Yesterday’s Q&A discussions on immigration seem to have attracted quite a bit of coverage.

Of course, most of that focused on the comments made by Winston Peters, and I don’t have anything much to say about those except to note two things.

First, I was interested to hear him talk of targeting 7000 to 15000 annual migrants, which was quite similar to my suggested target for residence approvals of perhaps 10000 to 15000 per annum.  The United States issues around 1 million green cards a year, and as the US had about 70 times our population that is about the same rate of per capita immigration as would be implied by my 10000 to 15000 annual range.  It isn’t a level that amounts to shutting the door.

Second, Peters has twice before been a senior minister and has never made the rate of permanent immigration a central issue in negotiations to form a government. Perhaps this time will be different.

Of my comments, most of the coverage has been around the suggestion that if the residence approvals target was cut as I suggested, house prices might be 25 per cent lower in a couple of years.  It wasn’t intended as a precise estimate, more an indication that population growth (and especially unexpected changes) make a material difference to house prices in markets where the supply response to impaired by the thicket of land use and building regulations.  However, it is quite a plausible estimate, consistent with some past empirical research on the link between population change and New Zealand house prices.

A decade ago, Coleman and Landon-Lane, in work done at the Reserve Bank, estimated that a 1 per cent shock to the population would shift house prices by 10 per cent, and more recently Chris McDonald’s Reserve Bank work produced not-dissimilar   estimates (especially for non New Zealand migrants).   Adopting my proposal to cut the residence target by 35000 per annum would, all else equal, lower the population by 1.5 per cent in the first two years.  But, more importantly, it would materially lower the expected future population, and asset markets (such as the urban land market) work on the basis of expectations.  Over a decade, again all else equal, the population would be around 7.5 per cent lower on my proposed policy than on current policy.  All else equal, urban land prices would be much lower.  Of course, all else is never equal, and with less population pressure some of the pressure to liberalise housing supply would dissipate.  But the direction of the effect on house prices is pretty clear, and the magnitude would almost certainly be quite large.

Perhaps one thing that disappointed me a little about yesterday’s programme was that discussion tended to focus on the immediate cyclical pressures, and especially those on Auckland house prices.  I guess those issues are most immediately salient, especially in Auckland, and perhaps most easily accessible to a lay audience.  My own arguments have tried to focus (a) not on the cycles in net migration, much of which are about New Zealanders coming and going, but on the trend target level of residence approvals, and (b) on the impact of New Zealand’s disappointing overall economic performance (ie the continued trend decline, over many decades, in our relative productivity).  We could fix up the land supply market –  and should –  and many of those questions and issues would, almost certainly, remain outstanding.  That said, when the advocates of the current policy can show so little evidence suggesting real economic gains to New Zealanders (as a whole) from our really large scale immigration policy (repeat, policy – the target level of residence approvals) then the appalling house price situation cries out for winding back the level of migration approvals, as one way of mitigating the adverse effects of the land use restrictions.    One could envisage an alternative world in which the real economic benefits of large scale immigration were large, clear, and demonstrable, and yet the housing market was still severely dysfunctional.  In that world, there would be some nasty potential tradeoffs if reform of land supply couldn’t be achieved.  But we aren’t in that world.  Here, it looks as though winding back migration approvals might well improve productivity prospects and improve housing affordability.   There would, and will, always be cycles in net measured migration, but the policy component is relatively easy to adjust, and to maintain at a different target level (lower or higher) than we’ve had for the past 15 years.

I was pleasantly surprised at the moderate and reasoned approach the Q&A panel took to the immigration segment.  They recognized that there are some real issues that need rational and thoughtful debate.  Nonetheless, they all still seemed in the thrall of the idea that “skill shortages mean we need migration, just perhaps a “better quality” of migrant”.   There are really just two points that need to be made in response.  The first is that empirical research suggests –  and historical casual empiricism does too –  that an influx of migrants adds more to demand rather than to supply in the short-term.  People who live in a modern economy need lots of real physical capital, and it doesn’t build itself.  So although an individual migrant might ease an individual employer’s problem, in aggregate high immigration simply further exacerbates any existing excess demand for labour (skilled or not).  Economists have recognized that for decades.  It doesn’t, of itself, make immigration a bad thing –  long term gains might still make it worthwhile –  but immigration isn’t a way of dealing with systematic skill shortages.    By contrast, a flexible domestic labour market is quite a good way: changing wage rates should signal difficulties in attracting people to particular roles/regions.  It doesn’t work overnight, and it doesn’t work in aggregate if the economy is overheating, but it works when given the chance.

The panellists also seemed taken with the idea that more should be done to get more of the migrants who do come to go to regions other than Auckland.  That seems, at least in part, to reflect a sense that something is wrong about things in Auckland (whether short term or long term) and perhaps a sense that a more successful New Zealand is likely to be one less strongly skewed away from the regions. But it risks leading to even more wrongheaded policies.  We’ve already seen that last year, when the government amended the rules to give additional bonus points to people with job offers in the regions.  Unfortunately that has the effect of lowering the average quality of the migrants who get in.  The residence approvals target is largely fixed, and the changes in the scheme rewards those who can get to particular locations, not either (a) the most highly-skilled migrants, or (b) the most rewarding and productive New Zealand jobs.  Auckland’s economic performance has been quite disappointing, suggesting it isn’t a natural place to funnel ever more people into.  But that doesn’t suggest that the solution is to funnel more people to other places instead.  It suggests focusing on the whole economy –  in particular, getting the real exchange rate sustainably down –  and letting a rather smaller number of total permanent migrants locate where the jobs and rewards are best.  In that sort of world, Auckland’s population might be materially smaller than it would be on current policy, but the population of the regions might not be much larger.  But the share of the regions in overall economic activity would be larger than it is now.  Better to cut the overall residence approvals target, and focus in on a modest number of really highly-skilled people.  The regions aren’t short of people, but Auckland seems to be awash in them (relative to the high-returning opportunities that seem to exist in Auckland).

As a final observation on the Q&A discussion, I was interested in Andrew Little’s response to questions about immigration.  He continues to toy with the idea of some sort of short-term cap on migration. I don’t think that is particularly sensible or meaningful.  No one can accurately forecast short-term fluctuations in net migration (ie the combination of New Zealanders and foreigners) and if those fluctuations can’t be forecast, one can’t run meaningful short-term caps. In the nature of things, and well-intentioned as they might be, they would simply risk exacerbating the short-term cycles in net migration: pull back approvals when net migration was at a cyclical peak, and by the time those changes took effect, often enough the natural cycle would have turned down anyway.  And vice versa when net migration is at a trough.  We are much better to run a stable and predictable programme of residence approvals, and live with the natural variation that results mostly from New Zealanders coming and going.    In my view, the target level of approvals should be lowered quite substantially, but wherever it is set it shouldn’t be messed around with –  up or down –  in response to short-term cyclical pressures.

But my concern about Little’s comments was more about the underlying message.  Twice in the space of thirty seconds, he repeated the line that “New Zealand has always been a country dependent on bringing in skills from abroad”, stressing that he would never want to change that.  It is simply a mistaken model of growth.  The prosperity of any country depends primarily on some combination of the natural resources it has and, most importantly, on the skills and talents of its own people, and the institutions (political and economic) that those people nurture.    That was true of the United Kingdom or Holland centuries ago, it was true of the United States century or more ago, it was true of twentieth century New Zealand, and it is true of every advanced successful country today.  Of course, every country draws on ideas and technologies developed in other countries. In some cases,. immigration may even have helped the recipient country a bit –  but any such gains look to be quite small – but prosperity depends mostly on a country’s own people and own institutions.  The line Little is running is certainly consistent with the implicit stance of the New Zealand elite, across the main parties, but there is little or no empirical foundation for it.  Indeed, it risks sounding like a cargo-cult mentality –  waiting for just the right people from over the water to come and bring us prosperity.  Things simply don’t work like that.  It is a shame that our political leaders aren’t willing to put more faith in the skills, talents, and energies of our own people and firms, rather than (so it seems) wanting to “trade us in” for some better group of people.  Countries don’t get successful by bringing in better people: rather, successful countries can afford to bring in more people, if they choose.

In this morning’s Herald, the other key prominent academic in the liberally-funded (by MBIE) CaDDANZ project, Professor Paul Spoonley of Massey, has an op-ed championing the current immigration policy.  It probably warrants a post of its own, but his bottom line seemed to be “keep the faith”.

Spoonley starts with this:

The International Labour Organisation estimates a 1 per cent increase in population expands GDP by between 1.25 and 1.50 per cent.

I’m not sure the source of this estimate, but it is a huge effect.  Stop and think about what it means for New Zealand, if it were true over the medium-term.  We’ve had one of the fastest population growth rates in the OECD in recent decades, and yet one of the worst productivity growth performances.  So perhaps the really rapid migration-fuelled population growth has been really really good for us, and everyone else has gone really really badly, to explain our overall disappointing performance. But where is evidence –  the telling statistics that suggest that that is really what has gone on? Professor Spoonley knows about the disappointing New Zealand economic performance, so it is a shame that he didn’t try to relate his general claim to the specific experience of New Zealand.

Spoonley then argues

Auckland gains from the effects of agglomeration. Population growth and immigration is associated with economic growth and diversity. For example, Auckland and Canterbury between them accounted for almost all the new jobs growth in New Zealand last year.

Immigration is key to this as skilled immigrants add to the human talent pool that is available to employers. They also establish new businesses and contribute to demand, including for education. Regions and cities that are not attracting immigrants are losing out on this current windfall.

It is fine theory. It just bears no relationship to  the experience of New Zealand, and Auckland in particular, in recent decades.

I’ve shown this chart before

No one disputes – Spoonley doesn’t –  that Auckland’s population growth is largely migrant-driven.  And yet Auckland’s per capita GDP has been trending down relative to the rest of the country’s over 15 years.  And the margin of Auckland’s GDP over that of the rest of New Zealand was already low relative to what we see in most other advanced economies.

Perhaps Professor Spoonley and the other New Zealand pro-immigration advocates (many of them taxpayer funded) are right about the benefits to New Zealanders of this really large scale intervention.  But even if so, surely we deserve much more evidence of those benefits than we get when leading academics simply assert over again that, whatever the short-term stresses, the Think Big programme is really working out just fine?

And to end a long post, just a simple chart.  It shows residence approvals for each year since 1997/98.

The data are only available annually, but they are hard data on the number of people MBIE has given residence visas to.  This isn’t SNZ arrivals and departures data, it is the policy core of the immigration programme –  aiming at 45000 to 50000 approvals per annum.  One of my commenters keeps trying to distract from this issue by citing PLT data. Those data are often interesting and useful (and in other ways quite limited) for various other analytical purposes, but if we want to think about the implications of the annual flow of residence approvals this is where the focus should be.  Annual approvals under this programme are not very cyclical, and haven’t varied much across the last two governments.  They are simply very high by international standard (per capita) –  three times the US level.  And on the (lack of) evidence to date of economic benefit to New Zealanders, the annual target should be wound back quite considerably.

The Herald’s editorial today is headed “Population growth is powering NZ economy”.   It isn’t just a statement of the rather obvious, that a rapid growth in the population –  particularly unexpectedly rapid growth – boosts total GDP.    When there are more people, they all need to consume stuff, and they need houses, schools, shops, roads, offices etc.  And unexpected surges in the population boost demand more, in the short-term, than they do supply.    But they don’t do anything much to boost sustainable per capita real GDP.

That isn’t, of course, the Herald line.  Rather, channelling the Prime Minister, they assert that

The population increase is helping to generate the growth in the economy that puts New Zealand ahead of most other and larger economies at present, which in turn makes it a magnet for yet more migrants, as well as persuading more young New Zealanders to stay here.

There is so much wrong with this sentence, it is difficult to know where to start.  First, and repeating it slowly yet again, it is per capita economic growth that matters.  New Zealand has been doing quite badly on that score over the last year or so, even by comparison with other countries.  And as I illustrated yesterday, even on the Treasury’s own, optimistic-looking, numbers, we are expected to be only an average performer over the next four year.  Average isn’t necessarily bad, except that we are starting out so much poorer than most advanced countries, and not closing the gap.

And it isn’t as if jobs are abundant here either,  Our unemployment rate, at 5.7 per cent, is well above most estimates of the “natural” rate of unemployment, and not much below the median unemployment rate for OECD countries.    The number of residence approvals here is subject to a target, so even if there is increased demand from foreign citizens to move here, it only increases slightly the quality of the people we can take, not the total number.  Much of the variation results from two things.  The first is the inflow of students, probably influenced more by the policy change allowing most to work here while they study, rather than by the intrinsic strength of the New Zealand economy.  And the second is the flow –  mostly of New Zealand citizens –  to and from Australia.  Australia’s unemployment rate is also now quite high, at 5.7 per cent, and New Zealanders moving there don’t have access to the welfare safety net and associated entitlements they do at home.

The editorial goes on

The Government would not want to say this out loud, but clearly it is not controlling immigration as tightly as previous governments have done. This attitude undoubtedly comes from the Prime Minister and it is consistent with his disinclination to restrict foreign investment or even monitor its impact on the house market. He deeply believes the country is better off being open and connected to the world’s flows of capital, trade and people. The performance of the economy on his watch suggests he is right. Even the housing affordability is a cost of prosperity. If we want drastic steps taken to stop rising prices we need to be careful what we wish for.

With the exception of allowing students to work, the initial claim here is simply incorrect.  The residence approvals target is the same as it was under the previous government, and even student arrivals have not reached the peaks seen under the previous government.  As for the rest, no doubt it accurately reports the Prime Minister’s views –  he has repeated them often enough –  but there is no evidence to support it.  Productivity growth –  the foundation of sustained long-term prosperity –  has remained disappointingly weak.  And the immigration inflows have been overwhelmingly concentrated in Auckland, and yet the official data show that Auckland incomes are (a) lower relative to those in the rest of the country than we see in most advanced countries (comparing dominant cities and the rest of the country) and (b) that that gap has been narrowing.  Whatever the reason, the strategy is failing.

From there the editorial launches off into its own alternative universe

New Zealand’s desirable population size has always been a contentious subject, though not previously an urgent question. The increase since the turn of the century followed 25 years of static population figures as more people left than arrived.

Immigration policy was a notoriously capricious. Each time the economy dipped, governments would close the door. Now that we appear to have a rapidly growing population again, we need to be discussing how high we want it to go, and how it might be channelled to regions that most need it, and the houses and services it is going to need.

This country would benefit from many more people, and better preparation for their arrival.

There was a period from the mid 1970s to the late 1980s when New Zealand’s population growth was quite subdued.  But for the last 25 years –  not just since the turn of the century –  we have had one of the faster population growth rates of the OECD.  One doesn’t have to take a view on causation to note that people haven’t exactly been flocking to an economic success story.  Incomes here are presumably better than they were in the migrants’ home countries, but our productivity growth rate over that 25 years has been among the very slowest in the OECD.  Starting low, we’ve just drifted somewhat further behind.

I’m also not sure where the author gets the idea that New Zealand “immigration policy was notoriously capricious”.  Yes, there are constant changes at the margin, but to a large extent we’ve been running much the same immigration policy for 25 years now, through several recessions, and some pretty sharp ups and downs in the labour market.  Much the same could be said of the post-war decades, until the Labour government in 1974 closed down automatic access for British and Irish citizens –  and that wasn’t because the economy was doing badly, but just because they thought immigration should be less focused on traditional sources countries.

Of course, I thoroughly agree that we should be having a national debate about immigration policy.  Policy has long been premised, explicitly or otherwise, on the belief that New Zealand would be better, and more productive, if only there were more people.     But there is just no evidence for that proposition, and certainly not enough on which to rest such a large scale economic and social intervention as our immigration policy.  Big countries don’t grow faster than small ones.  When we had 1 million people, there were calls for many more people.  And when we had 2 million people.  And when we had 3 million people. And so on.  And for decades our relative incomes and productivity performance have been deteriorating.  New Zealanders have been getting poorer relative to their advanced country peers.  I’m not sure where the advocates think the critical threshold is where things might turn around –  but clearly 4.5 million people hasn’t been enough either.

The editorial writer talks of channeling people to “the regions”, which is almost certainly even more wrongheaded than bringing in large numbers in the first place.  We’ve seen that in the policy changes the government made last year: giving more points to people with job offers from the regions simply has the effect of lowering the average quality of the migrants we do get, who (on average) have not been terribly highly-skilled in the first place.

Instead of constantly championing the case for ever more people –  even at the cost of encouraging New Zealanders to leave Auckland (a weird way to help people at the bottom) – it is about time there was a serious conversation that stopped pretending everything was fine, and confronted the facts of New Zealand’s economic underperformance, and Auckland’s economic underperformance.  Doing so would force people to think harder about whether there was much realistic prospect of New Zealanders benefiting from an ever-increasing migration-fuelled population.  I’m not suggesting a population policy –  fertility and emigration choices of New Zealanders are their own affair –  rather, the abandonment of the implicit “big New Zealand” population policy we have had through successive governments.   Pretty much everyone accepts (and it is an uncontested OECD empirical result) that our distance from markets (and competitors) is a material penalty, making it harder to generate really high per capita incomes in New Zealand.  There is still no sign that New Zealand is getting much traction in products and markets that don’t rely largely on our natural resources –  and utilizing those natural resources in ever smarter ways simply does not need lots more people. Why penalize everyone more by rapidly increasing the population of a country with such a disadvantageous location?

The Herald is right that without the unexpected surge in immigration total GDP today would be lower than it is.  But without the surge in immigration over the last few years then, all else equal, our interest rates would also be lower, and our exchange rate would be lower.  And New Zealanders as a whole would be better off, because more firms would be better positioned to sell products and services into world markets at competitive prices.  But, probably more importantly in the long-run, our largely fixed stock of natural resources, found on not-very-propitiously-located remote islands, would be spread over rather fewer people.  As a country we’d be better off, and lower Auckland house prices –  no doubt still distorted by unnecessary land use restrictions –  would be a beneficial mark of that success.  As it happens, the regions  –  where the natural resources mostly are (pasture, forests, mines, seas, landscapes) –  would loom larger relative to Auckland, curiously the goal that the Herald’s editorialist seems to espouse.