Can any good thing come from the BIS?

Michael Reddell Reserve Bank

The Bank for International Settlements was supposed to be wound up after World War Two.  That was agreed at the Bretton Woods conference in 1944, partly because the International Monetary Fund was being established, and partly because the BIS –  based in Basle, just over the border from Germany – was perceived to have got altogether too cosy with, and protective of the interests of, the other side.

But the BIS –  originally set up to handle reparations settlements and related issues –  survived.  These days it provides a variety of useful services to central banks around the world, provides a venue for various central bank meetings, and employs some interesting people and publishes some stimulating research.    The BIS was once largely a North Atlantic affair, but these days even the Reserve Bank of New Zealand is a shareholder.

Prior to the financial crisis and 2008/09 financial crisis, the then head of the BIS Monetary and Economic Department, Bill White, was one of the few prominent establishment voices foreshadowing serious problems ahead.  Inflation targeting, he argued, was one of the causes of the looming problems.  Few national central bankers were at all receptive to his views (not all of which, by any means, were correct).

These days, the head of the Monetary and Economic Department is Claudio Borio, a long-serving BIS economist who, individually and with co-authors, has published a series of papers on matters financial and macroeconomic that have also tended to challenge  the current “establishment view”.   Over the last few years he –  and the BIS –  have been sceptical of case for official interest rates being as low as they’ve actually been, arguing that economic outcomes might even have been better if interest rates had been higher, and that monetary policy should be driven more by considerations around ‘financial cycles” than by (the outlook for) inflation.    There is a lot of work resting behind these arguments, and even if I don’t end up agreeing with many of the conclusions, Borio’s articles and speeches are well worth reading for anyone interested in the issues (a recent accessible example is here, which I might back and write about substantively at some point)

The prompt for this post was a column that appeared in the (UK) Daily Telegraph a few days ago, in which their economics columnist Ambrose Evans-Pritchard sought to tie together the BIS/Borio views –  which would have argued for a much tougher approach to monetary policy in recent years (at least on conventional definitions) –  with the New Zealand Labour Party’s (and the new government’s) desire to amend our Reserve Bank Act.   The article, which various readers sent me, appears under the somewhat flamboyant heading “Apostasy in New Zealand spells end of global central bank era”  (the article is behind a paywall, but if you register you can get one article per week free).

It begins

The cult of inflation targeting began in New Zealand in the late Eighties. We may date its demise to a remarkable ideological pivot in the same country thirty years later, and with it the end of central bank ascendancy across the world.

Which would not, I’d have thought, be how Grant Robertson (or his senior colleagues in the new government) would have thought about what they appear to be proposing for New Zealand.  They aren’t proposing to change the inflation target range itself (or even, so far as we’ve heard, move away from the explicit midpoint added in 2012), but argue that in adding a requirement (details to be advised) that the Reserve Bank pay explicit attention to the maintaining something near “full employment” (long-run sustainable rate of unemployment), they are simply converging on the international mainstream.  In particular, they cite Australia and the United States.

And if pushed about what difference such a focus might have made had it been in the Reserve Bank Act in the past, Grant Robertson has suggested that the Reserve Bank would have been less likely to have tightened (as much) in 2014 –  the shortlived, ill-fated, tightening cycle that proved unwarranted by inflation developments.  In other words, if anything  (and no one can be sure that different words, but same Governor, would have made a difference), it would have been towards having interest rates a little lower, a little sooner, than otherwise.   In other words, the diametrical opposite of the approach that Claudio Borio, the BIS, (and Ambrose Evans-Pritchard) would have favoured.  If anything, I suspect that the BIS view may have influenced Graeme Wheeler’s enthusiasm for raising the OCR in 2014 –  with constant references to “normalising” policy.

Evans-Pritchard concludes his article

“[Western central banks] can excuse themselves for runaway asset prices, vaguely talking about the deformities of China’s Leninist capitalism, or the Confucian ethic, or some unfounded exogenous shock from Mars.  It has let them cling to inflation targeting shibboleths for far too long. Premier Ardern is the canary in the mineshaft.  It was the same New Zealand Labour Party back in the Eighties that pioneered so much of what we think of as globalisation [I’m really not sure where he gets that idea from], before it was gamed by the elites and began to go off the rails.  The Party now wants to reassert the primacy of the democratic nation state, and to call time on the excesses –  starting with a ban on home purchases by foreigners.  The global axis is shifting.”

The BIS –  or Evans-Pritchard –  might (or might not) be right about the politics or the economics globally.  But nothing we’ve seen or heard from the new Minister of Finance –  or his colleagues –  suggest that they have anything in mind for New Zealand monetary policy, or the mandate of the Reserve Bank of New Zealand, that steps outside the international mainstream at all.  That might disappoint some –  who actively prefer higher interest rates without first securing the productivity growth and investment demand which would sustain higher real interest rates –  but what those people wish for is nothing like what Labour’s words suggest we in New Zealand are likely to be delivered.

Of course, the first big decision about monetary policy for the new government is who should be the next Governor.   Individuals matter at least as much, arguably more, than the details of formal mandates.   In almost all other countries, political leaders themselves get to appoint directly the head of the nation’s central bank.  Obama appointed Janet Yellen, Scott Morrison (Australia’s Treasurer) appointed Phil Lowe, George Osborne appointed Mark Carney, euro-area heads of government appointed Mario Draghi, and so on.  It is the way democratic societies typically work –  actually, non-democratic ones come to that.  But not New Zealand.

Here, unless he changes the Act, the Minister’s hands are tied. He will have to appoint as Governor someone nominated by Reserve Bank Board.  All the Board members were appointed by the previous government, the advert for the job was framed under the previous government, all the Board members have endorsed the conduct of monetary policy (and the performance of the Bank more generally) in recent years, none has much experience in central banking, financial regulation, and none has any public accountability.  And yet they will decide who will, single-handedly (for the time being) wield the levers of macroeconomic policy.  It is a gaping democratic deficit –  even if you don’t think actual policy should be run even a little differently in future.   The Government could easily change those provisions, and bring New Zealand into line with standard international practice. It requires a simple amendment to the Reserve Bank Act, deleting six words.

Strong candidates for Governor aren’t exactly thick on the ground. But if the Minister were to make a change, or even to make suggestions to the Board, one of the people he shouldn’t go past actually works at the BIS.   David Archer currently holds a senior position at the BIS, but until 2004 had spent a decade as first Head of Financial Markets, and then as Head of Economics (including carrying the title of Assistant Governor) at the Reserve Bank.  He fell out with Alan Bollard and made his escape.

I worked closely with (and for) David across a couple of decades.  Up that close you see both the strengths and weaknesses.  David has a reputation as something of an “inflation hawk”.  That was perhaps most obvious over 2003/04, when he was right –  interest rates were too low for too long, and as a result core inflation got away on us (see the chart in yesterday’s post).   But such reputations (“hawk” or “dove”) usually don’t mean very much –  smart people will sometimes differ on how to read any data, and at different times the same person will end up on the different side of those debates.  David’s greatest strength in my view is a high degree of intellectual curiosity, a demand for rigour, but an openness to debate, to challenge, to exploration of alternative views and ideas. It certainly isn’t the only quality one needs in a Governor, but it is an important one –  perhaps especially in a single-decisionmaker system, but also as the Reserve Bank recovers from the Wheeler years.  He is the sort of person who attracts capable people –  again something the Bank will need in the coming years.

There are drawbacks, or gaps, as there are with all the possible candidates.   David hasn’t had much involvement in bank regulation or supervision –  now a big part of what the Bank does –  and was (rigorously) sceptical of the Reserve Bank getting actively involved in discretionary supervision and regulation.   I’m not sure how his views on these issues may have evolved over the years, but what could be counted on would be a rigorous and systematic approach to the application of the law, and to recommendations on any possible changes to the law.  And, of course, he has now been away from New Zealand for 13 years –  that brings the upside of extensive international contacts, but the downside of reduced familiarity with New Zealand (and the way the Bank’s own role in the public sector has evolved).    That people here still recognise his potential value was seen in Treasury’s choice of him as one of the external reviewers of the recent (as yet unseen) Rennie review –  Treasury is currently fighting to keep Archer’s comments secret.

David wouldn’t be a candidate for the status quo.  If the Minister of Finance is really content with the status quo, he might as well just stick with the Board-led process, likely to end up appointing Deputy Governor Geoff Bascand.  But whether around decisionmaking structures, transparency and accountability, and monetary policy goals themselves, all the public indications have been that the government is looking for change, and a lift in the overall performance of the Bank.   If so, Basle might well, on this occasion, be one of the possible alternative places to look for someone to take on this very influential, powerful, role.

 

Foreign bans and CGTs

Michael Reddell Housing

I was going to write about something quite different this morning but I noticed an article by Bernard Hickey suggesting that the presence of a capital gains tax in Australia, and tighter restrictions there on foreign ownership of residential property, explains a substantial difference in performance in the two housing markets, across decades and over the last few years in particular.

Hickey starts from this chart, using a helpful tool The Economist makes available for comparing house price inflation across countries.

hickey chart

But (a) this is a chart of nominal house prices and everyone knows we had much more general inflation than these countries early in the period, and (b) 1980 marked near the trough of a savage correction in New Zealand real house prices (down around 40 per cent over five years or so, as the New Zealand economy went through some troubled times and the exodus of New Zealanders to Australia (not then offset by increases in other immigration) began).   1980 is the starting point The Economist uses, but it isn’t where I’d be starting looking for evidence of the contribution of Australia’s CGT and foreign ownership restrictions.

Australia’s capital gains tax came into effect in September 1985.  The restriction on foreign ownership of residential properties was already in place, but no one thinks that was a material issue in Australia at the time (either there, or here).    Rising concerns about non-resident foreign ownership (actual or potential) of residential dwellings –  especially in New Zealand –  have mostly been an issue for the last five years.

So how have real house prices in the two countries behaved since September 1985, when Australia introduced the CGT?  Using the same Economist  database – which has data only up to the end of 2016 – this is the resulting picture.

real house prices since 85 q3

In total, real house prices have increased a little more here than in Australia.  But at times, even over this period, prices in Australia have been increasing faster and at times here.   In the late 80s for example –  just after the capital gains tax was put in place –  prices in Australia were much stronger (the difference is quite large even if, without a log scale, it doesn’t appear that way).  And real house prices here fell from around 1997 to 2002 while they surged in Australia.

There are, of course, differences in the housing markets in the two countries, but the similarities look a lot stronger than the differences.  Both countries have tight land use restrictions, both countries have had rapid population growth (and although both countries currently have quite low absolute interest rates, both countries have among the highest real interest rates anywhere in the advanced world).  Here is the last 20 years of data (1996 q4 to 2016 q4).

economist index

Over the whole period, New Zealand house prices have increased just slightly less than those in Australia.

Of course, over just the last few years New Zealand real house prices have increased more than those in Australia.  Capital gains tax provisions haven’t changed materially in the two countries, although we did impose the bright-line provisions (on re-sale within two years) in 2015, and Hickey notes that Australia “removed the exemption from its capital gains tax for the main home for overseas investors in this year’s budget” (beyond the end of the data in these charts).

Perhaps the differing approaches to non-resident non-citizen purchases of existing residential property have played a part, at the margin.    We’d need a much more careful study to know, and it may never be possible to conclusively answer the question.  But recall –  the point I made yesterday –  that banning, or taxing, non-resident purchases of existing dwellings does not stop such purchasers buying new properties, or does not remove any of the road-blocks that stand in way of increased supply, of urban land in particular.  In both countries, land price inflation is by far the largest component of urban house+land inflation.

Personally, I’ve got a different candidate explanation for why house price inflation has been stronger in New Zealand just in the last few years than it was in Australia: our population growth has simply been much faster.

popn growth nz vs aus

Those are huge swings –  both in New Zealand’s own population growth rate, and in that growth rate relative to Australia’s population growth rate.     You might think that rapid population growth is a fine thing –  as people at the New Zealand Initiative (probably) do –  or a deeply problematic one, as I do, but no serious observer is going to dispute that when you have the sorts of land-use restrictions that both New Zealand and Australia do, big unexpected changes in population growth will, all else equal, quickly spill into higher house prices.  They did in Australia around the post-recession peak mining investment boom years, and they’ve done so here in the last few years.     Over longer periods of time, the two housing markets look (depressingly) similarly bad.

To be clear, I’m not suggesting that idiosyncratic tax or (eg) credit-restriction changes have no effect on housing market in the short-term. Australia has tinkered with its CGT, we’ve altered depreciation rules, ring-fencing rules etc, and we’ve put up and lowered again our maximum marginal tax rates (all things potentially relevant for investors).  I’m also not suggesting that large enough changes in the foreign buyer rules will have no effect in the short-term.    But the New Zealand and Australian experience over decades suggests that such effects don’t last for very long (and any permanent effects are pretty small), that the similarities in the two markets are much more important than the differences,  and the toxic brew of tight land use restrictions in the face of policies that drive up the population rapidly are a more compelling part of the story in both countries.    Relative economic cycles aren’t always in synch, and waves of intense population growth occur at slightly different times but the divergences in relative housing market performance never seem to have last for very long.   And are unlikely to, unless one or other set of governments sets about seriously fixing the land-use rules (and/or materially pull back on the policy contribution to population growth and housing demand).

Even the government seems to agree.    Asked about the foreign buyers ban the other day, David Parker noted (according to a record of press conference I saw) that “the impact on the number of houses built in New Zealand will be negligible”, and suggested that any price effect now would be pretty modest too.

 

A possible new Policy Targets Agreement

Michael Reddell Monetary policy, PTAs

“we have unemployment stuck stubbornly at 5% when it should be below 4%”

Those were the words of the Prime Minister in her speech to the CTU on Wednesday.  The latest published unemployment rate was a bit below 5 per cent.   But the average for the last four quarters is 4.95 per cent, and that for the last seven quarters is 5.0 per cent.

And “it should be below 4%”?   That’s a great aspiration –  ideally the unemployment rate should be much lower than 4 per cent, because even 2.5 per cent means that over a 40 year working life the average person spends a whole year unemployed – ie without any work, but ready to start work, and actively looking for work.     But I presume the reference to “below 4%” is more than that, and is something about what is attainable (sustainably) on, broadly speaking, the current labour market regulations, demographics, and welfare provisions.   Most observers think that the rate of unemployment consistent with stable inflation near the target is around 4 per cent.    Some, plausibly –  but we won’t know unless/until we get there – think it is lower than that.   Certainly there has been no sign of any acceleration in wage inflation with the unemployment rate near 5 per cent.

Most material deviations of the unemployment rate from the true (but not directly observable) long-run sustainable rate are, to a first approximation, due to monetary policy choices.    That was true in years leading up to 2008, when the unemployment rate was lower than the long-run sustainable rate –  monetary policy was too loose, and inflation was rising to outside the target band.  It has been true for the last eight or nine years when, at least with hindsight, monetary policy has mostly been a bit too tight. People who are unemployed, unnecessarily, have paid the price.    It isn’t the done thing to mention this in polite society –  few of whose members are affected directly by unemployment –  but it is true nonetheless.

And so I welcome the fact that we have a government that says it is serious about expecting the Reserve Bank to run monetary policy in a way that promotes full employment –  keeping unemployment as low as is consistent with a sustainable low and stable inflation rate.     I like the fact that the Prime Minister talks about lowering unemployment in her first speech.  (Whether she will do so as readily later in her term is another question).    And I’ve come to agree that adding some reference to unemployment to the mandate given to the Reserve Bank is desirable.     It has always been implicit.  We have active discretionary monetary policy to minimise the output and employment losses when severe adverse shocks hit.  Otherwise, we’d have stuck with the Gold Standard, which was really good for delivering long-run average price stability but –  by design –  less good at short-term stabilisation.

The New Zealand Initiative –  from the right –  disagrees.   In their newsletter this week Oliver Hartwich writes

Yet the real problem is that dual mandates do not work, not even in theory. They are the result of a misunderstanding as anyone who studied economics over the past half a century would know.

The best way for a central bank to achieve both low inflation and low unemployment is to make it pursue price stability alone.

The next RBNZ governor will no doubt be aware of that. In which case, she could safely ignore any dual mandate passed down from the new Government. And keep focussing on targeting inflation.

But that is simply not so.    It is certainly true that over the medium to longer-term monetary policy can only affect nominal variables (inflation, nominal GDP or whatever) and has no impact on real ones such as unemployment.  Most everyone agrees on that.  But it is equally true that monetary policy actions have a short to medium term impact on real variables, not just on prices.  Indeed, in the short-term the real effects are often larger than the price ones.   It isn’t something one can exploit to get unemployment permanently lower –  the long-run Phillips curve is more or less vertical – but it does mean that all discretionary choices about monetary policy are simultaneously choices about both inflation and output/unemployment.  The Reserve Bank knows that.  In fact, every advanced country central bank –  in countries with fairly stable inflation expectations –  knows that.

There is also some disagreement from the left.  In his column in yesterday’s Herald, Brian Fallow was sceptical about Labour’s proposed changes (the details of which we have not yet seen)

…in a later speech outlining his approach, Robertson said: “Had a mandate to maintain full employment been in operation in New Zealand it is likely that it would have constrained the bank’s [subsequently] aborted tightening of the official cash rate in 2010 and 2014. This would in turn likely have seen a faster return to target inflation and faster economic growth.”

Well, maybe. But counterfactual assertions about what would have happened if what did happen had not happened stand on epistemologically boggy ground.

Back here in the actual world, data from the OECD last week shows that New Zealand’s employment rate – the proportion of people aged between 15 and 64 who are employed – is at 76.2 per cent, the fourth highest level among the OECD’s 35 members.

Fallow goes on at some length about employment rates.   But employment rates simply aren’t the relevant variable for monetary policy (although they might tell us about all sorts of other areas of labour market, tax, retirement income etc policies): unemployment rates (and other measures of excess capacity) are.   People who want a job, are available now to start work, who are actively searching for a job, but just can’t find one.

(Having said that, as I’ve written previously I’m not sure that simply a different mandate would have changed the policy mistake of 2014.    With most reasonable possible formulations of an unemployment objective, a hawkish Governor misreading the data (as Wheeler was) would have been likely to have made the same mistake: the right person (“people” when they move to a committee model) matter at least as much as any tweaks to the formal mandate.)

I noticed in the Dominion-Post this morning what appeared to be a suggestion that amendments to the statutory goal for monetary policy might find their way onto the government’s 100 day plan, perhaps in part to ensure that the new mandate was in place before the new Governor is due to take office in March.

No doubt such a limited statutory change could be done quite quickly.  To simply make that narrow change would involve quite a short piece of legislation.  But getting the words right matters – and it isn’t something Parliament should be changing frequently.

Then again, all parties to the new government have also favoured changes to the governance model of the Reserve Bank, and that isn’t something that should be rushed.  The focus to date has been on monetary policy decisionmaking, but the case for reform is probably stronger for the Bank’s financial regulatory functions (where there is nothing akin to the PTA, and too much depends on what is little more than personal gubernatorial whim).   Getting the right governance model for these two quite different functions, and for all the remaining functions of the Bank, and all the consequential changes, takes time to do properly, and would benefit from a full Select Committee process.

As it happens, much of what the government appears to want to achieve can be done through the Policy Targets Agreement anyway.   There is no (lawful) Policy Targets Agreement at present, but a new one needs to be agreed with the incoming Governor before he or she is appointed.   Since the proposed emphasis on unemployment is implicit in the existing framework anyway – it is what a Governor doing his or her job should be keeping a keen eye on in determining the appropriate stance of policy –  simply writing it down more explicitly in the PTA does not raise any particular issues of inconsistency with the existing legislation.

Some might question that, but I’ve had a go at producing a concrete draft of a PTA that captures what seems likely to be the sorts of issues that motivated the Labour Party to promote legislative change.     The resulting text (below) isn’t my ideal framing of the PTA.  Instead, I worked with the text of the most recent document and made as few changes as possible while (a) capturing the spirit of the proposed changes, and (b) avoiding any inconsistency with the existing legislation.  I’ve highlighted the three paragraphs where I’ve proposed changes:

  • 1(b), a now-customary part of the document, where the government of the day lays out briefly its economic objectives, and how it sees monetary policy fitting in,
  • 3(b) where I’ve added words to make clear what has been well-understood since day 1 of inflation targeting, that in managing deviations of inflation from target a key consideration is to minimise short-term output and employment costs, and
  • a new 4(c) which would require the Bank to publish NAIRU estimates, explain why any (actual or forecast) deviations of the actual rate from those estimates was occurring, and to explain what steps it was taking (with monetary policy) to minimise the extent (magnitude and time) of those deviations.

There might well be improvements to this suggested wording.  But these, relatively simple, changes could quickly give effect to what seems to be the thrust of Labour’s proposals.   I’d welcome any comments or alternative suggestions.

Of course, if the government is serious about making a difference –  rather than just signalling one – words alone won’t suffice, whether in the PTA or the Act.  They need to take steps also to find, and put in office, the right people.  The combination –  people and mandate –  gives us a more serious chance of getting unemployment down to around the long-run sustainable rate, and keeping it near there as much as possible, than continuation of the status quo.

These are changes of the sort that the leading academic who reviewed the Reserve Bank’s handling of monetary policy for the previous Labour goverment  (Lars Svensson) would seem likely to endorse.  Svensson served subsequently for several years on the Monetary Policy Board of the central bank of Sweden, where his firm advocacy of an unemployment focus helped get Swedish monetary policy back on track, delivering lower unemployment and inflation nearer the target.  He might be worth consulting again.

Policy Targets Agreement

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1. Price stability

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.

b) The Government’s economic objective is to promote a growing economy in which full employment is achieved and maintained.   The management of monetary policy, subject to the medium-term constraint of a low and stable inflation rate, plays an important part in supporting this objective.

2. Policy target

a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint.

3. Inflation variations around target

a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

b) When disturbances of the kind described in clause 3(a) arise, and consistent with a goal of minimising the short-term output and employment costs, the Bank will respond consistent with meeting its medium-term target.

4. Communication, implementation and accountability

a) On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

c) The Bank shall publish its estimates of the sustainable long-run rate of unemployment in each Policy Statement made under section 15 of the Act.   When the unemployment rate (as measured in the HLFS) deviates, or is forecast to deviate, from this estimate the Bank shall explain why these outcomes are occurring, or are expected to occur, and what steps it is taking to minimise the extent to which the unemployment rate deviates from its estimate of the long-run sustainable rate.

c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

Grant Robertson
Minister of FInance

 

…….
Governor Designate
Reserve Bank of New Zealand

Dated at Wellington this ..th day of …. 201….

 

 

 

 

Reflecting on foreign ownership

Michael Reddell Foreign investment, Trade

[An Australian website yesterday reproduced, without my permission, my entire post on the new government’s immigration policy, running it under the heading “Is Jacinda Ardern a fake?”.   That heading does not –  even in the slightest –  represent my view.  I’m assuming the new government will do as they said in their manifesto.   And while I’m a bit sceptical as to how committed the new Prime Minister really is –  the policy having been adopted under her predecessor and she never having talked about it in public fora – the point of the article was (a) that the policy itself does not represent any significant change in the likely future contribution of immigration to population growth, and (b) that various overseas commentators have taken the, quite clearly laid out, Labour policy as something much more dramatic than it actually is.]

A few weeks ago, my 14 year son, mad-keen on ancient history and starting to study economics as well, brought home from the library a book about the economy and society of ancient Greece.  I’m not sure he read much of it, but I found it fascinating.   Among the things I learned was that the ancient Greek states, Athens most notably, generally banned foreigners – even resident foreigners – from owning land.   These states were typically actively engaged in international trade, and often encouraged foreigners with particular specialised skills to settle among them.  So it clearly wasn’t an autarkic approach –  some sort of isolation and national self-sufficiency.

But it caught my attention partly in the context of the change of government here, and the proposed new restrictions on non-resident foreigners being able to purchase existing dwellings.   But the issue goes wider than that, and the ambivalence about foreign investment and foreign ownership of New Zealand assets dates back decades at least.    And the Labour-New Zealand First agreement commits to

“strengthen the Overseas Investment Act and undertake a comprehensive register of foreign-owned land and housing”

This in a country where the OECD already rates our existing restrictions on foreign investment as more severe than those of almost any other advanced country (even if there is some genuine debate about how restrictive our screening regime –  what counts in the index –  actually is).

Of course, the proposed ban (which could yet turn into a heavy tax, to get around FTA constraints) on foreign purchases of existing properties, isn’t really much of a ban on foreign ownership at all.  Non-resident foreigners would be able to purchase a brand new house, with no particular restrictions, but not an existing house.    Since new and existing houses are, to a considerable extent, substitutes –  especially if you aren’t planning on living in the house – it isn’t even clear why the proposed ban would do more than throw a little sand in the wheels.   And land-use restrictions have been the main source of driving house+land prices far beyond sensible levels –  the best alternative use of those resources.   So it isn’t clear why a restriction on non-resident foreign purchases of existing houses will do anything to lower the price (increase effective supply) of developable urban land.   If governments can’t, or won’t, fix the land market, there might be more logic in a total ban on non-resident foreigners purchasing dwellings in New Zealand.   Were there to be strong evidence of a significant effect on our market of such non-resident foreign purchases, I could see a reasonable second or third-best case for such a restriction.  I’d prioritise the ability of our own people –  immigrant or native –  to buy a house+land over the freedom to sell to non-resident foreigners.    That’s a value judgement, but one I’m comfortable with.

To be honest, I’m not sure what to make of the data we have.  Lots of people are quite sceptical of the LINZ data, but I’m still struck by how high the non-resident numbers actually seem to be, at least in Auckland and Queenstown (the numbers are very small elsewhere).   For the first six months of this year, almost 5 per cent of Auckland gross sales were to buyers wholly or partly non tax residents of New Zealand.  In Queenstown-Lakes, the proportion was more than 10 per cent.   There were non-resident sellers as well, of course.  And some of those people (on both sides) were New Zealand citizens –  eg a New Zealander who has settled in Australia, no longer treated as a tax resident of New Zealand, and a few years later sells a New Zealand property.  But at a time when Chinese data show that capital outflows from China have hugely diminished

cap outflows

it is rather surprising how many purchases (net) were still being made by Chinese tax residents, even on the LINZ data with all its limitations.    (In Auckland, net Chinese purchases make up more than the total net foreign purchases –  ie people tax resident in other countries were net sellers.)   And recall that China is the issue simply because the place is currently so badly governed –  absent the rule of law –  that its own people don’t feel safe keeping their money in their own country: we never had an influx of Japanese, French or British purchasers.

With a well-functioning urban land market, sales of houses/apartments to non-resident foreigners  –  even ones that just sat empty –  could be just a modestly rewarding export industry.   But we are a very long way from that sort of well-functioning market.

In Eric Crampton’s piece the other day, he highlighted that the proposed restriction would affect those here on work visas, as well as those who were not resident at all.   If so, that was something I hadn’t realised.   But his argument against drawing the line there wasn’t particularly persuasive

If someone is building a life here, it shouldn’t matter what visa they’re on.

But it does.   If you are here on a student visa, or a temporary work visa, you might well hope you are now on a path to “a life here”.  There might even, in some cases, be an implied expectation that that is how things will turn out.  But New Zealand has not made a decision, at that point, to grant your wish.  It does that only at the point where you get a residence visa (and then permanent residence).  At that point we’ve said you can stay,  but not before.  If there is going to be ban or a tax, I don’t have a strong view on where the line should be drawn (there are avoidance issues wherever it is drawn).  In practice though, not many people going to another country (or even another city) for just a couple of years will buy a house –  the transactions costs are just too high –  so if we are going to impose restrictions, I’m not convinced drawing the line in a place that banned those on temporary visas would be particularly problematic.

But restrictions on non-resident purchases of urban dwellings are mostly a second-order distraction from the real regulatory failures that have rendered house prices here –  and in similar places abroad (eg Australia, UK, California) –  so unaffordable.

Perhaps more sensitive, and more difficult, issues are around other foreign ownership issues.  In reading around how they did things in Athens, I noted that foreigners might not have been able to own property, but they had the same access to the courts as citizens.  These days, however, we –  and many other countries –  go one further and give foreign investors better access to dispute resolution than we provide to domestic investors, through the investor-state dispute settlement (ISDS) provisions included in numerous preferential trade and investment agreements, including TPP (and presumably the replacement for it, now close to finalisation).    I wrote about these provisions back in 2015, quoting a writer for the New Yorker

“these provisions have been opposed by an unusual coalition of progressives and conservatives”

and a contributor to –  not exactly left-wing – Forbes magazine that ISDS provisions represent a

“subsidy to business that comes at the expense of domestic investment and the rule of law”

In a country with a good quality legal system, it should simply be offensive and unacceptable that we provide foreign investors access to different courts and dispute settlement procedures, under different rules, than are available to domestic firms (even in the same industry).   Equal status before the law is –  or was –  one of the cardinal principles of our democracy.    At very least, citizens should always have at least as good rights as non-citizens or non-residents.   (And that should apply to our citizens when operating in other countries, relative to the citizens of those countries –  but that is an issue for those governments, not ours.)

What of the foreign investment itself?

There are easy cases, at either end of the spectrum.  I don’t suppose anyone much is going to have a problem with a foreign investment fund owning an office block in Queen St.  And I don’t anyone would have opposed restrictions if, say, the Soviet Union had found willing sellers for the whole of Stewart Island.

The hard stuff is where to draw the line between those extremes.   There is a case –  I think generally quite a good one –  for a pretty relaxed view for most potential buyers and most potential assets.  In part, that is a property rights view.  If I own an asset and want to sell it, government restrictions on who can buy the asset lowers, probabilistically, the price I can command.  It is, in the jargon, an uncompensated regulatory taking.     Then again, a lot of the value of any (location-specific) asset arises from choices society has made collectively, about institutional quality, rule of law, good governance etc.  Auckland airport, for example, wouldn’t be worth much if New Zealand were an ill-governed hell-hole.

There is also the argument that the New Zealand and, in time, New Zealanders generally will benefit most if the assets are owned by those best able to utilise them.    When foreign investors bring technology or management expertise to a New Zealand industry or opportunity that isn’t as developed here, it is likely that in time there will be a wider benefit to New Zealand.  That was how, for example, Tasman Pulp and Paper was set up, under government sponsorship in the 1950s.  Or Comalco.  (And, yes, I deliberately choose examples where there might be some doubts as to whether these firms should have established here in the first place.)

There are also diversification arguments.  It bothers some people, but doesn’t really bother me, that most of our banking system is foreign-owned.  There are some possible downsides –  and we might have been better off if the foreign ownership was not so concentrated in Australia –  but my reading of the international (and New Zealand) experience is that we are probably better off (more stable) for having a largely-foreign owned banking system.

There are also bureaucratic competence/incentives arguments. Our current overseas investment act in many cases requires demonstrating that a proposed foreign purchase would be “beneficial to New Zealand”.   Beyond the evidence of, say, a foreign buyer being willing to offer the highest price, how comfortable can we be that officials and politicians have the ability or incentives to make those judgements correctly?

There are also arguments about debt vs equity.    You might, in some cases, worry about control passing to foreign owners.  But if domestic owners are reliant on lots of foreign debt there can be different, but at times more intense, levels of vulnerability.    Debt can be called up, or simply not rolled over.

Foreign investment has played a significant part in New Zealand’s economic history, and its economic development.  Sometimes in quite odd ways: the protectionist insulationist policies of post-war New Zealand encouraged quite a high degree of private direct foreign investment, as the most cost-effective way for foreign firms to get their products into the New Zealand market (inefficient and costly as it may have been for New Zealanders).  But my reading of the New Zealand evidence and data is that foreign investment restrictions aren’t to any material extent what holds New Zealand’s productivity performance back.  It is a more a case of there being too few good profitable new potential investment opportunities, whether for domestic investors or foreign.

None of this is really an argument for a laissez-faire approach, even if I’d still be more hands-off than most New Zealanders might.      National cohesion and national identity aren’t easy to pin down, but are both real and important.  And part of that –  perhaps especially in a small country –  is the control/ownership of land.   I find it quite plausible that there might be international agricultural operators who could add new and different value to New Zealand operations through ownership and management of substantial parcels of agricultural land.  But if, on the other hand, a growing number of wealthy offshore people simply wanted to own South Island stations and install local managers to farm much as they always have, I also don’t care very much if political unease is real enough that we end up simply saying “no” to such purchases on a large scale.  Again, at an extreme, if non-resident non-citizen buyers ended up owning 80 per cent of the land in some locality –  be it Northland or central Otago, or wherever –  then I think we’d have undermined something about what it means to be New Zealand –  given undue weight, including in local government, to the interests of people who aren’t part of this polity – in that area.     A country is some mix of people in some specific place; a bundle of tangible people and land, not just an idea.

How real are those particular risks?  I’m not sure –  perhaps the new register will help give us a better sense.  And there are plenty of countries –  other open liberal societies – that place few or no restrictions on such purchases.    But perhaps things are a bit different in a small country?

And then there are the national security dimensions, which seem to be treated too lightly here.  A standard response is “but the local government can always regulate things” .  I don’t think it is typically an adequate response if, say, a hostile foreign power owned key telecoms networks or ports/airports: regulation and governments just aren’t that good, and can also become too responsive to the interests of the overseas investors.    Of course, confronting this issue also involves identifying the minority of countries that count as potential “enemies” and, on the other hand, which are countries where there is (a) a substantial commonality of interest, and (b) where investors can be reasonably assumed to be working in their own interests, not those of their home governments.   At a time when the Soviet Army was just across the border, the West German government would have been crazy to have allowed Soviet interests to have purchased and controlled major West German infrastructure or technology assets.   We’d have been crazy to sell Stewart Island to Soviet interests.

Today’s Soviet Union is China, with the difference that these investment hypotheticals are increasingly real, used as a direct means of extending political reach.   That is nothing about race, and everything about (geo)politics.  I don’t think that taking these issues and threats seriously means banning all, or perhaps even most, Chinese foreign direct investment.  But it means a greater degree of realism, than tends to have pervaded recent governments, that their interests are not our interests, that all or most Chinese corporates are effectively under the thumb of the government and Party, and that not all voluntary transactions are likely to be beneficial for New Zealand as a whole even if they benefit both the buyer and the immediate seller.

There is no particularly strong conclusion to this post.  Drawing appropriate lines –  and translating them into legal rules –  isn’t easy, and that is often a good reason for restraint.  And yet neither is defining, or  fostering and sustaining, nationhood.  But that something is hard isn’t an excuse for simply ignoring the potential issues.  Part of doing that well is perhaps first fostering a compelling and convincing sense that governments are governing in the interests of New Zealanders as a whole.  Of course, different people will see those interests, and the policies that best serve them, differently –  that’s politics. But finding the right answers –  as perhaps around immigration –  is unlikely to proceed best by simply exchanging slogans.

The new government’s immigration policy

Michael Reddell Greens, Immigration, labour party, NZ First

It was confirmed yesterday that the new government’s immigration policy will be the policy the Labour Party campaigned on (albeit very quietly).  And so we learned that the new government will remain a fully signed-up adherent of the same flawed, increasingly misguided, “big New Zealand” approach that has guided immigration policy for at least the last 25 years.

If that is disappointing, it shouldn’t really be any surprise.     The Green Party approach to immigration is pretty open –  the “globalist” strand in their thought apparently outweighing either concern for New Zealand’s natural environment or any sort of hard-headed analysis of the economic costs and benefits to New Zealanders.  Only a few months ago, they were at one with the New Zealand Initiative, tarring as “xenophobic” any serious debate around the appropriate rate of immigration to New Zealand.  Never mind that population growth is driving up carbon and methane emissions, in a country where marginal abatement costs are larger than in other advanced economies, and yet where the same party is determined that New Zealand should reach net zero emissions only 33 years hence.

As for New Zealand First, they talk a good talk.  But that’s it.   As I noted a few months ago, reading the New Zealand First immigration policy (itself very light on specifics)

If one took this page of policy seriously, one could vote for NZ First safe in the expectation that nothing very much would change at all about the broad direction, or scale, of our immigration policy.     Of course, there would be precedent for that.  The last times New Zealand First was part of a government, nothing happened about immigration either.

Even so, I was just slightly surprised that there wasn’t even a token departure from the Labour Party’s immigration policy that New Zealand First could claim credit for.   The New Zealand Initiative’s report on immigration policy earlier in the year was largely (and explicitly) motivated by concerns about what New Zealand First might mean for immigration policy.

Six months ago, when we started scoping the Initiative’s immigration report, we had a very specific audience in mind: Winston Peters. Our aim was to assemble all the available research and have a fact-based conversation with New Zealand’s most prominent immigration sceptic.

Turns out that, perhaps not surprisingly based on the past track record, that they needn’t have bothered.

And so Labour’s election policy will be the immigration policy of the new government.    The policy documents themselves are here and here.   I wrote about the policy here at the time it was released in June, before the Ardern ascendancy.   It was notable how little attention Labour gave to immigration policy during the campaign –  perhaps it didn’t fit easily with the “relentlessly positive” theme –  and I understand there was a conscious decision by the new leadership to downplay the subject.    It will be interesting to see now whether they follow through on their manifesto, but very little about immigration policy requires legislative change so, in principle, the changes should be able to be done quite quickly.  In fact, as the biggest proposed changes affect international students one would assume they will be wanting to have those measures in places in time for the new academic year.

What also remains quite remarkable is the extent to which Labour’s policy has been taken as a substantial change.  Serious overseas media and intelligent commentators have presented Labour’s proposals as some sort of major sustained change in New Zealand approach to immigration, and thus to expected immigrant numbers.    To read some of the Australian and American commentary you might have supposed, say, that in future New Zealand’s immigration approvals might be cut towards, say, the sorts of levels (per capita) that prevailed in the United States under Bush and Obama.

Labour’s policy is, of course, nothing of the sort.  Under the proposed policy, New Zealand will remain –  by international standards –  extraordinarily open to non-citizen migrants, with expected inflows three times (per capita) those of the United States, and exceeded only (among OECD countries) by Israel in a good year (for them).

What determines how many people from abroad get to settle permanently in New Zealand is the residence approvals programme.   Under that programme, at present the aim is to grant around 45000 approvals to non-citizens each year (Australians aren’t subject to visa requirements, but in most years the net inflow of Australians is very small).  The outgoing government reduced that target (from 47500) last year.   Labour’s immigration policy document does not, even once, mention the residence approvals programme.  That was, no doubt, a conscious choice.  They are quite happy with the baseline rate of non-citizen immigration we’ve had for the last 20 years; quite happy to have the highest planned rate of non-citizen immigration anywhere in the OECD.  Medium-term forecasts of the net non-citizen immigration inflow will not change, one iota, if Labour proceeds with their policy.  For some of course, that will be a desirable feature.  For others it is a serious flaw, that results from failing to come to grips with the damage large scale immigration is doing to the economic fortunes of New Zealanders.

Of course, there are planned policy changes.    There are various small things:

  • an increased refugee quota,
  • steps to increase the utilisation of the existing Pacific quotas,
  • more onerous requirements for investor visas (including requiring investment in new “government-issued infrastructure bonds”),
  • a new Exceptional Skills visa,
  • a KiwiBuild visa

Taken together, these won’t affect total numbers to any material extent.

There is also a (welcome) change under which they will

Remove the Skilled Migrant Category bonus points currently gained by studying or working in New Zealand and standardise the age points to 30 for everyone under 45.

All else equal, these changes won’t affect the number of people getting residence, or materially affect the average quality (skill level) of those getting residence.   That is a shame: at present, too many migrants aren’t that skilled at all, and maintaining such a large approvals target (in such a remote, not very prosperous, country) makes it hard to lift the average quality.

The bigger changes are under two headings.    The first is around temporary work visas.   Here is what they say they will do.

Labour will:

• Actively manage the essential skills in demand lists with a view to reducing the number of occupations included on those lists

• Develop regional skill shortage lists in consultation with regional councils and issue visas that require the visa holder to live and work within a region that is relevant to their identified skill

• For jobs outside of skills shortages lists, Labour will ensure visas are only issued when a genuine effort has been made to find Kiwi workers

• Strengthen the labour market test for Essential Skills Work Visas to require employers to have offered rates of pay and working conditions that are at least the market rate

• Require industries with occupations on the Essential Skills in Demand lists to have a plan for training people to have the skills they require developed together with Industry Training Organisations

• Review the accredited employers system to make sure it is operating properly.

The broad direction seems sensible enough –  after all, the rhetoric has been about lifting the average skill level of the people we take.   But as I noted in my comments in June, the policy is notable for its touching faith in the ability of bureaucrats to get things right, juggling and managing skills lists, and now extending that to a regional differentiation.   There is no suggestion, for example, of letting markets work, whether by (as I’ve proposed) imposing a flat (quite high) fee for work visas and then letting the market work out which jobs need temporary immigrant labour, or by requiring evidence that market wages for the skill concerned have already risen quite a lot.  The latter would have seemed an obvious consideration for a party with trade union affiliates.

On Labour’s own estimates, these changes won’t have a large effect on the number of people here on work visas at any one time, although in the year or so after any changes are implemented, the net inflows that year will be lower than they otherwise would have been.

Much the same goes for the biggest area of change Labour is proposing, around international students.

Labour will:

• Continue to issue student visas and associated work rights to international students studying at Level 7 or higher – usually university levels and higher

• Stop issuing student visas for courses below a bachelor’s degree which are not independently assessed by the TEC and NZQA to be of high quality

• Limit the ability to work while studying to international students studying at Bachelor-level or higher. For those below that level, their course will have to have the ability to work approved as part of the course

• Limit the “Post Study Work Visa – Open” after graduating from a course of study in New Zealand to those who have studied at Bachelor-level or higher.

In general, I think these are changes in the right direction.  Here were some of the comments I made earlier

I’m a little uneasy about the line drawn between bachelor’s degree and other lines of study.  It seems to prioritise more academic courses of study over more vocational ones, and while the former will often require a higher level of skill, the potential for the system to be gamed, and for smart tertiary operators to further degrade some of the quality of their (very numerous) bachelor’s degree offerings can’t be ignored.  …… I’d probably have been happier if the right to work while studying had been withdrawn, or more tightly limited, for all courses.   And if open post-study work visas had been restricted to those completing post-graduate qualifications.

The proposals are some mix of protecting foreign students themselves, protecting the reputation of the better bits of our export education industry, and changes in the temporary work visas rules themselves.     In Labour’s telling –  and it seems a plausible story –  the changes are not designed to produce a particular numerical outcome, but to realign the rules in ways that better balance various interests.  The numbers will adjust of course, but that isn’t the primary goal.

Labour estimates that these changes will lower the number of visas granted annually by around 20000.   That is presented, in their documents, as a reduction in annual net migration of around that amount.   But that is true only in a transition, immediately after the changes are introduced.  The stock of people here on such student and related visas will fall, but after the initial transitional period there will be little or no expected change in the net inflow over time (which is as one would expect, since the residence approvals target is the key consideration there).

To see this consider a scenario in which 100000 new short-term visas are issued each year, and all those people stay for a year and a day (just long enough to get into the PLT numbers).  In a typical year, there will then be 100000 new arrivals and 100000 departures.

Now change the rules so that in future only 75000 short-term visas are issued each year.  In the first year, there will be 75000 arrivals and (still) 100000 departures (people whose visas were issued under the old rules and who were already here).  But in the next year, there will be 75000 arrivals and 75000 departures.    Measured net PLT migration will have been 25000 lower than otherwise in the first year, but is not different than otherwise in the years beyond that.

That doesn’t mean the policy changes have no effect.  They will lower the stock of short-term non-citizens working and studying in New Zealand.    They will ease, a little, demand for housing.  In some specific sectors, with lots of short-term immigrant labour, they may ease downward pressures on wages (although in general, immigrants add more to demand than to supply, and that applies to students too).   But it won’t change the expected medium-term migration inflow.

Oh, and the student visa changes will, all else equal, reduce exports

Selling education to foreign students is an export industry, and tighter rules will (on Labour’s own numbers) mean a reduction in the total sales of that industry.   Does that bother me?  No, not really.  When you subsidise an activity you tend to get more of it.  We saw that with subsidies to manufacturing exporters in the 1970s and 80s, and with subsidies to farmers at around the same time.  We see it with film subsidies today.  Export incentives simply distort the economy, and leave us with lower levels of productivity, and wealth/income, than we would otherwise have.   In export education, we haven’t been giving out government cash with the export sales, but the work rights (during study and post-study) and the preferential access to points in applying for residence are subsidies nonetheless.  If the industry can stand on its own feet, with good quality educational offerings pitched at a price the market can stand, then good luck to it.  If not, we shouldn’t be wanting it here any more than we want car assembly plants or TV manufacturing operations here.

I participated in a panel discussion on Radio New Zealand this morning on Labour’s proposed changes.  In that discussion I was surprised to hear Eric Crampton suggest that the changes would put material additional pressure on the finances of universities.    Perhaps, although (a) the changes are explicitly aimed at sub-degree level courses, and (b) to the extent that universities are getting students partly because of the residence points that have been on offer, it is just another form of “corporate welfare” or subsidy that one would typically expect the New Zealand Initiative to oppose.      Whether hidden or explicit, industry subsidies aren’t a desirable feature of economic policy.

Standing back, Labour’s proposal look as though they might make a big difference in only a small number of sectors, notably the lower end of the export education market.  If implemented, they will be likely to temporarily demand housing demand –  perhaps reinforcing the current weakness in the Auckland housing market, along with some of their other proposed legislation (eg the extension of the brightline test and the “healthy homes” bill).   But they aren’t any sort of solution to the house price problem either: after the single year adjustment, population growth projections will be as strong as ever, and in the face of those pressures only fixing the urban land market will solve that problem. Time will tell what Labour’s policy proposals in that area, which have sounded promising, will come to.

Two final thoughts.  One wonders if whatever heat there has been in the immigration issue –  and it didn’t figure hugely in the election –  will fade if the headline numbers start to turn down again anyway.   The net flow  of New Zealanders to Australia has not yet shown signs of picking up –  but it will resume as the Australian labour market recovers.  But in the latest numbers, there has been some sign of a downturn in the net inflow of non-citizens.

PLT non citizen

There is a long way to go to get back to the 11250 a quarter that is roughly consistent with the 45000 residence approvals planned for each year.  But, if sustained, this correction would provide at least some temporary relief on the housing and transport fronts.  As above, Labour’s changes will have a one-off effect on further reducing this net inflow in the next 12 or 18 months, but nothing material beyond that.

And in case this post is seen by the new Minister of Immigration, or that person’s advisers, could I make a case for two things:

  • first, better and more accessible data.  The readily useable migration approvals is published only once a year, with a lag even then of four or five months.  The latest Migration Trends and Outlook was released in November 2016, covering the year to June 2016.  It is inexcusably poor that we do not have this data readily, and easily useable, available monthly, within a few days of the end of the relevant month, and included (for example) as part of Statistics New Zealand’s Infoshare platform.  The monthly PLT data are useful for some things, but if you want a good quality discussion and debate around immigration policy, make the immigration approvals data more easily available.    As a comparison, building permits data is quickly and easily available, reported by SNZ.  Why not migration approvals?
  • second, considering referring the issue of the economics of New Zealand immigration to the Productivity Commission for an inquiry.   Perhaps the current policy, as Labour proposes to amend it, has all the net gains the advocates say it does.  If so, the Productivity Commission could helpfully, and in a non-partisan way, demonstrate that.  But there are still serious issues around New Zealand’s unusually liberal immigration policy, in a country so remote and with such a poor track record in increasing its international trade share.  Whatever the economic merits of immigration in some places, it is by no means sure that large scale immigration here is doing anything to improve the fortunes of most New Zealanders.  It may, in fact, be holding us back, being one part of the story as to why we’ve failed to make any progress in closing the productivity gaps with other advanced economies.  It would seem an obvious topic for the Productivity Commission, and a good way of lifting the quality of the policy debate around this really substantial policy intervention.

 

 

 

Wishful Australian thinking

Michael Reddell Australia, New Zealand economic performance, NZ politics

I’ve been fascinated for some time by the way elements of the right wing of the Australian business and political community have sought to lionise John Key and Bill English.      On the day of his successful party room coup, Malcolm Turnbull was at it

“John Key has been able to achieve very significant economic reforms in New Zealand by doing just that, by taking on and explaining complex issues and then making the case for them. And I, that is certainly something that I believe we should do and Julie and I are very keen to do that again.”

As I noted at the time, I couldn’t think of any such “very significant economic reforms”, although there were various useful modest reforms, offsetting other backward steps.

The “look at New Zealand, why can’t we do it like them” theme has endured to the end.  There was a column along those lines in The Australian the other day headed “Bill English, John Key leave NZ a far stronger economy”, by Nick Cater, Executive Director of the Menzies Research Centre, a think tank affiliated to the Liberal Party (his column is reproduced here).

The column was so full of questionable claims and overstatement that it was almost hard to believe it was written by a serious commentator.  Near the start Cater notes

Key and English were described more than once as the quiet achievers. The governments they led as the bore-cons introduced reforms in tax and welfare while balancing the budget without fanfare or fuss. Seldom has the demise of a New Zealand government caused such political shockwaves on this side of the Tasman. In a period of near-universal political volatility, it raises the dispiriting possibility that simply governing well may no longer be enough. The Key and English legacy compares starkly with Australia’s record over the same period.

The first item is his list of achievements is this

In 2008, when the National Party came to power, New Zealand was 24th on the World Economic Forum’s Global Competitiveness Index, six places behind Australia. Since then the positions have been ­reversed. Today New Zealand is in 13th place on the index, eight positions ahead of Australia.

I’m not so familiar with that particular index, and tend myself to use the Fraser Institute’s economic freedom index, partly because there is a long time series of data.

econ freedom

The big story, for both countries, is surely that of a lot of reform and liberalisation in the 1980s and 1990s, and almost nothing material since then.   On this measure, of course, New Zealand does better than Australia, and has at every reading for more than 20 years now.   Perhaps New Zealand policymakers have done slightly better than their Australian counterparts in the last nine years or so but any differences are pretty small.

Cater then turns to GDP outcomes

New Zealanders are still poorer than Australians on average but they are catching up fast. Nine years ago GDP per capita in New Zealand was 30 per cent lower than in Australia, now the gap has narrowed to 19 per cent.

Would that it were true, but it isn’t.    Here is real GDP per capita for the two countries, both indexed to 100 for calendar 2007, just prior to the global recession..

real GDP nz vs aus

Over that time, we’ve done just slightly worse than Australia has.  Cater might argue for starting the comparison from 2008. but I doubt even he is going to credit John Key and Bill English with ending the global recession.

The productivity growth comparisons, of course, are particularly unfavourable to New Zealand, esepcially over the last five years.

aus vs nz ral gdp phw 2

Productivity is something closer to what government policy can usefully and materially influence (although other stuff matters too).

If we assume that governments have the power to control the economy — which incidentally 33 per cent of Australians no longer believe, according to the most recent Australian Electoral Study — then Key and English governed exceedingly well by ­almost any measure.

On the bits governments have a fair influence over we’ve done particularly badly relative to Australia (less badly relative to some other countries).  But there are bits of the economy that national governments have almost no control over whatever.  Commodity prices are perhaps foremost among them.  Our government can’t do anything much about the dairy price and the Australian government can’t do much about, say, iron ore prices.    Fluctuations in the terms of trade affect real per capita income measures even when the volume of production doesn’t change.

TOT aus and NZ

Australia had a huge terms of trade boom up to 2011, and even now if we take the last 15 years as a whole Australia’s terms of trade have increased more than ours have.   But since 2007/08, our terms of trade have done a bit better than Australia’s.  Hard to see how governments on either side of Tasman deserve credit or blame for those developments.

But as a result of these terms of trade swings, on a measure that adjusts for the effects of the terms of trade (real GDI per capita), New Zealand has grown three percentage points faster than Australia since 2007.  A nice-to-have windfall to be sure, but (a) even that gap makes only tiny inroads into the accumulated levels differences between New Zealand and Auatralian incomes, (b) the terms of trade are volatile, and who knows what they’ll do to the income gaps in the next decades, and (c) in the long-run, productivity growth is almost everything, when growth in living standards is in question.

As Cater notes, there has been a big change in trans-Tasman immigration (although even those flows have been quite –  typically –  variable over the last nine years).

The relative change in economic fortunes has changed the migration flow across the Tasman. Inward ­migration from ­Australia exceeded outward ­migration last year for the first time in a quarter of a century.

Of course, that last time –  quarter of a century ago –  was when the Australian labour market was also doing very badly.   New Zealand’s was as well, but when you are looking at moving to another country, conditions in the destination market matter a lot.   Australia has struggled in the last few years, but actually both countries are still among the diminishing number of advanced countries where the unemployment rate is still well above pre-2008 downturns levels.   That reflects no great credit on governments, or central banks, on either side of the Tasman.

Then, of course, there is a fiscal policy.  Personally, I think the outgoing government has done a pretty reasonable job on that score –  as, in fact, its predecessors for the previous 20 years had done.

But even here Cater gets some things quite badly wrong

While treasurer Wayne Swan was doling out cash and spending billions on poorly conceived make-work projects to help Australia survive the 2008-09 ­financial crisis, English gave personal and business tax cuts.

I’m no fan of the Rudd/Swan fiscal stimulus programme, but….. the appropriate comparison here is that we had no active discretionary fiscal stimulus to attempt to counter the recessionary forces.  None.  And the almost accidental stimulus that happened to be in place resulted from the Budget choices of the outgoing Labour government which had put in place tax cuts and spending increases at a time when Treasury was advising them that the government accounts would remain in surplus even after those initiatives.

Of course, there were some tax reforms here  –  in 2010 –  and conventional wisdom tends to count them “a good thing” (I’m less convinced, because the package of measure increased the effective taxation levied on capital income, against the prescriptions of standard economic analysis).   But I’m not aware of any analyst who thinks those changes made a material difference to New Zealand’s economic performance in the last few years.

Cater quotes some debt numbers that I don’t recognise

Today the New Zealand budget is in surplus while Australia is still running deficits. Ten years ago the New Zealand government’s gross debt stood at 25 per cent of GDP while Australia’s sat on 20 per cent. Today the positions are reversed. Australia’s net public debt is at 47 per cent; New Zealand’s hit a peak of 41 per cent in 2012 and has steadily declined to 38.2 per cent.

Here are the OECD’s number for general government net financial liabilities as a share of GDP.

gen govt net liabs nz and aus

Every year for the last 25, Australia’s overall government net debt has been less than ours, and if the gaps between the two countries has closed a bit in the last few years, the change is pretty small and the similarities, in the respective paths, are more striking than the differences.     Of course, we’ve had one nasty shock they haven’t had –  earthquakes.  Then again, they’ve been coping with a really big correction in the terms of trade.

On both the tax and spending sides of the government accounts, we have a slightly bigger government (share of GDP) than Australia –  and more variable one.  None of that has looked like changing over the last nine years.

Perhaps you thought this was just an economic case.  But, no.  Cater is just getting into his stride.

The achievements of Key and English are by no means limited to the economy, however.

Cater appears to be a big fan of the “investment approach” to welfare and related government spending.    I’m still more ambivalent –  the use of data appeals, of course, but big-government joined-up data makes me very nervous (hints of, eg, Chinese social credit scores).   For now, I’m happy to look for evidence of results.  Cater is convinced.

From this thinking flowed a new approach to welfare that has since been adopted by the Abbott and Turnbull governments to great effect.

and

In its second of two [three?] terms the ­National government first halted the long-term trend of rising welfare dependency and then ­reversed it. The number of New Zealanders claiming sole parent benefit has fallen by a quarter as 20,000 single parents found work. Long-term welfare dependency has fallen substantially. In 2012 78,000 New Zealanders had been collecting benefits for 12 months or longer. By June this year the number had fallen to 55,000.

The first sentence is simply wrong.   Here is the MSD data on the number of working-age main benefit recipients as a percentage of the population aged 18 to 64.

benefits 2017

There was a recession in the first term –  welfare benefit numbers rise in recessions –  and then the downward trend that had been in place for the previous decade resumed.   But as of last month, the share of the working age population on these main welfare benefits was only very slightly below where it had been in September 2007.

In a way, that isn’t surprising.  Unemployment is still well above pre-recession levels.   But it should be somewhat troubling, both on that count, and because one component of benefit numbers has dropped away quite sharply.     As Cater notes, the number of sole parents on the benefit has fallen away a lot.  Here is the chart – there is a discontinuity in the series associated with the welfare changes (including labelling changes) in 2013.

DPB

The trend was underway during the decade prior to the recession.  The pace of decline has certainly accelerated since then (at least since 2013), but since the overall number of benefit recipients as a share of the working age population hasn’t changed since 2007, other categories must have increased.

It would also be interesting to see a serious study of just what role policy changes have played even in the decline in sole parent beneficiaries.   After all, teen pregnancy rates have been dropping globally –  for reasons not, I think, that well-understood – and in New Zealand the teen birth rate halved between 2008 and 2016 (but, even so, was still higher than the comparable rate in Australia).  Welcome as that trend is, it seems unlikely that New Zealand government policies will have been a large part of the explanation.

And, of course, over the outgoing government’s term there has been a huge increase in the number of elderly age-benefit recipients (2011 saw the first baby-boomers turning 65).   In the last months of the outgoing government, there was finally talk of lifting the age of eligibility –  something Australia began years ago –  but it was going to happen 20 years hence.  And now –  for now –  it isn’t going to happen at all.

At this point, Cater leaves the numbers behind.

The government’s strategy of taking the public with them on reforms, ­explaining the logic well in advance in language people could follow, adjusting ­expectations and then implementing the promised changes, was remarkably successful until the end.

On what measures I wondered?

And he concludes

For 11 years he and Key had written a counter-narrative to that prevalent in Australia that reform was all but impossible in the era of Facebook and Twitter. While Australia appeared stuck in a policy drought, New Zealand was breaking new ground, discovering new ways to measure government programs by their results and finetuning them accordingly. Feel-good policy, sentimentalism and identity politics were anathema to them.

English and Key proved that centre-right parties were not condemned to be nasty parties, ­focused on numbers rather than people, as they doggedly cleared up their predecessors’ fiscal mess. Devoid of ideology, fiercely pragmatic, self-aware and inspired, the pair stands as inspiration to the rest of the developed world in these anxious and volatile times.

So horrendous house prices, no productivity growth, an export sector shrinking as a share of GDP are the sorts of things that provide an inspiration to the world?  I’m flabbergasted.    The terms of trade have certainly been favourable, and yet even the outgoing Minister for Primary Industries has been heard to talk of the possibilities of “peak cow”.   Where exporters haven’t done badly, it has too often –  export education and dairy being prime examples –  been partly a result of unpriced subsidies and environmental externalities.

Relative to Australia, the story of the last nine years isn’t all bad.  Neither country has been managed that well.    There are some good stories.  Broadly speaking, New Zealand’s fiscal policy is one of them, but too much can be made even of that.  A much lower balance of payments current account deficit is often counted as another good story, except that much of the contraction reflects (a) the slump in global interest rates, reducing the cost of our external indebtedness, and (b) the weakness of investment even years into the recovery phase.   Perhaps we’ve had tidy stewardship, but going nowhere.  A safe pair of hands at the bridge perhaps, but with the ship meandering without clear direction, or any compelling sense of how better outcomes might be achieved.

All of which should not be taken as any sort of enthusiasm for the new government.  No doubt –  like their predecessors –  they’ll do a few sensible things.  But, like their predecessors, at present they (or the constituent parties) show little sign of either understanding the nature of New Zealand’s dismal long-term economic performance, or of adopting the sorts of policies that could at last begin to reverse that decline.  A pessimist might incline to the view that things may even get gradually worse –  and here I’m not thinking of the cyclical pessimism Winston Peters was enunciating on Thursday night.

There have been very few periods in the last 150 years when policy has been much better managed in New Zealand than in Australia.   The last nine do-little-or-nothing years (following on from a similar nine years) hasn’t been one of those periods.   That is to the credit of neither New Zealand or Australian politicians, but of course Australia’s starting point is so much less bad than ours.

 

 

 

OIA: unexpected bouquets and brickbats

Michael Reddell OIA, Rennie review, Reserve Bank, Treasury

I have been critical over the years of the Reserve Bank’s approach to Official Information Act requests.  I made mention of it, in passing, just this morning.   The long-established practice had been to withhold absolutely anything they could conceivably get away with, and to delay as long as possible anything they really had to release.   The presumptions of the Act (well, specific provisions actually), of course, operate in the opposite direction.

In the last couple of weeks I had lodged requests for a couple of pieces I had written while I was still working at the Bank in 2014.   One was the text of a speech, on New Zealand economic history and the evolution of economic policy, to a group of Chinese Communist Party up-and-coming officials, delivered as part an Australia New Zealand School of Government programme (in which they got to hear from John Key, Gerry Brownlee, Iain Rennie, no doubt a few others, and me).     The other was a discussion note I had written on how best to think of New Zealand’s economic exposure to China.    The second request was lodged only late on Monday.    I could not envisage any good (lawful) reason for them to withhold the material, but that often hasn’t stopped the Reserve Bank in the past.  If they released the material at all, I was anticipating a 20 working day wait.

But this afternoon, I received both documents in full.  I was shocked.  I took the opportunity to send a note to the Bank thanking them for the prompt response.  And as I have often been critical here of aspects of the Bank’s handling of various things, including OIA requests, I thought I should take the opportunity to record my appreciation openly.    Who knows what prompted the change, but it is an encouraging sign.  Perhaps the “acting Governor” (a sound caretaker, unlawful as his appointment may be) is making a positive difference?

On the other hand, I’ve usually been pretty openly positive about The Treasury’s approach to OIA requests.  One isn’t always happy with their decisions, but there is a strong sense that they generally do all they can to be as open as possible.    There is the look and feel of an agency that seeks to comply with the spirit of the Act, as well as the letter.

But not when it comes to the Rennie review.   Some time ago, they refused a journalist’s request for the terms of reference for the review.   They also refused to release some of the papers associated with the Rennie review (including drafts of the report) that I had requested some time ago .   In July they told me they wouldn’t release papers because of “advice still under consideration” (even though that is not a statutory ground, and Rennie is neither a minister nor an official, and even though I had not then requested a copy of the final report which had been delivered in April).

But time has moved on, and so early last week I lodged a fresh request.  This time I asked for:

I am requesting copies of :

  • the draft supplied to Treasury on 5 April 2017
  • the report delivered to Treasury on 18 April 2017
  • the version of the report sent out for peer review
  • the completed report incorporating any comments provided by the peer reviewers.
  • copies of comments supplied on the draft paper by peer reviewers
  • file notes of meetings Rennie or assisting Treasury staff had with non-Treasury people in the course of undertaking the review (including the Board of the Reserve Bank).

I am also requesting copies of any advice to the Minister of Finance or his office on the Rennie review, and matters covered in it, since 18 April 2017.

And this afternoon I got a response from The Treasury, refusing to release any of this material.

Their justification?

This is necessary to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials.

That is, in principle, a valid statutory ground (unless public interest considerations trump it).  But…..Iain Rennie is not an official or a Minister, but was rather a contractor to The Treasury.

But what about the advice to the Minister himself (or his office)?  Well, according to Treasury,  “Mr Rennie’s report has not been tendered to the Minister of Finance, nor has any other Treasury advice on this issue since the report was commissioned.”

So, the report which was requested by the Minister of Finance himself (he told a journalist so in April which is how news of the review became public), which was finalised more than six months ago, has not been sent to the Minister of Finance at all, and nor has any advice from Treasury been sent.  Since oral briefings are covered by the Official Information Act, we must then assume that a notoriously hands-on minister has no idea what is in a report he requested, and which was finished six months ago.   Perhaps, but it seems unlikely.

Treasury tries to claim in its letter “that this work was commissioned to inform Treasury’s post-election advice”.  But that certainly wasn’t the impression the Minister of Finance was giving in April, when this was presented as his own initiative.   But even if that story is true, it still isn’t grounds for withholding a six months old consultant’s report paid for with public money.  It is official information, and releasing the report is not the same –  at all –  as releasing Treasury’s views on it.

There were three external reviewers of the draft report.  Comments were sought from:

  • Charles Goodhart, an academic and former Bank of England official and MPC member,
  • Don Kohn, former vice-chair of the Fed, and currently a member of the Bank of England’s Financial Policy Committee, and
  • David Archer, former Assistant Governor of the Reserve Bank and now a senior official at the Bank for International Settlements.

The comments of the first two are withheld on the standard ground “to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials”, but neither Goodhart nor Kohn is either an official (of New Zealand or –  in Goodhart’s case of anywhere) or a Minister, and these are comments on a draft report I’m seeking, not something ever likely to get as far as the Minister of Finance.

Archer’s comments are withheld on different grounds:

  • “the making available of that information would be likely to prejudice the entrusting of information to the Government of New Zealand on the basis of confidence by the Government of any other country or any agency of such a Governoment or by an international organisation”

But there is no indication that Archer was commenting on behalf of an international organisation, but rather was offering personal views (rather than confidential “information”).   It isn’t, say, confidential information about the business of, say, the BIS.

  • “to protect information which is subject to an obligation of confidence where the making available of the information would likely prejudice the supply of similar information or information from the same source and it is in the public interest that such information should continue to be supplied”.

There is no evidence that (a) Archer’s comments, made presumably in a personal capacity, were subject to an “obligation of confidence”, or (b) that publishing his comments on a draft report would make him less likely to provide such comments (not clearly “information” in any case) on future Treasury consultants’ reports on Reserve Bank issues.      And nor is there any reason why this clause should apply any more to Archer’s comments than to those of Goodhart and Kohn –  for which it has not been invoked.

It is all (a) incredibly obstructive and (b) not remotely convincing.  I will be appealing The Treasury’s decision to the Ombudsman.  Perhaps some journalist might consider asking Steven Joyce if it is really true that he has no idea what is in the Rennie report that he asked for eight months ago, which was completed six months ago, and which is held by his own department.  Even if that is true, it is not good grounds under the Act for withholding a consultant’s report, let alone drafts of it.

So, well done Reserve Bank.  And it is a shame about The Treasury.

 

 

 

 

 

The tech sector…and ongoing economic underperformance

Michael Reddell Exports, Productivity

The 13th annual TIN (“Technology Investment Network”) report was released a couple of days ago.  I’ve largely managed to ignore the previous twelve –  breathless hype and all –  but for some reason I got interested yesterday, and started digging around in the material that was accessible to the public (despite lots of taxpayer subsidies the full report is expensive) and then in some of the New Zealand economic data.   Perhaps it was the seeming disconnect between the rhetoric from the sector, and its public sector backers, and the reality of an economy that has had no productivity growth at all for five years, and where exports as a share of GDP have been falling (and are projected by The Treasury to keep on falling).

The centrepiece of the report is an analysis of “New Zealand’s top 200 technology companies” (by revenue) where, as far I can tell, “New Zealand’s” here means something about the base of the company being in New Zealand, whether it is owned here or not.  I’m not quite sure either what the definition of a “technology” company is, and it is worth remembering that almost every type of economic activity uses technology in ways that were inconceivable even 50 years ago.  Often new technologies are developed and adopted inside companies that wouldn’t think of themselves primarily as “technology companies”.   No one doubts the important pervasive role that technology plays, in New Zealand and in any moderately-advanced economy.   But the TIN Report appears to focus on a pretty broadly-defined group of companies in biotech, ICT, and (more than half) in “high-tech manufacturing”.

Here are the top 10 companies from the list

Date founded Total revenue ($m)
Datacom 1965 1157
Fisher & Paykel Appliances 1934 1146
Fisher & Paykel Healthcare 1934 894
Xero 2006 295
Gallagher Group ca. 1938 232
Orion Health 1993 199
Douglas Pharmceuticals 1967 190
Tait Communications 1969 175
NDA Group 1894 175
Temperzone 1956 175

Perhaps most immediately striking was the gap between the first three companies on the list and the rest of them.   But I also realised that I’d visited quite a few of these companies (the Reserve Bank’s business visits programme), in some cases a long time ago.  Tait was one of the good news stories we used to tell in the 1980s –  economic times were tough, and we had a selection of (sometimes rather desperate) anecdotes of economic transformation.  So I dug out –  as best I could –  the dates each of these firms was founded.    Of the top 10, as many (one each) had been founded in the 19th century as in the 21st century, and only one more had been founded in the last three decades of the 20th century, even as the New Zealand economy was being liberalised.      It isn’t exactly the image one has of really top-tier technology companies.  Sure IBM and Hewlett-Packard have been round for a while now, but Google, Facebook, and Amazon all date from the last 25 years  –  and they’ve managed to dominate world markets, not just been big in New Zealand.

Actually, a somewhat similar point even found its way into the TIN press release

Companies with over $20 million revenue grew at twice the rate of companies below NZ$20 million.  The 90 companies with revenues NZ$20 million and over grew at 8.4%, compared to just 3.8% revenue growth for the 110 companies with under $20 million in revenue.

Nominal GDP in New Zealand grew by 5.9 per cent in the year to June, and yet the second tier of New Zealand based technology companies could only manage sales growth of 3.8 per cent in the last year (and even that number is subject to a form of survivor bias –  some firms that did worse will have dropped out of the list).  I was, frankly, astonished at quite how weak the revenue growth seemed to have been.

The headline TIN were keen to highlight was that the annual worldwide sales of the TIN 200 companies had now passed $10 billion (just a bit more than Foodstuffs supermarkets).   $10 billion isn’t a trivial sum of course, but New Zealand GDP last year was $268 billion dollars (and gross sales are higher than GDP) –  so worldwide sales of these 200 companies were just under 4 per cent of New Zealand’s GDP.    They were also keen to highlight 43000 people employed around the world.  Again, not a small number but just over 2.5 million people are employed in New Zealand at present.    In many of these companies, overseas employment –  an important part of making the businesses successful –  is quite a large share of the total.  For many of the companies, data aren’t easily accessible, but from Fisher and Paykel Healthcare’s latest annual report I learned that of its 4100 employees, 1800 are overseas.

Writing of the $10 billion revenue number, the TIN Managing Director noted

It is not just a number but a marker that indicates that our technology exporters are well and truly entrenched as a critical part of New Zealand’s economic growth

Perhaps he isn’t aware that there has been no productivity growth for five years?

But what of “exports”?  We are told that these 200 firms have “more than NZ$7.3 billion sourced through exports”.   They carefully describe that in their headline as “the equivalent of 10 per cent of all New Zealand’s exports”, but some media rather loosely translated this into a story that these tech companies now account of 10 per cent of New Zealand’s exports.

Without access to the full report, it is difficult to know quite how they calculate the number.  But almost certainly, a lot of that $7.3 billion –  perhaps total overseas sales –  will in fact be counted as other countries’ exports.  Chinese-owned Fisher & Paykel Appliances, for examples, manufactures in Thailand, Mexico, China and Italy.    Fisher and Paykel Healthcare manufactures in Mexico, and presumably most of that production goes to the United States.   And if, say, Datacom has big operations in Australia, much of the value-added from that operation will accrue to Australian employees.

I don’t have a problem with any of that.  It is how successful international businesses work.  In most cases, the relevant intellectual property is probably being generated in New Zealand, and the value of that should be captured by those doing the work, and the owners of the relevant businesses (in many, perhaps most, cases, New Zealanders).

But how does all this fit with the overall economic performance story.  One of the public sector funders of the TIN report was quoted in a Newsroom story yesterday

Victoria Crone, chief executive of one of the sponsors of the report, Callaghan Innovation, said technology was a key for growth in New Zealand’s economy. “Every dollar invested in the tech sector creates three dollars of growth in the New Zealand economy. Doubling or tripling the contribution of dairy or tourism by simply expanding these sectors is simply not practical given their respective demands on land, water and infrastructure.

“By contrast all the tech sector needs to expand is more brains, more ideas and more capital to bring them to market.”

Which might all sounds fine, but how have those tech sectors actually been doing?  Getting too deeply into the line items of our export data isn’t really my thing but (for example) SNZ publish a summary breakdown of merchandise exports, with a category of “elaborately-transformed manufactures” (not all of which would typically be thought of as anything like “technology exports”).    Here is how elaborately-transformed manufactures on the one hand, and primary products on the other, have done as shares of total merchandise exports, going back to 2003  (just before the first TIN Report was published).

share of merch exports

And over that period, total merchandise exports have fallen from 21.4 per cent of GDP to 18.6 per cent of GDP.

What about services exports –  the weightless economy and all that?

Again, it is a challenge to break out the things that most people will think of as “technology exports”, so I’ve erred on the side of including more items rather than less.   There is greater detail for the last few years, but to go back further the data are less disaggregated.    From the annual services exports data I summed four categories

Services; Exports; Charges for the use of intellectual property nei
Services; Exports; Telecommunications, computer, and information services
Services; Exports; Other business services
Services; Exports; Personal, cultural, and recreational services

The latter because the largest component of it appears to be film and TV exports (Weta workshops, Peter Jackson etc).

These components of services exports are, as one would perhaps hope, a larger share of total services exports than was the case 15 or 20 years ago.    Unfortunately –  and unusually for advanced economies –  services exports in total have not been growing as a share of GDP.    This chart shows these four components of services exports as a share of GDP.

tech services exports

It looks quite sensitive to the exchange rate (as one might expect), but whatever the reason the share in the most recent year is still around where it was in 2000 or 2001.  Even with, for example, those amped-up film subsidies.

Still on the trail of (overall) success stories, I thought I’d check out the investment income account of the balance of payments.  New Zealand shareholders will still be better off –  as I noted earlier –  even if there aren’t exports directly from New Zealand if their offshore operations are generating profits.  Whether those profits are remitted to New Zealand or reinvested in the business abroad, it is a gain for New Zealanders (and captured in the Gross National Income numbers, although not in GDP –  the latter is about production in New Zealand).   The published data in the investment income account isn’t broken down by economic sector, but there is data on different types of income.    I focused on two columns

Primary Income; Inv. income; NZ inv. abroad; Direct inv.; Income on equity etc; Dividends and distributed branch profits
Primary Income; Inv. income; NZ inv. abroad; Direct inv.; Income on equity etc; Reinvested earnings

Unfortunately, the data are patchy to say the least so I can’t show a time series chart.  And bear in mind that these profits are from direct overseas investment by New Zealand firms in all economic sectors.    But here are the total returns under these two headings for the five years to 2000 and for the last five years, both expressed as a percentage of GDP (over those five year periods).

profits on NZ inv abroad

Remember that these are profits from firms in all sectors, but if there are big transformative tech sector profits they must be pretty well hidden.

When, many years ago now, I read Brian Easton’s economic history of New Zealand since World War Two, one of the things I noted then was the evidence Easton had gathered for how the composition of New Zealand’s exports had changed rapidly in the past.

Back in the 1960s, in the Official Yearbook Statistics New Zealand reported a high-level table of the composition of our exports.  The traditional products were these

Meat
Dairy
Wool
Fruit and vegetables
Animal by-products

In 1962, these products made up 85 per cent of (estimated) total goods and services exports.  Just a decade later in 1972, those same products made up only 67 per cent of total goods and services exports.  Subsidies probably played a part –  counteracting the additional cost imposed by our own tariffs and import quotas.  Then again, film subsidies (or Rocket Lab subsidies) anyone?

In earlier decades, new technology  –  it was all technology that made it possible –  meant that dairy products went from being only for the domestic market to being our second largest exports in 30 years.

By contrast, the performance of today’s New Zealand based tech sector seems pretty distinctly underwhelming.  I’m sure there are plenty of good firms, and plenty of able people trying to build them –  New Zealand isn’t short of able people, or of a regulatory environment that makes it easy to start new businesses –  but in aggregate the results should really be seen as rather disappointing.  Vic Crone talks of how, in her view, “all the tech sector needs is more brains, more ideas, and more capital to bring them to market”.    New Zealand has never had a problem with any of those three.  It looks rather more as though the opportunities just aren’t here – in a location so remote –  to any great extent, and the challenges of remoteness are just compounded by a real exchange rate that has got persistently out of line with the deteriorating relative competitiveness of the New Zealand economy.

The taxpayer –  through Callaghan and NZTE – has been helping pay for this report, and the associated puff pieces made available to the public.  One can only hope that a new government (of whatever stripe) might start by asking some hard questions, of those agencies and of MBIE and Treasury, that look behind the hype.  I’m not optimistic –  all sides seem to have a stronger interest in believing the spin than in confronting the real and persistent underperformance.  Then again, the good thing about being a pessimist is that just occasionally one can be pleasantly surprised.

 

 

OCR cuts as plausible as increases

Michael Reddell inflation, OCR

The CPI data for the September quarter were released yesterday.  They were the last for the period Graeme Wheeler was Governor of the Reserve Bank –  charged with targeting inflation – although of course the lags mean that policy choices Wheeler made will still be influencing inflation through next year.    The target Wheeler willingly signed up for five years ago was 2 per cent CPI inflation.  In his time in office, he saw annual inflation that high only once (of 20 observations).  On his preferred core measure –  which is probably the best indicator of the underlying trend in inflation –  September 2009 was the last time core inflation was as high as 2 per cent.

In fact, here is that (sectoral factor) measure of core inflation back a decade or so.

core inflation

There are various readings one could put on that chart.  On the one hand, core inflation (on this measure) has been astonishingly stable in the last six years or so.   That would normally be to the credit of the Governor concerned.   Then again, the same Governor explicitly signed up for a focus on 2 per cent inflation, and there has been no sign that the trend in inflation is any closer to fluctuating around 2 per cent than it was in 2012.

On the other hand, at the start of chart, back in 2006/2007 at the peak of the last boom, inflation was clearly too high (relative to the target the government had given us).   Partly for that reason, I continued to recommend OCR increases throughout most of 2007.  With hindsight –  but probably only in hindsight – those increases weren’t needed.  But my point here is to recognise that the gap between actual core inflation and the target midpoint (2 per cent) was materially larger then that it is now.  As it happens, we didn’t have this particular core measure in 2007, but when we sat around the table debating what Alan Bollard should do with interest rates then, we knew a best estimate of core inflation was around 3 per cent (we were also pretty confident that the unemployment was well below a sustainable level).  In fact, at the time the Bank’s Board was asking uncomfortable questions as to quite how 3 per cent annual core inflation squared with the statutory mandate of “a stable general level of prices” (I wrote a, from memory, slightly casuistical paper in response.)

So, if there are legitimate questions about the conduct of monetary policy right now –  the Bank having already undone its 2014/15 mistake –  they pale in comparison with those that should have been being asked in 2007.  (As I recall it, Stephen Toplis was raising such questions then, and attracting the ire of the then Governor).

What do yesterday’s inflation data show?

I’ve previously shown a table of six core inflation measures

Core inflation, year to Sept
CPI ex petrol 1.8
Trimmed mean 2
Weighted median 2
Factor model 1.8
Sectoral factor model 1.4
CPI ex food and energy 1.5

A couple of those measures are actually bang on 2 per cent.  On the other hand, the Reserve Bank has been consistently clear in recent years that its favoured measure is the sectoral factor model (a statistical exercise that searches of underlying common trends in the disaggregated components of the CPI), and international comparisons often use a CPI ex food and energy measure (it is the one core measure the OECD reports for its member countries).

Hawks might be inclined to dismiss the Bank’s preference for the sectoral factor model as just “cover for a reluctance to raise the OCR to where it ‘should’ be”.  I think they would be wrong to do so.  It isn’t that long since the median core inflation measure was running materially below the sectoral factor model number, and the Bank was then asserting that the core inflation measure was a better guide.   I wasn’t fully convinced at the time, but it seems that they were probably right.

We only have consistent data for all six core measures back three years or so, but even that is enough to illustrate the point.  In this chart I’ve shown the sectoral core measure and the median of the other five measures.

core inflation measures oct 17

The gap between the two lines was larger a couple of years ago than it is now.  I don’t think many observers will find it that credible that in the sort of economy we’ve experienced in the last couple of years “true” core inflation has picked up as strongly as the blue line suggests.  The general understanding of how inflation works, in settled and stable economies, is that there is lots of short-term noise, but that the underlying trend –  the bit monetary policy should usually focus on –  is pretty sticky and slow-moving.   Personally, I find it more convincing to believe that core inflation has been pretty consistently low for several years than to suppose it has gone through the quite large cycles some of the other measures suggest.  In support of this proposition, over the almost 25 years for which we have estimates from the sectoral factor model, it is easy –  with hindsight –  to tell a persuasive story about what was going on in that series.  Less so with some of the other measures.

One other way to illustrate the point is to compare the sectoral factor model numbers to a couple of the other core inflation indicators for which there is a long run of data.    This compares the sectoral factor model and the factor model (an earlier iteration, using a similar class of filtering techniques).

core measures

Or in this one a comparison of the sectoral factor model with the CPI ex food and energy (in the latter I haven’t manually excluded the 2010 GST spike).

core measures 2

You will struggle to find an economist who thinks that, in an economy like New Zealand’s, the underlying trend in inflation is anything like as noisy as those other measures suggest.

We don’t have a formal Policy Targets Agreement at present, but for some years now PTAs have included this phrase

For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target.

There isn’t much sign either that the medium-trend of inflation is fluctuating around 2 per cent –  where it supposed to have been –  or that it has been increasing and getting any closer to target.

Here is another way of looking at the issue.   Headline inflation is thrown around by changes in taxes and government charges, and although SNZ don’t (unfortunately) publish a series of CPI inflation excluding taxes and charges (as many other countries’ statistical agencies do), they do publish a series of non-tradables inflation excluding government charges and the cigarettes and tobacco component (the latter having been the subject of repeated large tax increases in recent years, which have nothing to do with the underlying inflation process).  The data only go back 10 years or so, but here is what that chart looks like.

NT ex govt charges and tobacco oct 17

This measure of core non-tradables inflation is off its lows (in 2010, 2012, and 2015) but shows no sign of racing away.    Construction cost pressures play a big role in this series, but even with the pressures in that sector, this measure of non-tradables inflation is currently running at only around 2.25 per cent.   The 2014 peak was (a bit) higher. (Consistent with this story, wage inflation –  although quite high relative to productivity growth –  has also been showing no signs of acceleration).

I saw one commentary yesterday suggesting that if non-tradables inflation was above 2 per cent that was grounds for thinking about tightening –  after all, 2 per cent is the inflation target midpoint.  Actually, for decades non-tradables inflation has averaged well above tradables inflation.  Our benchmark in discussions at the Bank was often along the lines of “a 2 per cent inflation target means tradables inflation averaging about 1 per cent and non-tradables inflation averaging about 3 per cent”.  As it happens, for the 17 years the Bank has data on its website, tradables inflation has averaged 1.0 per cent, and non-tradables inflation has averaged 3.2 per cent (CPI inflation averaged 2.2 per cent).

If the Reserve Bank is serious about ensuring that core inflation fluctuates around  per cent, they will need to be seeing quite a lift in non-tradables inflation from here.  There is nothing in the data suggesting that lift is already getting underway.  And, of course, that is largely why their own projections haven’t shown any OCR increases for some considerable time.

Against this backdrop, the troubling question remains why every commentator (I’ve seen) has been focused on the timing of a potential OCR increase (even if all agree it is probably still some time away).    Core inflation is persistently below target, the best measure of core inflation shows little or no sign of picking up, and –  not irrelevantly – the unemployment rate is still above any credible estimates of the long-run sustainable rate.  It is not as if rapid productivity growth is driving prices downward either –  some sort of “good low inflation”.  Instead, there is no aggregate productivity growth.  And few commentators seem to envisage GDP growth (headline or per capita) accelerating from here.  Even if there are some encouraging signs in the world economy at present, it isn’t at all clear to me why one would think the next OCR change was any more likely to be an increase than a cut.

I wouldn’t be pushing for an OCR cut at present, but it isn’t hard to envisage how we might be better off if the OCR was a bit lower than it is now.   I’ve resisted the argument that house price inflation should be an additional factor in OCR decisions, and I’m not about to reverse that stance just because house price inflation is (temporarily?) subdued, but for those who did want to give house price inflation some extra weight even that argument against further OCR cuts probably has to be put to one side for now.

In conclusion, I noticed this paragraph in the BNZ commentary on yesterday’s numbers

What is peculiar to New Zealand, however, is the very confused governance picture we have at the moment. Not only do we have a caretaker governor but we also don’t know who the incoming government is or what its expectations are for future fiscal stimulus, the Policy Targets Agreement and the Reserve Bank Act itself. Until these questions are answered it is very difficult to make any meaningful comment on future RBNZ action with any degree of certainty.

I’d largely agree with all that. It remains possible that the Bank could be operating under a different PTA as soon as next week (it happened to varying degrees in each of 1990, 1996, 1999 and 2008), and even then the (unlawful) caretaker Governor has little or no effective mandate to do anything much, minding the store until a permanent appointee is in place.  Of course, even when all those uncertainties are resolved –  Governor, and any (or no) changes to the PTA or Act – it will still be hard “to make any meaningful comment on future RBNZ action with any degree of certainty”.   Doing so would require a degree of knowledge about future inflation pressures not gifted to central banks, or to private forecasters.  We (more or less) know what we see now, and not much beyond that (ever).

 

 

 

Debate debased

Michael Reddell Immigration

On the Herald website yesterday morning, I noticed a headine “As an immigrant, I’m terrified of Winston Peters”.    I ignored it, as clickbait.  But it was still there last night, so out of curiosity I opened the story.   The Herald is, after all, one of the main media outlets in the country, sometimes still approximating a serious newspaper, and immigration policy is one of the issues that, in a New Zealand context, I’ve given a lot of thought to.

With such a florid, emotionally overwrought, headline, I had low expectations of the article.  But I still wasn’t prepared for what I found.    The author, Ben Mack, is described as a “lifestyle columnist” for the Herald.   His previous columns include a, borderline offensive, piece on “18 reasons why New Zealand is like North Korea”.

He’s an American citizen, and despite the headline isn’t really an immigrant at all.   He is apparently here on a temporary work visa, having previously been here on a student visa.   Quite how the economic prospects of New Zealanders would have been impaired by an apparent shortage of New Zeaaland “lifestyle columnists” isn’t clear, but set that to one side for the moment.   Apparently he has hopes of eventually being granted New Zealand residency and staying on.  Many do, but it isn’t an entitlement.  When you go to a country to work on a temporary visa, you might well have to go home again –  I know, I’ve done it three times.   It is up to New Zealanders, and the New Zealand government, to decide how many people, and who, it allows to settle permanently among us.  That’s not unusual.  It is how pretty much every country in the world operates.  I suspect Barack Obama might have been too conservative to Mr Mack’s tastes and preferences, but under the Obama Administration –  as under the present US government –  the United States grants one-third as many residence visas, per capita, as New Zealand does.

But, as a temporary resident in New Zealand, Mr Mack is apparently “terrified” by Winston Peters – a long-serving democratically elected member of a long-established Parliament.   Why?  Well, that isn’t really clear.

His article begins

Winston Peters is gaslighting the entire country. Sound extreme? If anything, I think it’s an understatement, actually.

The Oxford Dictionary defines “gaslighting” as to “manipulate (someone) by psychological means into doubting their own sanity.”

That’s exactly what Mr Peters is doing. And it’s long past time we did something about it.

I’m glad he provided a dictionary definition because I’d never heard of “gaslighting” myself.   I still can’t say I recognise the phenomenon,   And as for “it’s long past time we did something about it”, surely (a) it is called democracy, freedom of expression etc etc –  all that stuff they don’t have in North Korea, and (b) the relevant “we” here is New Zealand citizens and voters (the latter category, even under our unusually liberal law, not including people on temporary work visas).

I get that Winston Peters isn’t everyone’s cup of tea (he isn’t really mine).  In fact, only 7.2 per cent of voters opted for his party.  92.8 per cent didn’t.  That’s almost as many as the 93.7 per cent of voters who didn’t opt for the Green Party.   But, you know, it is democracy.  I’m sure MMP is a strange concept to visiting Americans –  and I’m not a fan of it myself – but it was the freely chosen system adopted by New Zealand voters. If you get 5 per cent of the vote, your party gets seats in Parliament.  Personally, I think the threshold should be lower, but again the rules are the rules and one shouldn’t tamper with them lightly.  New Zealand First has now been around for almost 25 years, and the high point of its electoral support was 1996, when the party got 13.4 per cent of the vote.  And in a proportional representation system –  and such systems are pretty common –  it is rare for a single party to win a majority of seats in Parliament, and in the absence of a taste for “grand coalitions” –  arrangements that undermine the potency of political opposition, a vital part of a parliamentary democracy – that means that at times smallish parties that could readily work with either main party can get to exercise quite a bit of clout.

But –  and here is where a bit of perspective and experience of New Zealand might have come in handy to Mr Mack – not usually that much at all.   New Zealand First was in coalition with National in the mid 1990s –  Winston Peters as Deputy Prime Minister and Treasurer –  and it was in partnership with Labour for a few years from 2005 –  Winston Peters serving a Foreign Minister, and generally accepted as having done a reasonable job.   And what changed?  1996 is a while ago now, but I can recall:

  • a small increase in the inflation target, never subsequently reversed,
  • free doctor’s visits for kids under six, never subsequently reversed, and
  • a referendum on reform of New Zealand Superannuation, in which the cause Peters was advocating lost decisively.

Oh, and I think there was a Population Conference.

The 2005 to 2008 term was even less memorable, unless you were a Ministry of Foreign Affairs bureaucrat: their Minister secured them a great deal of additional money and the prospect of various new embassies.

I’m sure there was other stuff, but none of it was transformative.

Whether New Zealand First never made much difference because of Peters’ own limitation as a government politician or because he was always a minority party and legislation actually requires 61 votes, or some combination of the two, or other reasons altogether is an interesting question.  But even if the opposition bark was in some way genuinely “terrifying”, the track record in office has been such as to not leave much trace.

Mack continues

Let me get this out of the way: I have zero respect for a man who, for decades, has made populist xenophobia his stock-and-trade, and who seems to delight in causing misery for entire groups of people (his abuse of the press – people simply doing their jobs like everyone else – is unacceptable enough).

I’m sure in journalism school they do – or did –  encourage people to use words carefully.   And when young journalists didn’t, grizzled sub-editors did it for them.  But perhaps that discipline no longer exists?    The Oxford dictionary –  Mack’s own source –  defines “xenophobia” as a ‘deep-rooted fear of foreigners’.    Perhaps Peters does have that fear –  I’ve never met the man –  but I doubt Mack could produce any serious evidence for it.  Instead, as with many pro-immigration people –  be it the Greens, or the New Zealand Initiative –  “xenophobia” has become a substitute for “thinking that, just possibly, one of the highest rates of immigration in the world might not always be benefiting New Zealanders”.

And I can’t say I have much time for how Peters handles the media but…..it is a free country.

Mack continues

What’s worse is his red herring that he’s “looking out for New Zealanders”, trotting out all kinds of nonsense about how us immigrants are supposedly pushing this great nation to breaking point.

He’s ignoring that it’s immigrants who have helped build this country. It’s thanks to immigrants New Zealand punches far above its weight on the international stage than a nation with fewer people than most big cities has a right to.

Actually, I suspect “breaking point” is Mack putting words in Peters’ mouth.   But I really hope that all the politicians we elect –  and those who sought office but missed out –  could comfortably put their hand on their heart (although I guess that is more of an American idiom) and declare that they are, first and foremost, “looking out for New Zealanders”.   A pretty basic expectation surely?  Reasonable –  and unreasonable –  people might differ on what is in our best interests.  That’s the stuff of politics.  But I’m only interested in voting for parties that are interested in pursuing our best interests.   I suspect all of them fit that bill, even if none align very well with what I personally think of as our best interests.

As for the second paragraph in that little excerpt, I have no idea what he’s talking about.  I’m sure that some of those who’ve immigrated to New Zealand in the last 25 years or so –  the current wave of large scale non-citizen migration –  have made a great contribution.  Most will have done well for themselves (if they hadn’t presumably they’d have gone home again), but in what way does Mr Mack think we now “punch above our weight” more than we were doing in 1990 (say)?  In economic terms, we’ve slipped a bit further down the international league tables in that time.  Hundreds of thousands more New Zealanders have left for the better opportunities they find abroad.  Are our universities better ranked internationally? Our media more influential?   Mostly, what has happened is that our population has grown rapidly and that, compounded with our crazy land use laws, have made housing ever more unaffordable.  And New Zealand firms have found it ever harder to compete internationally.

It’s absolutely gaslighting when you look around and have no idea who is infected with New Zealand First’s noxious anti-immigrant extremism: Co-workers, classmates, friends, family, fellow shoppers at the supermarket, the clerk at the post office, the teller at the bank, the bus driver, the usher at the movie theatre …

Oh, no…..ordinary New Zealanders might share some unease about the rate of immigration in New Zealand.  How unacceptable.  Some economists do too.  And here I’m not just talking about myself.  Gareth Morgan-  who seemed to draw his votes mostly from pretty left-liberal places and professional people –  was expressing some unease too.

When you’re an immigrant like I am, you start to get a bit paranoid, wondering who might secretly want to see you forcibly removed from the country you now call home. Believe me, always having to be suspicious is incredibly damaging to your health and quality of life.

When you come on a temporary visa, you have no entitlement to stay. I quite get that worrying that the rules might change could be unsettling.  But elections are like that, not just in respect of immigration but, for example, pension ages, water rights, taxation of capital assets and so on.  Countries –  their citizens and voters –  get to make choices, and every choice has people on the other side of it.

And then the rhetoric rises to new levels of absurdity

It’s even more frightening when people with influence – like Duncan Garner recently – spout the same extremist views as Peters, then bizarrely claim it’s not xenophobic to say things like “immigration is great, but I’m not sure our traditional standard of living is enhanced by it”.

Yeah, nah bro. That’s dog-whistle politics 101. It’s the same kind of thing Hitler and the Nazis said during their rise to power. It’s the same thing the likes of Richard Spencer, Marine Le Pen, Alternative für Deutschland, Alex Jones, Milo Yiannopoulos and others spout with sickening regularity. It’s the kind of hateful rhetoric that has caused real harm.

It’s the kind of hate speech that can get people killed because it can inspire folks to physically attack immigrants.

Lets just state it simply: to prefer a low rate of immigration is not an illegitimate position.  You might think, as I do, that a high rate of immigration to New Zealand has been quite economically damaging to New Zealanders.   You might prefer social cohesion rather than ever-increasing cultural diversity.  You might just prefer to live in a small, sparsely-settled country.  Or you might just fear that politicians will never sort out of the housing market and the only way your kids will get a foothold, under say age 60, is if the population pressures (all policy-induced) are ended.   They are all arguable views –  some about evidence, some just about preferences.  They are conversations societies need to be able to have among themselves, in a mutally respectful way.    As a reminder, there is only one OECD country that actively aspires to take more immigrants than New Zealand does –  and that is Israel, where the door is open to all (but only those) who share the Jewish faith and ancestry.  The New Zealand status quo is exceptional, not normal.  Perhaps it benefits most New Zealanders –  I doubt it –  but that is the issue that should be able to be debated.

Mack continues

You’ve heard it before, but it’s worth repeating again: many immigrants sacrifice literally everything to come to New Zealand for a better life. I am one of them. In coming here, I gave up a well-paying job with serious potential for career advancement at one of the largest news organisations in Europe (an organisation which took a chance on hiring me when I had a woefully skint resume and didn’t speak a word of German at the time).

I had a nice apartment in Berlin, enjoyed the luxuries of living on a continent where I could take a one-hour flight for as little as $30 to experience a completely new culture, and had close friendships with people I’ll never forget (all the more important when you’re like me and struggle with making friends).

To which my reaction is mostly “And……?”     Yes, moving continents on a temporary work visas is a risk.  Plenty of things in life are.  And if you find it difficult to make new friends, sometimes staying at home makes sense.  Recall, that Mack comes from a far richer country than New Zealand, and if by some chance he doesn’t end up getting residence –  something he has no entitlement to –  it isn’t clear why that is our problem.

What truly makes my blood run cold is now Peters has power. Make no mistake: Peters being “kingmaker” is the worst thing to happen to this country in modern times.

I am not exaggerating.

Yes you are.  See 1996 and 2008.    (And personally, I worry a lot more about politicians of all parties who for 25 years, after each election, have done nothing to reverse our slow relative economic decline.)

And he ends – after rants at the unfitness of office of the Prime Minister and Leader of the Opposition

A change in mindset is well overdue. When we watched the 2016 US presidential election with open-mouthed shock, many felt that such a thing could never happen here, that at least a dangerous figure like Trump could never gain power in the Land of the Long White Cloud. Guess what: it’s happened.

We need to galvanise our outrage and fear into action. As much as we might like to, we can’t ignore someone like Peters. His Trumpian style of bigoted nationalism is here, now. Instead, he must be repudiated at every turn. On panels. At press conferences. At political gatherings. At workplaces. At schools. Around dinner tables. Online. Everywhere.

If New Zealand wants to have a prosperous, less hateful future, it’s time to step up, now.

The lives of thousands of people truly depend on it.

The question is: what side of history do you want to be on?

I guess he’s new to the country, a temporary resident at this stage, but has he encountered the difference between a single decision-maker system (all executive authority in the US is vested in the President) and a system of Cabinet government?  In whichever government emerges in the next week or so, members of the National Party or the Labour Party will hold either a majority of the positions, or all the positions.  Perhaps Mr Mack could devote his political energies to securing change in his own country, where he is presumably entitled to vote.

What isn’t clear in any of this is what, specifically, in New Zealand First immigration policy Mr Mack objects to.   I’ve written about it previously, drawing attention to the lack of any real specificity, and the lack of any real change to immigration policy when New Zealand First was part of government.  Personally, I count that as a flaw, but it might be a reason for Mr Mack to consider toning down his hyperventilated rhetoric.   At best –  from the perspective of someone who thinks our immigration policy is much too liberal, whether the immigrants come from Ontario, Oregon, Bangalore, Beijing, Buenos Aires or Birmingham –  we might end up with a system that reduced the average inflow to around the per capita rates Barack Obama was presiding over, in turn more liberal than the systems of many other advanced countries.  But I doubt anything like that will happen, and New Zealand will continue its slow relative decline.  Probably it will always be a nice place to live –  if very remote.  And while I’m not a fan of “what side of history do you want to be on” arguments, I’d prefer to vote for someone –  if there were such a candidate –  who was going to offer a serious prospect of reversing 70 years of relative economic decline for New Zealanders, and on building on the strengths that once made New Zealand one of the very richest and most successful nations on earth.

You might wonder why I bothered devoting so much space to Mr Mack.  His views aren’t, in themselves, very important or, apparently, grounded in much understanding of New Zealand economic history or cross-country comparative experiences.    But his column was published by one of our leading media outlets –  supposedly more than just a portal for any view anyone wants to express.  And it is inconceivable that the same outlet would publish anything so overwrought from someone on the other side of the issue  (  and nor would I encourage them to do so).  It is just the sort of contribution the New Zealand debate doesn’t need.  But, of course, the strong suggestion in Mr Mack’s column is that he isn’t interested in debate, or dialogue…..instead disagreement, in his view, should invite ostracism.

There was a much better piece on The Spinoff last week from Jess Berentson-Shaw of the Morgan Foundation, encouraging serious debate and dialogue on immigration policy issues.   I don’t agree with all of what she has to say – indeed, I suspect that when we got to the details of specific policies we might not agree on much at all –  but it is a much more constructive, eirenic, approach to thinking about how a civilised society can grapple with complex and multi-dimensional issues, in this case immigration.  She was prompted  by the faux furore over Duncan Garner’s recent column

Discussing what we value and what matters in immigration will help. Having a decent framework for the issues that matter is a really good start, so let’s continue along this constructive track. I want to buy my undercrackers in a tolerant society that can talk more reasonably about this stuff.

I might come back to some of his specifics, and her links to a brief paper by Peter Wilson and Julie Fry on a possible framework for evaluating immigration policy.

And finally, when I was responding to David Hall last week –  who objected to any suggestion immigration policy and emissions reduction policy should be linked in New Zealand –  I went back to read his introduction in the BWB Texts book Fair Borders.    Having read that introduction several times, I’m still not quite clear what specific immigration policy he would favour for New Zealand.  But I was struck by this brief comment

To echo an argument by migration scholar Alan Gamlen, if we cannot justify our migration policy while looking into the eyes of those it affects, we need to think again.

And, actually, I agree totally.  But I wonder who doesn’t?  (And actually the same comment could be made for all areas of policy.)   There are many people who are at least emotionally sympathetic to an open borders approach who seem unable to conceive that there might be reasoned, moral, and defensible arguments for –  following the practice of all states –  and putting limits on who might come and settle among us.  But I also suspect that in Hall’s quite “the eyes of those it affects” doesn’t include the New Zealanders who are already here.  Economic prosperity and stable ordered societies aren’t mostly a matter of luck, but of consistent discipline and hard work over centuries.  Successful societies need to guard what they’ve built –  not in some in insular sense, closed to outside ideas, or even in some sense of “our wealth is at the expense of your poverty” (it just isn’t) – but because what is hard- and painstakingly built can be too easily corroded, put at risk, and eventually destroyed.    They are particularly important economic considerations for an extremely remote nation with few obvious economic opportunities, which has already been in relative economic decline for 70 years.