of us –  a flawed human being, rather than some plaster saint.

There are other areas for concern.  I highlighted last year my concern at how the Board seemed to see its role as “having the Governor’s back”.

Too often, the Reserve Bank’s Board seems to see a significant part of its role as being to help the Governor spread  his story and to explain the choices the Governor is making.

And this year the Board uses exactly the same words it used last year to describe the functions they host for locals “elites” on the evenings of Board meetings

This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments, and the wider public’s understanding of the Bank’s policies.

As I noted then

Worthy activities for management, but that isn’t the role Parliament envisaged for the Board –  whose purpose is to hold management to account, not help management explain their choices to (select elements of) the public.

The public needs awkward questions, not sympathy.  The Board isn’t there to be a part of the Governor’s PR programme, but as part of citizens’ protection in respect of perhaps the most powerful unelected individual in New Zealand.  But there is just no sign that the current Board members get the distinction, or are interested –  or perhaps capable –  of playing such a role.

There is also the constant risk of the Board getting too involved with management to be able to credibly hold the Governor to account.  I was interested in this extract from the Report

With the Governors present, the Board met three of the chairs and a deputy chair of the four major banks for discussions on two key issues: the governance of New Zealand subsidiaries of the large Australian banks; and regulatory issues that are currently front-of-mind for New Zealand bank boards. The banks discussed risks in the dairy and housing sectors and the impact of LVR limits on balance sheet risks. The banks also discussed the review of the Bank’s outsourcing policy and risks associated with possible cyber threats.

Sounds like an interesting series of meetings, but what role of the Board was being pursued here?  The Reserve Bank Board has no role in such areas of policy, and if its concern was about being able to hold the Governor to account, if the commercial bank boards were ever going to speak freely, they weren’t likely to do so with the Governor in the room.  Individually, such meetings probably do little harm, but they just reinforce a sense of a Board which serves the Governor’s interests more than it serves the interests of the people of New Zealand, or (more specifically) the sort of role Parliament set out for them.

The one key power the Reserve Bank Board has is to recommend the appointment of the Governor.  The Board –  not one of them elected, very few of them widely known, none with any accountability themselves –  control the appointment, since the Minister cannot appoint as Governor someone the Board has not recommended.  It is now less than a year until the current Governor’s term expires, and yet there is nothing in the Annual Report from the Board on how it thinks about the exercise of that appointment powers; no sense of what makes a good Governor in such a powerful public role, and no discussion at all of (for example) the Bank’s succession planning.  Successful organizations typically promote from within, but 1982 was the last time a Reserve Bank Governor was appointed from within –  contrast that with the Reserve Bank of Australia.  But you would have no sense from this report that the Board was even paying attention to such issues, or grappling with why the Bank appears to have had such a poor record of developing potential Governors.

As I said, with such limited resources and such dependence on Bank management, the Board members face quite a challenge to do the sort of job Parliament asks of them, and which citizens should expect.  There are plenty of much better resourced review agencies around the New Zealand public sector, and when a government finally gets round to reforming the Reserve Bank Act they should look hard at such models, but there is a lot more the current Board could do, and be seen to be doing.  Under the chairmanship of Arthur Grimes and Rod Carr, there was a strong predisposition to support the Governor and the institution’s decisions.  That needs to change. The Board works for citizens –  and the Minister of Finance –  not for the Governor.

The Board has recently chosen a new Chair, an outsider for the first time rather than a former insider.  The challenge for Neil Quigley will be to try to lift the performance of the Board, and reorient it in the direction Parliament clearly intended (including when it required publication of a Board Annual Report).  It won’t be easy, and some of the Board members might not be keen –  keeping cosy with the Governor is much easier –  but if they believe the current governance model is the appropriate one, and one that can work well, they owe to us, and to themselves, to show it can work much better, and offer much more scrutiny and challenge, than on the evidence before us it has been doing in recent years.  Apart from anything else, support and endorsement is usually that much more persuasive if there is demonstrable evidence that those who end up offering the support have posed hard questions, brought alternative perspective to bear, and come away convinced.  Unreflective echoing of the perspectives of the decisionmaker convinces few people anywhere.  If anything, it just leaves questions about the quality of institutional governance in the New Zealand public sector.

As individuals Reserve Bank Board members typically look better than that. But they need to demonstrate that they have what it takes in this demanding role.

(Three months ago, I outlined what I thought the Board should have covered in this year’s report.  To no one’s surprise, there is little or no overlap with the actual report.)

 

 

 

 

 

 

A boardroom coup?

Michael Reddell Reserve Bank, Uncategorized

The Reserve Bank’s Annual Report should be due out later this week.  With it, no doubt, will be the separate report by the Bank’s Board of Directors.  The Board has few/no executive responsibilities, and its prime responsibility is to (a) recommend the appointment of a Governor, and (b) to monitor the performance of the Governor.

The Bank’s own Annual Report is usually an anodyne affair, as no doubt it should be.  The Governor has plenty of other vehicles to comment on policy etc.  But the Board’s Annual Report should be different.  After all, it is the one time in the year when the Board makes a public statement.   But the operative word is “should”.  I wrote about last year’s Board report here –  that report said almost nothing, and seemed consistent with a Board view of itself primarily focused on “having the Governor’s back”, at least in public.  We’ll see soon if this year’s report is any better.

But then this morning, in a statement no doubt timed deliberately in advance of the Board Annual Report, came news that the Board had acted to replace both its chair, Rod Carr, and its Deputy Chair Keith Taylor.    In one of the odd and unsatisfactory features of the Reserve Bank Act, the Minister of Finance appoints Board members, but the Board members themselves appoint the chair and deputy chair from among their number.

And one of the practical problems of how the Act has worked since the new structure was put in place in late 2003 is that Board members have repeatedly (each year, since chair is an annual appointment) chosen former Reserve Bank staff as chair.  First Arthur Grimes (who had previously been Chief Economist and Head of Financial Markets) and since 2013 Rod Carr, former Deputy Governor (and Acting Governor for a time after Don Brash resigned).  I presume the Board liked the idea that the chair had some subject-specific expertise and experience, but the downside was that those chairs were all too ready to bring a management perspective to the Board.  When they ask questions, they might be the geeky questions that get asked on the internal Bank committees, it is too easy to get too close to management,  and externally they seem to have wanted to make sure they “have the Governor’s back”.   We saw a particularly egregious example of those sorts of faults in the way Rod Carr was egging on Graeme Wheeler, and backing him up, over Wheeler’s misjudgements in the OCR leak debacle.

But now Carr is gone, and with him his deputy Keith Taylor, replaced by the two economists on the Board: Neil Quigley (Vice-Chancellor of Waikato University) takes on the role of chair, and Kerrin Vautier becomes Deputy Chair.

In my experience, Quigley was always willing to ask hard questions, and look for alternative perspectives, even if that meant upsetting first Alan Bollard and then Graeme Wheeler.  Combined with a background that doesn’t include a stint in RB management, it looks like a step forward.

But it also looks as though the Board itself really wanted some things to be different. We are told:

Dr Carr said that he had advised the Board some months ago that he would not be seeking a further term as a Director of the Reserve Bank when his present term ends in July 2017. In light of that decision he had decided to step down as Chair.

But one might reasonably wonder if perhaps the causation was not the other way round?  Carr was in his first term as Board member, and could surely have expected reappointment to the Board by the current government.  Sure, he has a busy day job, but not necessarily any busier than it was when he first became Chair three years ago.   There might be a sense in which Board members had become discontented with Carr’s chairmanship, quietly foreshadowed the prospect of a “coup” at the next annual election, allowing Carr to go quietly, suggesting it was all his own decision.

The timing is also interesting given that Graeme Wheeler’s term expires a year (almost to the day) from now.  An experienced chair, in whom the Board had confidence, would have been a natural to oversee the process of identifying the person to serve as the next Governor.  That would have been so even if Carr had genuinely not wanted another term –  oversee the selection process, which would be over before Carr’s term expired, and then leave it to another chair to work with whoever is the new Governor.  By contrast, while Quigley has been on the Board for several years, he only becomes chair now, and has (as far as I’m aware) no experience in the leading a process to fill such a powerful role.  In itself, that shouldn’t be disqualifying –  and as I noted earlier, I think his appointment is a modest step forward –  but it does suggest something more in the nature of a board room coup has gone on.

If anything, Graeme Wheeler’s press release could be seen in the same light. I’m sure there was a nice laudatory press release from the then Governor when, in 2003, Rod Carr left the Bank staff.  And yet we get this today

When Dr Carr’s term ends as a Director, this will end a 10-year relationship with the Bank. Between July 1998 and July 2003, he was Deputy Governor and then Acting Governor of the Bank. In these positions he also served as a Director of the Bank until September 2002, since when Deputy Governors have no longer been Directors of the Bank. Dr Carr was appointed to the Board in 2012, and was first appointed Chair in September 2013.

Governor Graeme Wheeler paid tribute to Dr Carr’s contribution. “Rod has provided over a decade of invaluable service to the Bank, spanning key management and governance roles. He has been an outstanding Chairman and the Bank has benefited greatly from his intellectual rigour and sound advice and judgment.”

It is all a bit strange really.  Being a Board member is (supposed to be) quite different from being a senior manager, especially in the Bank legislative model.  And isn’t it a bit icky to have the person whose performance the Board, and Chair, are primarily responsible for monitoring lauding the excellence of the outgoing chair just a few days before the Annual Report –  the performance assessment on the Governor – is due?  I suspect Wheeler probably was rather keen on Carr’s unquestioning defence of the Governor.  But that might have been part of the problem –  just helping to reinforce that bunker mentality which characterizes the late-Wheeler Reserve Bank.

Today’s news really does start the process leading to the appointment of the new Governor.  I remain convinced that the Board –  all members unaccountable and barely known –  has far too much power in that process.  But better at least to start the current unsatisfactory model with something of a clean slate at Board chair level, and a perspective that isn’t shaped by a term as Reserve Bank senior manager.

PS: The Bank should probably be aware of the factual error in the press release.  Contrary to the statement in the blocked text above, Carr had served as a Board member throughout his term as Deputy (and Acting Governor).  He didn’t leave until the second half of 1993, and the provisions removing Deputy Governors from the Board weren’t in effect until after his departure.    It is all there on page 6 of the 2003 Annual Report.

 

 

$100000 of coerced child labour

Michael Reddell Uncategorized

Late last year I ran a post on the shockingly bad economics of school fairs. At least in my observation of our local school, it would be more efficient all round for most people to simply write a cheque.  But at least school fairs are largely an optional involvement –  even if there is a bit of social pressure.  Parents can simply write a cheque instead, and children themselves don’t need to be involved much if at all.

My daughter’s intermediate school (as left-leaning as they come) practises a much more inherently exploitative and costly fund-raising model.  Fairs are mostly run by adults, happen at weekends, and are –  at bottom –  voluntary.  But at South Wellington Intermediate today is “market day”, the culmination of weeks of preparation in which for two hours this afternoon the kids will attempt to sell the fruit of their labours (typically food of various sorts) to parents, each other, and anyone else they can lure onto the grounds.

I’m not sure how much this exercise typically raises – I couldn’t find the relevant newsletter from last year –  but I’d be very surprised if they managed to raise as much as $20000 [UPDATE: The Principal has confirmed that it raises much less than that.]

But how is this money raised?

By the compulsory conscription of the children.  The kids have no choice about being involved: more-structured teaching is simply set aside to make space for all the time “market day” involves.  Kids are encouraged to beg for money (“seek sponsorship”) from local businesses.   Now some of the kids seem to quite enjoy what they are doing, but that isn’t really the point.  And outside North Korea, it isn’t how real businesses operate either.

Kids are sent to school to learn.  Despite what it often feels like to a child, the school years aren’t really that long –  perhaps 12 years of schooling, and 192 days of school per year.  Make allowances for teacher stop-work meetings –  why does the government as employer agree to these occurring during class-contact hours? – and the little that seems to get taught in the last day or two of each term, or the inevitable days when relieving teachers do little more than entertain kids, and the actual time available for teaching core content gets slimmed down quite quickly.

And then comes market day.  It is difficult to tell quite how much time this affair involves, but from listening to my kids’ accounts I’d be very surprised if it was much less than a week per child. Even tomorrow, when the school is closed in the morning for some reason, the message to my daughter was along the lines of “anyone coming to school tomorrow afternoon will just be tidying up after market day”.

Coerced child labour doesn’t have a direct price –  so probably the teachers and the Board think of it as free –  but it certainly has an opportunity cost.  One way of getting a fix on that is to look at how much parents pay for schooling in the private market.  There is a nearby private school, which some parents who are particularly frustrated by the inadequacies of the state intermediate do send their kids to.  It seems like a fair representation of a price of schooling.  From that school’s website, New Zealand residents pay around $16000 per annum at intermediate level, and international students (for whom there is no NZ taxpayer support) pay around $22000 per annum.    The private school probably has fancier facilities etc, so lets call the market price of a basic intermediate education $20000 per annum.

Since intermediate schools are only required to be open for 192 days a year, or just over 38 weeks, it seems reasonable to put shadow price on the education of around $500 per week per child.  So how much are the inputs to this fundraising exercise –  Market Day – actually costing?   Let’s assume that the kids don’t actually spend a full week on the thing –  or, alternatively, that there is some slight educational value in the thing –  but only four days each.  That would be $400 per child.  There are around 250 kids at the school, suggesting that $100000 of school time –  lost learning – is being taken to raise, at most, $20000.  And in addition to the $100000 of lost (well “stolen” would be more accurate) time there are all the donations of ingredients from parents –  again something over which we had little effective choice –  and the donations from local businesses.  It is just staggeringly uneconomic –  and has me looking less unfavourably on old-fashioned school fairs.

Is this any way to fund public services?   Perhaps the Air Force could plough up all that land at Ohakea and send their staff out to work each day growing turnips, grazing sheep or whatever to supplement their budget  (but at least staff are free to resign)?     Perhaps Treasury could run cake stalls on The Terrace each lunchtime to help cover their costs?  But even that would be less bad than compulsory stealing the scarce learning time of our children to, extremely inefficiently, raise funds to keep schools going.

My inclinations are to the right in matters of education. In my ideal world, schooling would be purchased on-market (as food is), with income support available for those society assesses to be in real need.  But that isn’t the model New Zealand has chosen.  I’m also not a parent with a taste for extravagant facilities: mostly I think schools spend too much on IT, and have smaller class sizes than they could sensibly (evidence-based) have.  So my practical preference would be for all state schools to be adequately funded from the centre, and for schools to be banned (statutorily prohibited) from using coerced child labour to fund raise.  If parents really really want something better for the kids in their school, parents can either write a cheque (compulsory but tightly capped fees) or do their own fundraising out of school time.

Sadly, this use of coerced child labour isn’t restricted to fundraising.  At my son’s otherwise rather good high school, a Year 9 boy is apparently rostered on each day to act as messenger boy for the office –  the child concerned spends no time in class, but just runs messages as required.  In this day of emails and cellphones it is a little hard to imagine quite how many physical messages need to be run.  But lets assume they still do need to be run.  The alternative approach would be to pay an adult the minimum wage to do the job.  Over a six hour school day that would be $91.50 a day.  And the value of schooling?  Well, remember those estimates I calculated from private school fees –  around $100 a day.  In other words, the school is simply cutting costs by coercing child labour.

Perhaps these issues don’t bother many people.  I think they should.  In the far-distant days of my youth, the only school fair (or equivalent) I recall in twelve years was one to raise funds for the 1974 Commonwealth Games.  I have no objection to voluntary activities to fundraise for worthy causes –  mufti days for charity etc –  but having schools force our kids to run cake stalls to keep their school going isn’t, to my mind, what an advanced country should look like. Apart from anything else, it is just so wildly –  almost unbelievably –  economically inefficient.

And I’m still not sure how the teachers (and Board) reconcile this coercion with their own left-wing approaches more generally.

UPDATE: Stuff covered this post here together with some responses from the intermediate school Principal.  To be clear, despite her comment that she deals with me fairly regularly, we’ve never actually met, and I think we might have exchanged two emails in the course of this year (I did raise some other concerns with her and the Board last year).  I mentioned my concerns about the forced labour behind the fundraising in an email to her earlier in the week, and had no response.

The fact remains that this is the prime fundraising exercise the school undertakes in the year, and it is all done on the basis of coerced child labour, including encouraging 11 or 12 year old children to “beg” to help fund the school.  State schools shouldn’t be run that way.  (And, as I say that, I have a modicum of sympathy with those running schools on current, generally inadequate, funding levels.  Such fundraising activities, let alone the use of coerced labour, didn’t happen 30 or 40 years ago.)

Hard Stuff or MBIE puff piece?

Michael Reddell Immigration, Uncategorized

According to TVNZ,  “The Hard Stuff sees Nigel Latta tackling the key issues facing NZers”, funded with taxpayers’ money through NZ On Air.

I don’t think I’d watched any of Latta’s programmes previously, but when I heard a couple of years ago that he was planning to tackle immigration I suppose I welcomed the notion that a mainstream broadcaster would give serious coverage to a major instrument of economic (and social) policy.

Shortly after Latta’s new series got underway, I’d heard underwhelming things about the immigration episode from people who’d watched it on the website.  But I only got round to watching it this weekend, after it was broadcast last Tuesday.

Frankly, even with the warnings I’d had, I was staggered at how much of a puff piece it was.  In many respects MBIE and the Minister of Immigration must have been delighted. But if that is the strongest case that can be made for New Zealand’s large-scale non-citizen immigration policy, we should be pretty worried.  Being a bit of a naïve optimist at times, I keep expecting someone –  MBIE, Treasury, the Minister, supportive academics, whoever –  to come up with some pretty compelling evidence or argumentation to seek to demonstrate how New Zealanders have benefited (economically) from one of the largest actively managed immigration programmes in the world.  But they don’t.  It must leave thoughtful supporters of the policy at least a little uncomfortable.

Latta’s programme had three main interviewees:

  • Nigel Bickle, the senior bureaucrat who heads the Immigration New Zealand arm of MBIE and who –  being a public servant –  is simply the mouthpiece for government policy.  The MBIE website describes his background as  follows:  “the majority of his experience is in front-line service delivery, in a number of operational and support leadership roles specifically within complex organisations undertaking change”.  Those are really valuable skills in some public sector roles, perhaps even in Immigration New Zealand, but I’m not sure they suggest he has much to offer on the costs and benefits to New Zealand of a large scale immigration programme.
  • An immigration consultant, and
  • Professor Paul Spoonley, an academic sociologist, one of the key academic advocates of New Zealand’s immigration policy, and one of the key figures in the MBIE-funded research programme CADDANZ, a programme that simply assumes the benefits of large-scale immigration.  I dealt with some of his overblown economic claims here.

There was some brief snippets from several  other pro-immigration people –  including one who claimed, incorrectly, that there had been a net influx of New Zealanders to Auckland (thus to downplay the role of non-citizen immigration on house prices) when the data suggest quite the opposite over recent decades.   And there were several heartwarming snippets from immigrant families, and from the Principal of Rangitoto College and that was about it.

The intended message seemed to be “there’s really nothing to worry your silly little heads about”.  And while I suspect (hope) he didn’t really mean to tar everyone with any doubts about the programme in this way, the only reference to alternative perspectives  that I spotted in the entire programme was to “racist idiots”.  Take that….

We were told (reasonably enough) that some past mistakes in the immigration programme  had now been fixed.  For example, there really had been an influx of highly-qualified people in the 1990s whose qualifications were not recognized here (while now the programme puts a strong emphasis on applicants having a job offer).  I was a little surprised to learn that in the 2013 census data, 62 per cent of taxi-drivers really were overseas-born.  Some of the least satisfactory features of the family stream of the immigration programme have been fixed –  one such featured (sibling) arrival seemed to be working extremely hard, but as his two jobs were at Pak N Save and as a cleaner it didn’t seem likely that the spillover benefits to the rest of the economy were large.  And, of course, we still allow around 4000 a year in under “parent visas”.

Bickle  –  that “front-line service delivery expert” –  argues that we need lots of immigration because a country “can’t get wealthy trading with ourselves”.  There seemed to be quite a bit of confusion there.  Of course, small countries (in particular) need to trade internationally, but that tells one simply nothing about the case for (or against) large scale immigration.  As it happens, and as I’ve pointed out before, most countries –  and especially most countries of our sort of size population –  export and import a much larger per cent of their GDP than New Zealand does.  And that is true whether or not those countries have had lots of immigration.  Even the academic advocates of immigration accept that the evidence that immigration does much to boost the export share of GDP is pretty slender.  I’d argue that there is a good case that in New Zealand (specifically) rapid population growth has, if anything, crowded out growth in exporting.

Towards the end of the show, Latta was burbling on about how “the economic gains are a no-brainer”.  And – in his view –  there are no other plausible risks/downsides of a large scale immigration programme,  So, he concludes, “immigrants are doing us a favour” and we should really be grateful to them for choosing to settle here –  rather than, he implied rather than directly stated, complaining or indulging those “racist idiots”.

You might wonder how Latta concluded  that the economic gains to New Zealand were a ‘no-brainer’.  I did.  I guess that is what comes of approaching the issue with what appears to have been a pre-conceived answer in mind, talking only to advocates of the immigration programme, and misinterpreting (or misapplying) a consultant’s report.

For some time, MBIE (and its predecessors) have been paying consultancy firm BERL to produce a report every few years, drawing heavily on Census data as well as other material from government agencies, to produce an estimate of the fiscal impact of immigration.  The latest such report was released, MBIE tell me, a couple of weeks ago.  But, as it suited MBIE’s agenda, it had been provided to Latta well in advance of that (the programme was the website before the BERL report was available to the public).  On this particular methodology, BERL estimates that the average non New Zealand born person (“immigrant”) contributed a net $2653 to central government finances, compared with only a net $172 per New Zealand born person.

The Minister of Immigration and MBIE are obviously keen on this report,  Only a week or so ago, Michael Woodhouse, Minister of Immigration, appeared on TVNZ’s Q&A programme and was asked, near the end of his interview, if there was in fact any evidence that, over the longer-term, our immigration programme lifts exports, productivity etc.  Not in the least abashed, Woodhouse responded that there most certainly was such evidence, citing a report BERL “put out just last month” which demonstrated a very strong positive contribution.  I looked around for such a report and eventually had to ask MBIE what the Minister was referring to.  I was told it was the BERL fiscal paper linked to in the previous paragraph.

I hope the Minister had simply misunderstood that report.  It is an interesting exercise in its own way, but it has very considerable limitations.  Let’s start with those the BERL authors themselves list:

This study focuses on a subset of relevant issues and is subject to a number of limitations
1. The study concerns the impacts of gross immigration, not of net migration flows.
2. The study concentrates on fiscal rather than economic impacts. Due to this the study is limited to estimating the direct monetary impacts on the government’s operating budget.
3. The study does not cover all components of the government accounts.
4. This study captures a number of influences on differences in the fiscal impacts between population groups. Data limitations restrict the degree to which within group differences can be used to estimate overall impacts.

To be clear, the fiscal exercise does not even purport to look at the overall economic impact of immigration (good or ill).  It sheds no light at all on that issue.

But even in what it does look at, there are some quite severe limitations:

  • recall that the report estimates that both NZ born and immigrants made a net positive fiscal contribution to the government’s accounts.  Perhaps, but recall that in 2013 (the year studied) the government was still running quite a large fiscal deficit.  In other words, even if the study is roughly accurately capturing the relative contributions of immigrants and the native-born, it isn’t remotely accurately capturing the absolute contribution.
  • The BERL exercise does not appear to recognize at all that much of the demand for increased government capital spending now arises from the immigration programme itself (as it notes, between 2001 and 2013, the New Zealand born population aged 25 to 64 actually fell slightly while the foreign born population of that age increased by 222000 people).  Over those 12 years, 80 per cent of the total population growth has been among the foreign-born.   Assign much of the (above-depreciation) government capex to the immigration programme and suddenly even the fiscal numbers will look quite different.
  • These are snapshot effects rather than inter-generational ones.  It is hardly surprising that an immigration programme that brings in relatively young people involves less government operating spending (per capita) than for natives –  people that age are typically young and fit –  but if we want to think about even the fiscal impact of the immigration programme as a whole it would be important to look at the impact not just of the immigrants in the couple of decades post-arrival, but (for example) at the impact as those people age, and the impact of their own children (many of whom will be New Zealand citizens, but still a consequence of the immigration programme).
  • perhaps most importantly, any sort of exercise like this is only meaningful if it deals with very small changes (when one can keep the rest of the economy held constant).  By contrast, the potential for a large scale immigration programme to affect real interest rates, the real exchange rate, and the underlying structure of the economy, means these fiscal exercises offer no insight at all on the overall impact of immigration even on the fiscal accounts, let alone the wider economy.

I’ve never made much of the fiscal issues around immigration.  By international standards our residence programme , if large, isn’t bad  –  if it doesn’t attract many very skilled people, at least it does successfully focus on getting people quickly into the labour market.  But precisely because in the end we are largely bringing lots of people quite like us –  who can readily get jobs –  it is very unlikely that in the long-run there will be much net difference in the fiscal effects between the contributions of those whose ancestors have been here for generations and more recent arrivals.

But to revert to Latta’s –  and the Minister’s –  overblown claims, not even BERL would argue that their report sheds any light on whether New Zealanders are gaining economically from our large scale non-citizen immigration programme, that has now been in place (albeit with constant tweaks) for 25 years.  Perhaps there are such gains, but to demonstrate them one would surely need to grapple with such disconcerting statistics as:

  • New Zealand having had among the lowest (lower quartile) rates of productivity growth among OECD countries for the last 25 years (and perhaps the only OECD country with materially higher immigration – Israel –  is one of the few countries to have had even less productivity growth than New Zealand),
  • the failure of exports as a share of GDP to increase for 30 years

exports small countries

  • the failure of per capita tradables sector real GDP to have increased at all for the last 15 years (recall, this isn’t just a share of GDP – there has simply been no real per capita growth in our outward-oriented sectors in that time).
  • the fact that after all these years, our exports remain very heavily natural-resource based, sectors that would seem unlikely to have much need of a rapidly growing population.
  • the continuing relative decline of Auckland’s GDP per capita, despite the concentration of the immigrant population in Auckland.

Perhaps I shouldn’t really expect words like “productivity” to appear in prime-time mainstream TV, even when taxpayer-funded, but it was as if Latta had never heard of the concept, and those he interviewed just didn’t care.  There was an (immigration) programme to defend after all.  Who cares if New Zealand has been in gradual economic decline for 60 years or more? The elites apparently simply know that the economic gains of an extraordinarily large immigration programme are a ‘no-brainer’.

Actually, I suspect a few of them will have cringed, and squirmed rather uncomfortably, when they heard Latta make that claim.  But the defenders of the programme –  Ministers, officials, and academics –  really need to start coming up with something much persuasive if we are really to be confident (and few things are ever certain) that New Zealanders are benefiting from this large scale intervention.

Chile: undermining the NBR editor’s own argument

Michael Reddell Immigration, New Zealand economic performance, Uncategorized

Browsing on the NBR website yesterday morning, I noticed a headline: “Editor’s Insight: Migrant scaremongering will damage economy in long run”.   The headline didn’t exactly suggest fair and balanced reporting, but I don’t have an NBR subscription so didn’t pay it any more attention.

Later in the day someone showed me a copy of the text of the article.  In it, the editor of the NBR, Nevil Gibson, laments that

Hardly a day goes past when the anti-immigrant arguments aren’t being given the headlines and air time.  It has put government ministers on the backfoot as they attempt to justify New Zealand staying open for business.

Perhaps if there were evidence being produced of the benefits to New Zealanders of the large scale non-citizen immigration programme, that would be getting some air time too.  I’m sure ministers would be keen to use such evidence if it existed –  and the rest of us would be keen to see it.

Gibson singled out the interview with me in the latest North and South, noting of “the popular economic contention…that population growth has reduced per capita wealth, according to GDP figures”   that “these are quantitative but do not tell the full story of immigration benefits”.

Given that the non-citizen immigration programme is ostensibly driven by economic considerations –  recall MBIE’s phrase that it is a “critical economic enabler” –  I suspect most would settle for actually seeing evidence –  or even a compelling sense –  that per capita incomes of New Zealanders were rising over time as a result of the immigration programme.  But even Gibson seems to more or less accept that those benefits either don’t exist, or at least are hard to find.

Gibson devoted the final section of his article to a comparison between relatively high immigration countries –  New Zealand, Australia, and Canada, with passing reference to the much less open USA –  and Chile.

“Chile provides an example of an open economy like New Zealand’s but with a restrictive immigration policy.  It has fallen off the pace and Harvard-based Professor Ricardo Hausmann, a former planning minister in Venezuela, says the reason is the low proportion of foreign-born citizens”

Around 2 per cent of Chile’s population is foreign born, and the comparable figures for the other countries are New Zealand 28 per cent, Australia 27 per cent, and Canada 20 per cent.

Chile went through some pretty tough times in the 1970s and 1980s: very high inflation, military dictatorship, and severe financial crisis.  It was much more badly mismanaged than (then) heavily-protected New Zealand, even with the massive waste of resources that was Think Big, and a pretty bad financial crisis at the end of the 1980s.  And per capita incomes in New Zealand have always –  going back to first European settlement here –  been considerably higher than those in Chile.

But to read Gibson you’d expect to find that Chile was drifting ever further behind. Here is the relative productivity performance of the two countries, using the Conference Board’s estimates of real GDP per capita since the data begin in 1950.

chile and nz.png

On these estimates, 1990 was the best year for New Zealand relative to Chile.  We –  not Chile – have been in relative decline ever since.  As it happens, our current immigration programme has been in place since around 1990.

It isn’t just New Zealand.  Australia and Canada have also been losing a lot of ground relative to Chile, as has the United States.  Over the full 65 years, all those four high immigration countries have lost ground relative to Chile.

I’m not, repeat not, suggesting that the only factor explaining Chile’s pretty impressive productivity performance is the absence of a large non-citizen immigration policy.  Rather, I’d see it as an illustrative example of a point I’ve made many times previously: successful countries mostly make their own success, through the skills and talents of their people, the energy and dynamism of their firms,  the natural resource endowments they have, and the strength of their legal and cultural institutions.  Cargo cults –  “there is a better lot of people in other countries, if only we could get them here” – are not the answer.

Chile apparently hasn’t needed lots of foreign immigrants to put itself on a much better economic performance path.  And, by contrast, New Zealand –  in particular –  and Australia and Canada show few concrete signs of having benefited (and in particular of their citizens having benefited) from the large-scale non-citizen immigration programmes they’ve run for decades now.

So when Mr Gibson talks about a concern that lower non-citizen immigration might damage the economy in the long run, one has to wonder quite when he expects the tangible benefits for New Zealanders to show up.    It has been 71 years since World War Two ended and New Zealand restarted its large scale immigration programme (with an interruption between the mid 1970s and late 1980s).  We haven’t seen –  not even the advocates can’t point to –  the concrete economic benefits yet.  Perhaps I’m just an excessively cautious former bureaucrat, but I’ve rarely found the idea of just keeping on with a policy when, after several decades, there is no evidence of its benefits to New Zealanders a particularly attractive one.    It looks more like a pursuit of an “ideology”, without regard to the specific circumstances of our own country –  very remote, in an age when personal connections seem to matter more than ever, and strongly natural-resource based, suggesting little likelihood that lots more people would add much, if anything, to New Zealand’s medium-term productivity or per capita growth story.

 

 

 

“Ethical” investment

Michael Reddell Uncategorized

There has been a new upsurge recently in coverage of so-called “ethical” investment, and some mix of genuine and confected “outrage” over the investment of money in the shares of companies that may be involved in the production of various disapproved goods and services.  The main focus of attention has been on the government’s own investments – particularly those in ACC and NZSF –  and those of the government-promoted Kiwisaver funds, especially the default funds in which many people passively find some portion of their savings invested.  There even seems to be the possibility that some of these holdings may be illegal, and knowing/intentional breaches of the statutory ban on financing the production of cluster bombs carry very heavy criminal penalties.

In the Dominion-Post on Monday, Rob Stock had an article pointing out that moral concerns might not be limited to companies making cluster bombs, tobacco products, or whatever other product is particularly shunned right now.  I wasn’t entirely sure whether he was serious, or simply trying to highlight the absurdity of the whole business, but as he noted one could raise similar objections to holding the sovereign bonds of many countries based on the policies those governments run –  on his reckoning such a list could readily include Qatar, Israel, China, the US, Japan, Turkey, Russia, the Philippines.

Choices people make about what to do with their money are a moral matter.  Passively or actively, a person’s choices reveals what matters to them.  I’m a Christian, and so a believer in absolute truth.  But I doubt that would even lead to a unanimous view on what investments were appropriate, even among members of a single small local congregation.  How much greater is the difficulty in reaching a common view among much larger pools of investors, in an age when all faiths and none compete in the marketplace for ideas?

That is one reason why I remain staunchly opposed to the New Zealand Superannuation Fund.   In that fund, the government has taken money, by force, from citizens and invested it according to the moral precepts of those running the fund.  Actually, it is probably worse than that.  They’ll invest in anything (lawful), but will pull back if particular vocal lobbies succeed in creating too much perceived reputational risk for them.  It simply rewards the vocal, and the modern rent-seekers (pursuing a “cause” rather than personal profit) and forces minorities into investment holdings they may be quite uncomfortable with  (and in some cases probably keeps even majorities out of investments they might be quite comfortable with).

Some might be unhappy with investments in firms making weapons, tobacco products, involved in whale hunting, or in funding governments that apply the death penalty. Others probably have problems with coal or oil producers.  I don’t have a particular problem with any of those investments, but I do object to investing in (or having my taxes invested in), for example, firms associated with the Chinese government, or (US-listed) hospital chains providing abortions, or casino companies and so on.  My point is not to argue the merits of my particular concerns, but to highlight the near-impossibility of reconciling the range of individual concerns, individual freedom, and investments through large scale collective (particularly compulsory) entities.

In the genuinely private sector, and for schemes that are open to new money, there is a bit of a market test: funds won’t keep on investing in particular companies/products if investors are withdrawing their funds or new investors are going elsewhere.  But that doesn’t grapple with the moral point.   Personally, it leaves me uncomfortable with collective investment vehicles, unless they are very clear in advance of what sorts of companies, or governments, they’ll invest with.  You make your choices and I’ll make mine.  And all  but the most scrupulous –  or most morally indifferent –  will almost inevitably have to make trade-offs: what matters enough to adjust one’s investment (or consumer custom) in response to.

As it happens, I’m a trustee of a superannuation scheme –  the Reserve Bank Staff Superannuation and Provident Fund.   Our scheme is not a public body, isn’t subject to the Official Information Act,  and is not subject to any directions from either the Reserve Bank itself or the Minister of Finance. Neither the Crown nor the Bank gets any direct financial benefit from our investment choices.  We aim to ensure that we obey the law, and as the law requires, we seek to act in the best interests of members.  So the investments of our scheme are really only a matter for our members.  Probably the only thing the members have in common is that they work, or once worked (most are now retired) for the Reserve Bank.   Some will be smokers, some won’t.  Some will favour coal mining, others won’t.  Some will support Israel, others won’t.  And so on. Quite how the trustees of such a fund should invest, or avoid investing, is quite a challenge.  Since we have fiduciary responsibilities, it can’t just be on the basis of the personal preferences –  likes and dislikes –  of individual trustees –  let alone, some prevailing public “mood”.  In an age where one can no longer count on much common ground in values, morality etc, it is probably another reason to welcome the demise of old-fashioned workplace savings schemes.

The badly dysfunctional New Zealand housing supply market

Michael Reddell Housing, Uncategorized

This chart has had a bit of coverage in the last few days.  It was produced by Statistics New Zealand, and was included in a useful release last week bringing together dwelling consent and population data over the last 50 years or so.

snz picture

As SNZ noted, there is a bit in the chart for everyone.

The number of new homes consented per capita has doubled over the past five years, but is only half the level seen at the peak of the 1970s building boom, Statistics New Zealand said today.

One sees these sorts of per capita charts from time to time, but I’ve never been sure they were very enlightening.  After all, the existing population typically doesn’t need many new houses built –  it is already housed, and the modest associated flow of new building permits will result mostly from changes in tastes, changes in occupancy patterns (eg more marriage breakups will probably increase the number of dwellings required for any given total population) or perhaps even the age composition of the population.  Even quite big differences in  the number of new dwelling permits per capita don’t, in isolation, tell you much: Marlborough and Gisborne have very similar populations, but over the 21 years for which SNZ provides the data, there were almost three times as many houses built in Marlborough as in Gisborne.

Mostly (at least in countries like this one), new houses are needed for increases in the population.  Marlborough’s population was growing over that period, and Gisborne’s wasn’t.

So we might be more interested in the growth of the housing stock relative to the growth of the population.   Growth in the housing stock is typically more interesting than building permits, because if two old villas are demolished to build six townhouses, it is the net addition to the number of dwellings that is typically more interesting, than the number of new units consented.  In recent New Zealand context, if lots of houses are destroyed by an earthquake, the gross number of new consents won’t offer much insight on the supply/demand balance.

SNZ produces some housing stock estimates.  I’m not sure quite how they do them, but they suggest that each year typically about 2000 existing dwellings are destroyed, a tiny proportion of the (current) stock of around 1.8 million dwellings.  If New Zealand’s overall population was static, there would still be a small amount of replacement activity and –  if the Gisborne numbers are roughly indicative –  perhaps 11000 new dwelling consents a year for the country as a whole would be fine.   Gisborne house prices, for anyone interested, are still lower than they were a decade ago.

Here is the nationwide picture since 1991.  This shows the increase in the number of dwellings per increase in the population  (thus, 0.4 means one new dwelling added for each additional 2.5 people).

housing stock

So, far from  the situation improving in the last few years –  as the SNZ chart above might have suggested (and as SNZ themselves suggested) –  things were worse than ever in the year to June 2016.  The population is estimated to have increased by 97300, and yet the housing stock is estimated to have increased by only 23800.  Talk about dysfunction, and no wonder house prices have been rising strongly.  In 1999, 2000 and 2001, by contrast, the population increased by only around 21000 per annum.

SNZ doesn’t have (or not that I can find) annual housing stock estimates back to the 1960s, but we can still look at the new building permit numbers relative to the change in the population.   Here is the chart showing new dwelling permits per person increase in the population.

housing 60sWhat happened?   Well, in the late 1970s the large scale outflow of New Zealanders got underway, and the number of non-citizen immigrants had also been scaled right back.  In the years to June 1979 and June 1980, the population is actually estimated to have fallen slightly, and yet 18000 and 15000 new dwelling consents were granted in each of those two years.  For the three June years from 1978 to  1980 there was no population growth at all, and yet there were more than 50000 new dwellings consented.  No wonder that over the late 1970s and through to around early 1981, New Zealand experienced the largest fall in real house prices (around 40 per cent) in modern history.

Nothing in the data suggests that the New Zealand housing and land supply market is now even remotely capable of coping with population increases of 2 per cent per annum.  Of course in some sense it should, and could, be fixed.  But there is little or no sign of it happening –  are there any reports of peripheral land prices in Auckland collapsing since the Unitary Plan was adopted? – which makes the continued active pursuit of rapid population growth look even more irresponsible (than it would already be, given the absence of evidence of other real economic gains to New Zealanders from such a, now decades-old, strategy)

The Governor has form

Michael Reddell Monetary policy, Uncategorized

If one had simply been handed the Governor’s speech this morning, with no other knowledge of the New Zealand data, or of the Governor’s stewardship of monetary policy in his four years in office, it might have seemed quite reasonable.  And a person who had a good track record in making sense of inflation pressures and adjusting the OCR to keep inflation fluctuating around the target would have built a store of reputation and credibility.  Backed by all the analytical resources at his command, one might be inclined to be influenced by such a person’s analysis and storytelling.

But Graeme Wheeler is not that sort of person. Instead, he –  and his advisers –  badly misread inflation pressures, and after champing at the bit to raise interest rates, he launched an ill-judged, unnecessary, and ill-fated tightening cycle.  He set out on his quest talking up a coming 200 basis points of OCR increases, before finally bowing to reality after 100 basis points, and has only, and mostly very grudgingly, lowered the OCR since then.  In real terms, the OCR today is no lower than it was before that tightening cycle began.    And so core inflation lingers well below the midpoint of the target –  a focus he and the Minister had explicitly added to the PTA in 2012 –  and the unemployment rate is now into an eighth year materially above anyone’s estimates of the NAIRU.

Of course, forecasting and policy mistakes are, to an extent, inevitable.  No one is granted the gift of perfect foresight –  and if anyone had, they’d be better employed somewhere other than a central bank.  But what has compounded the problem –  the reasons not to take too seriously what the Governor says –  is his continued failure to even acknowledge mistakes, let alone express any contrition.  It is hard to have any confidence that someone has learned from their mistakes if they won’t even own up to having made obvious ones.  And while no individual speech can cover everything, it is striking how totally absent any treatment of the Bank’s conduct of monetary policy over the last four years was from this one.

Since my wife will be ticking me off for overdoing it and not resting if I write too much, I wanted to pick up on just two points in the speech.

The first was the Governor’s apparent model of inflation.

low inflation in some countries is linked to demographic change, especially in countries with a declining workforce and rapidly ageing population. Low inflation is also due to technological change around information flows and energy production, and to the global over-supply of commodities and manufactured goods;

Which sounded depressingly like the excuses and alternative explanations that were touted, in reverse, in the 1960s and 1970s.  At that stage people talked about the role of union power, occasionally even about demographics, about oil prices and resource scarcity and so on.  Each of those phenomena were real –  as those in the Governor’s list are –  but to cite them as explanations for persistently high, or persistently low, inflation is some mix of cop-out and analytical failure.

Persistent inflation –  or the absence of persistent inflation – is always and everywhere a monetary phenomenon.  By that, I don’t mean printing banknotes, and I don’t mean particular levels or growth rates for things central banks call “monetary aggregates”.   I mean simply that monetary policy can, if it chooses (or is permitted to) counter the impact of the sorts of factors the Governor listed and deliver an inflation rate that averages around target.  If they no longer believe that, the Reserve Bank should hand back its remit.

Sometimes, the job of monetary policy is harder than normal, and sometimes easier.  In the 1960s and 70s, with overfull employment in many countries, lots of union power, and lots of demand pressure associated with a rapidly growing workforce, it took a lot of effort to get and keep inflation under control.  Some countries did pretty well.  Others –  and New Zealand and the UK were two prime examples –  did poorly.  In the current climate, there seem to be a variety of ill-understood factors dampening inflation pressures globally.  Some countries have done well in countering them –  Norway is an example, and on Stan Fischer’s reckoning the US might be too.  Others less so.  But last year, on IMF numbers, around 90 countries had inflation in excess of 2 per cent, and almost 70 had inflation in excess of 4 per cent

Of course, the current effective lower bound on nominal interest rates, a bit below zero, does constrain many countries’ freedom of action.  But it doesn’t change the fact that inflation is a monetary phenomenon –  it is just that regulatory and administrative practices hamstring the ability to use monetary policy to the full in those countries.  Low inflation in other countries doesn’t make the Reserve Bank of New Zealand’s job harder. although common global factors –  affecting us as much as other countries –  may do.

Before turning to the second main aspect of the speech I wanted to comment on, I would note that there was plenty in the speech that I agreed with.  My differences with the Bank have never been about how the inflation target is specified and I agree that the government should not be considering lowering the target when the next PTA is signed next year. There might be a case for considering raising the target –  to minimize the risk that the near-zero bound becomes a problem –  but that is a topic for another day.   As the Governor notes, no other governments in other countries have changed the inflation targets their central banks work to, or abandoned inflation targeting.

The second area I wanted to focus on was the section devoted to explaining why the Governor disagrees with people like me, who think that interest rates should be cut further now.  Here is what the Governor has to say.

This view advocates bringing inflation quickly back to the mid-point of the inflation band by rapidly cutting the OCR. Driving interest rates down quickly would lower the exchange rate, contributing to increased traded goods inflation and stronger traded goods sector activity. The ensuing increase in house price inflation is not seen as a consideration for monetary policy, even though there would be an increased risk of a large correction in the housing market and associated deterioration in economic growth.

There would be considerable risks in this strategy. An aggressive monetary policy that is seen as exacerbating imbalances in the economy would not be regarded as sustainable and would not generate the exchange rate relief being sought.

With the economy currently growing at around 2½ – 3 percent and with annual growth projected to increase to around 3½ percent, rapid and ongoing decreases in interest rates would likely result in an unsustainable surge in growth, capacity bottlenecks, and further inflame an already seriously overheating property market. It would use up much of the Bank’s capacity to respond to the likely boom/bust situation that would follow and would place the Reserve Bank in a situation similar to many other central banks of having limited room to respond to future economic or financial shocks.

Such consequences suggest that a strategy of rapid policy easing to extremely low rates would be counter to the provisions in the PTA that require the Bank to “seek to avoid unnecessary instability in output, interest rates and the exchange rate” and to “have regard to the soundness of the financial system”.

Do note the rather loaded language throughout this section.

Note too, as context, the chart of the real OCR

real ocr to aug 16

To this point, far from having seen “rapid” OCR cuts, the OCR in real terms hasn’t yet got back down to where it was before the ill-judged tightening cycle began.  Context matters: if the Governor were making these sorts of arguments when the real OCR was already 100 bps below previous record lows, with the labour market overheating and inflation rapidly heading back to 2 per cent, they might sound more plausible

As it is, I’m not  quite sure what to make of the comments.  On the one hand, in the first paragraph he accepts that such a strategy would work by lowering the exchange rate. But then in the next paragraph he appears to suggested that unexpectedly rapid OCR cuts would not in fact lower the exchange rate.  We all know that foreign exchange markets can be fickle things, but I’m pretty confident that if he’d come out this morning and said “you know, on reflection it does look as though interest rates will need to be quite a bit lower than we had thought.  We’ll do whatever it takes to get inflation fluctuating back around 2 per cent, and at present it looks as though that might mean the OCR has to head towards 1 per cent” that the exchange rate would be quite a lot lower.

And what of GDP growth?  Recall, that the Bank has persistently overestimated how rapidly spare capacity has been used up.  Their forecasts currently have GDP growth accelerating to 3.5 per cent. But the expectations survey they run  –  and apparently now want to gut – suggests informed observers don’t agree: latest expectations among that group were for growth of 2.5 per cent and 2.4 per cent in each of the next two years.   On that basis, those observers don’t expect the substantial excess capacity in the labour market to be absorbed any time soon.  And as a reminder to the Bank, to absorb an overhang of unemployed people the economy has to have a period of faster-than-sustainable growth.  To get core inflation back to target typically involves much the same sort of pressures.

In fact, most of this is –  as always with this Governor –  about house prices.  In his description of the “further cuts” view, the Governor notes that for those running this view

The ensuing increase in house price inflation is not seen as a consideration for monetary policy

That is because it is not, under the current Act and PTA, a relevant consideration for monetary policy.  The target is medium-term CPI inflation.  House prices don’t figure in that index and –  unless they have had a major recent change of view –  the Bank doesn’t think they should.  Monetary policy has one instrument and can really only successfully pursue one target.  The Minister of Finance and the Governor agreed that target would be medium-term CPI inflation.

But perhaps my biggest concern is that the Governor is now falling back, quite openly and formally, on the spurious argument that if he cut more now, he would only increase the chances of running into the near-zero lower bound at some future date.   His logic here is totally wrong, and his approach is only increasing the risk of lower-bound problems becoming an issue for the Reserve Bank of New Zealand.

With hindsight that is pretty clear. Remember that I’ve pointed out that we’d have been better off if the Governor had done nothing at all on monetary policy in his four years in office.  Actual inflation would be a bit higher –  since average interest rates would have been lower, and no doubt the average exchange rate –  and, on the Bank’s own reckoning (they point out that expectations appear to have become more backward looking) inflation expectations would have been higher.  Higher inflation expectation would, in turn, have supported higher nominal interest rates now (for the same real interest rates).    But the same analysis applies looking ahead.  If the OCR were cut further and faster than the Bank currently plans then, on their forecasts, inflation and inflation expectations would rise, helping to underpin higher nominal interest rates in future.  The risk of the current strategy –  especially given the Bank’s asymmetric track record –  is that actual inflation continues to undershoot, excess capacity lingers, and in response inflation expectations drift ever further downwards.  If that happens, the nominal OCR will have to be lowered just to stop real interest rates rising.

The lesson from a wide variety of advanced countries over the last decade is surely that, with hindsight, they didn’t cut their official interest rates hard enough and far enough early enough.  I stress the “with hindsight” –  there was little good basis for knowing that in 2009, but there is much less excuse for central banks, like the RBNZ and RBA, that still have conventional policy capacity.

On which point, two other observations:

  • there was still no reference in the speech to New Zealand doing anything about making the near-zero lower bound less binding.  There is simply no excuse for the New Zealand authorities to have done nothing pre-emptive to ensure that the ability to use monetary policy aggressively in the next downturn is not constrained by artificial constraints around the price of physical banknotes.
  • in his alarmist rhetoric about “further inflaming” the housing market, the Governor appears to have forgotten completely the line the Bank used when LVR restrictions were first imposed.  Asked then why not use monetary policy instead, the (correct) response was that our modelling suggesting that it would take 200 basis points of OCR increases to have the same impact on the housing market as the (quite limited) estimated impact of LVR controls.  No one –  not even me –  is suggesting that the OCR should be cut by 200 basis points now.  And if the Bank is concerned about banking system risks from high house prices, it has capital requirements that it could adjust.

Once again, this is a speech that reflects a key aspect of the Governor’s underlying “model” –  his fear that inflation might be just about to break out, all while taking little or no responsibility for the fact that it repeatedly fails to do so.  I’m caricaturing a little bit, but not a lot. Go back and read what he was saying leading into the 2014 tightening cycle, and then read those paragraphs from today’s speech that I included above –  written from a point where the real OCR is still slightly higher than it was before the tightening cycle.  That mindset clearly shapes how he thinks about policy and his asymmetric view of risks.  Past performance might not be a good predictor of future performance in investment management, but in senior managers and key decisionmakers it often is. It is hard to self-correct unrecognized biases –  perhaps especially if the decisionmaker thinks those biases are actually strengths.   The Governor has form. Unfortunately, it is has mostly been poor form.  It is not clear why that bad run is about to break.

In passing, it is just worth noting one of the Governor’s final observations

Central banks do not have special powers of market foresight or a franchise on wisdom. But they do have significant research and analytical capacity that can deliver valuable insights, and this is being applied to challenges associated with the current global economic and financial developments.

And yet, neither in the text of the speech nor in any of the 11 footnotes, is there any reference to any Reserve Bank research at all.

The social democrats at the Productivity Commission

Michael Reddell Housing, Uncategorized

A short time ago, a press release from the Productivity Commission dropped into my in-box, announcing the release this morning of the Commission’s draft report on better urban planning.    The Government asked the Commission to take a first principles, or “blue skies” approach to the issue.

I’ve been increasingly skeptical of the work of the Productivity Commission.  They often provide some interesting background analysis and research, and yet they increasingly seem to be well described by the old line “when your only tool is a hammer, it is tempting to see every problem as a nail”.  The Productivity Commission is mostly made-up of, and run by, (able) long-term public servants.  Public servants design and help implement the instrument of state –  government attempts to remedy problems, typically with government-based tools.  There is a self-selection bias problem –  people who are inclined believe in the importance/viability of government solutions are more likely to work for government than those who don’t –  and a greater reluctance than usual to ask hard questions about one’s own capabilities, since government agencies typically face few market tests and weak accountability.  The Productivity Commission –  like the OECD –  tends towards smarter better government, not to asking hard questions about whether we couldn’t just get government out of the way in many more areas, as prone too often to being the source of problems rather than the solution.

The Productivity Commission’s report runs to over 400 pages, and since it was released at 5am this morning, I assume no one has read it all.  I was, however, struck by the fact that in a 600 word press release there is no mention of property rights and a single mention of markets (and that not positively).  There is a 10 page overview of the entire report, and a word search suggests that “rights” does not appear at all and “markets” only once.

My unease was heightened when I read this line in the press release

Planning is where individual interests bump up against their neighbours’ interests, and where community and private objectives meet. It is inherently contested and difficult trade-offs sometimes have to be made. These decisions are best made through the political process not the courts.

Again, no mention of rights.  And the prioritisation of the amorphous “community interests”.   The suggestion of increased reliance on the political process rather than the courts hardly seems like a recipe for a clear, stable, predictable (and non-corrupt) regime for managing potential conflicts between the property rights of various individuals and groups.

Perhaps this draft report will recommend some  useful steps in the right direction.  Time will tell.  But on the face of it –  the shop window, of the press release and summary – it seems to fall quite a long way short of a first principles approach in a free society.