RBNZ slams the population ponzi

ScreenHunter_07 Mar. 19 12.02

By Leith van Onselen

The Reserve Bank of New Zealand’s (RBNZ) Michael Reddell has written an interesting paper questioning the merits of New Zealand’s high immigration program, which appears to have crowded-out (through higher interest rates and a high average real exchange rate) other productive investment, lowering living standards in the process:

Over the last 50 years (and more) New Zealand’s population has mostly grown materially faster than the populations of other advanced countries…

ScreenHunter_2141 Apr. 23 11.01

All else equal – and in particular for an unchanged savings rate – faster population growth (especially relative to that abroad) means that some other investment that would otherwise occur will tend to be crowded out to make way for the infrastructure (private and public) needs of the increased population. This is not some central planner’s response, but how the market respond to the demand created by the additional population – it crowds out spending that is relatively more sensitive to changes in real interest and exchange rates. Typically, that will be business investment, especially that in the tradables sector.

In such a situation, the total capital stock will still be growing, perhaps quite materially, but the capital stock per capita, or per worker, will be growing less rapidly than it would otherwise have done…

After the period of very subdued population growth, New Zealand’s population growth accelerated rapidly from the early 1990s and, relative to other advanced economies, the pace remains strong. Public policy played a decisive part in the change – it is not just a matter of the free exercise of individual New Zealanders’ preference (either through having more children, or choosing to stay rather than leave New Zealand).

Immigration policy was markedly reshaped and liberalised in the late 1980s and early 1990s. In macroeconomic terms, the most important element of the change was the very substantial resulting increase in the net inflow of non-New Zealanders…

ScreenHunter_2142 Apr. 23 11.05

Taking the period as a whole, it is likely that the markedly increased net inflow of non-New Zealanders – a new wave entering each and every year – has extended and exaggerated the degree to which our average interest rates have exceeded those of other advanced economies. That, in turn, will have extended and exacerbated the persistent severe average overvaluation of the real exchange rate. In that sense, government policy has tended to directly, if inadvertently, stymie the rebalancing and adjustment that private citizens’ choices would otherwise have brought about.

Had that net outflow experienced in the 1970s and 1980s continued over the last two decades, the resources that had to be devoted to the housing (and the other population-driven components of the capital stock) demands of a fairly rapidly rising population would have been free for other uses. Other things equal, we might have expected to have seen rather lower real interest rates and a lower real exchange rate. The prospects for “capital deepening”, and for associated improvements in labour productivity and MFP, made possible by the other reforms and liberalisation of the late 80s and early 1990s, would have been materially enhanced.

If, say, the same ratio of total investment (gross investment to GDP) had occurred, it would have involved materially less house-building and less government infrastructure investment. On the other hand, private business investment, which is much more sensitive to expected economic returns, would have made up a much larger share of total investment. Within business investment it is likely that there would have been a stronger skew towards investment in the tradables sector to take advantage of the opportunities created by a lower exchange rate and the generally fairly good business regulatory environment…

Internationally, there is no evidence over the last century that countries with faster population growth, or greater inward migration, have achieved faster income or productivity growth than
other countries…

With modest savings, and a large net outflow of New Zealand citizens, it looks quite anomalous for policy to have been designed to induce large net inflows of people from other countries. I suspect it looks anomalous for good reason – given the specific circumstances of New Zealand, and the aspirations towards convergence, it was not very good policy…

Low population growth of the sort we saw in the late 1970s and 1980s would have provided a good platform to maximise the per capita income benefits of the wide-ranging reform programme, especially in a country with a modest savings rate. Instead, immigration policy reforms had the effect of sharply reaccelerating population growth, at just the time when the focus might more naturally have been on lifting per capita income rather than total GDP…

The indications that countries with faster population growth have in recent decades devoted fewer resources to non-housing investment and have seen less growth in multi-factor productivity are sobering. They provide another straw in the wind, suggesting caution about the merits of continuing large inward immigration to New Zealand for the time being…

Had the inflow of (well-chosen) non New Zealanders been kept to the aggregate levels seen in the 1980s, it is almost certain that over the last couple of decades New Zealand real interest rates would have been closer to those in the rest of the world, and the real exchange rate would have been materially lower. (House prices would have been lower, and) if real interest and exchange rates had been lower then per capita incomes would most likely have been materially higher…

Reddell’s paper follows analysis completed earlier this month by the New Zealand Treasury, which questioned the merits of high immigration, and recommended a reduced immigration intake in the event that the economy is unable to adequately cope with population pressures.

It also follows a 2011 report by New Zealand’s Savings Working Group, which also supported the notion that high levels of immigration tend to put upward pressure on inflation and interest rates, which can crowd-out productive sectors of the economy.

As argued many times on this blog, a big negative of high rates of immigration is that it places increasing pressure on the pre-existing (already strained) stock of infrastructure and housing, reducing productivity and living standards unless costly new investments are made, which in turn chokes-off other productive investment.

Indeed, as explained in a 2011 speech by the Reserve Bank of Australia’s Phil Lowe (summarised here), rapid population growth (immigration) since the mid-2000s has placed upward pressure on rents, as well as caused a big surge in utilities prices as the capacity of the system struggled to keep pace with the growing demand, requiring costly new investments.

In a similar vein, modelling by the Productivity Commission has found that immigration is neither beneficial for the economy or living standards, nor can it sustainably alleviate the impacts of an ageing population.

Any objective examination of the facts suggests that the case for a high level of immigration is anything but clear-cut and those advocating a strong migration program need to justify their position.

[email protected]



Unconventional Economist


  1. I hadn’t realised, until I read an article in “Investigate” Magazine (NZ) that NZ’s rate of immigration is higher per capita than the immigration in the UK and Europe that is causing such a backlash now.

    One difference in NZ is that less of the immigrants are outright trouble-makers and integration refusers. There are many high profile success stories among the immigrants that get the concept a good name. The high proportion of Asians of Chinese extraction, and Koreans, and other SE Asians, have generally resulted in low drains on welfare and law and order, in contrast to certain other immigrants that predominate in Europe.

    Of course NZ gets low quality immigrants as well, and the core problem everywhere this issue comes up, is the quality of the migrants and the screening processes, but it is politically incorrect to say so. Easier to write papers condemning “immigration”, period, as having been excessively costly.

    • I noted an article in “Quadrant” Magazine some years ago that suggested that the UN and other trans-national agencies responsible for processing refugees, deliberately do NOT select for Anglo countries, those who can speak English; or those who are Christians. Apparently it would be counter to the ideals of global egalitarianism to give Anglo countries anyone other than people who will impose the maximum possible burden and disruption.

    • Whilst the RBNZ was focusing on immigration in particular in the above, it’s a shame Mr Reddell didn’t touch on the NZs tax policy which favours malinvestment in property. This tax policy has also contributed to the current price level of housing. Excessive immigration is not the sole culprit as might be implied by Mr Riddell.

      • I do touch on those issues in my paper. My perspective on the tax issue is that the New Zealand tax system is no more favourable to housing than many/most others. If so, there is certainly a case for some changes – for example, taxing imputed rent on owner-occupied houses, and perhaps inflation-indexing the tax treatment of interest (including deductibility) – but that such changes would not materially improve NZ’s relative productivity position. Unlike this blog, I regard provisions allowing negative gearing of investment properties as a neutral and equitable treatment – putting rental housing on the same footing as other small business activities.

      • Hi Michael. Thanks for your response.

        If I could use Germany as a converse example of how capital is allocated differently due to their differing expectations surrounding capital growth, particularly around housing. Property valuations (as a multiple to generated income) are a little lower, and home ownership rates are considerably lower in Germany than NZ.This may be in part due to the to the tax policy surrounding capital growth in this area, along with more elastic supply responses. As a default, capital in Germany has been allocated elsewhere to more productive purposes, as you touched on in your paper, with respect to NZ.

        As we lack strong tax policy with regard to capital growth, helping to create an expectation of further capital growth in the future, surely there is some representation of this in our overvalued property market?

        Valuations of property in NZ have diverged from their earnings potential for some time now. It seems current valuations are not based on future earnings potential.

        In my view, more needs to done to lower expectations of capital growth in our property market, which would help allocate capital to more productive industries such as the tradables sector.

      • Michael Reddell responds with “..taxing imputed rent on owner-occupied houses..’ – No argument there! Of course it should, if we are going to encourage otherwise productive capital to be freed up from non-productive assets. But his comment on Negative Gearing being applicable to housing, as it is to other business activity misses three points (1) Housing is a necessity, shelter, not merely another business (2) if it is loss making – to attract the NG – it encourages a drain on productive national output and (3) the current system pits two distinct types of participants against each other in the one asset class with different sets of rules for each. Owner/occupiers and Small Business Owners ( I won’t call them investors, because most of them are just revenue/tax transformation businesses, not investors at all). Negative Gearing seeks to perpetuate the detrimental social/tax treatments that apply to residential property ownership – and as a start to reform, should be removed for all but first-build properties, which should be relinquished upon their subsequent sale.

      • Mike

        I have no problem at all with the idea that more should be done to lower expectations of capital growth in residential land prices. Changing migration policy would do that, but so would far-reaching reform of land use law to enable new houses to be built more easily. Without a land constraint, international experience shows that real house prices don’t rise for long.

        Cross-country comparisons of tax systems, and their effects, are hard. I guess my reading of the international evidence is that population pressures (none in Germany) and land use restrictions, especially when they interact, are more important influences on the housing market than differences in tax regimes. It is worth noting that when one looks at real residential investment as a share of GDP, the NZ numbers don’t look anomalous once one takes the fast rate of population growth into account.

        But as I said, I doubt anyone thinks the tax treatment of housing in NZ is optimal.

      • Michael Reddell,

        It is great to see you commenting here.

        “….population pressures (none in Germany) and land use restrictions, especially when they interact, are more important influences on the housing market than differences in tax regimes…..”

        What I keep saying on this site is that in the old days when Council Planners were there to help developers build new suburbs, not hinder them, everything else we are now agonising about tended to be beneficial.

        Immigration tended to be beneficial, because it created opportunities for more economies of scale in housing construction.

        Negative gearing was beneficial because it incentivised the provision of rental housing.

        FHB subsidies were beneficial because they had a net assistance effect on FHB’s instead of driving house prices up by more than the subsidy.

        Low interest rates stimulated the economy without causing a house price bubble.

        Demand side boosts do not need to force house prices up any more than they force up the price of anything else. It is all about elasticity of supply.

  2. “Any objective examination of the facts suggests that the case for a high level of immigration is anything but clear-cut and those advocating a strong migration program need to justify their position.”

    An objective examination of the facts suggests the people occupying the left are treasonous morons, the people occupying the right are treasonous morons, and real Australians need to get off their arse and get more vocal. And before the big brother PC stasi get “offended”, when I say “real” Australians, I mean people of any race that care about this country’s future.

    • “In the year through March, New Zealand gained a net 31,900 migrants, an 11-year high”

      31,900? Try 400,000+ extra residents in a year.
      Our ponzi is bigger than your ponzi 🙂

      • I chuckled at the detailed analysis “A net 400 people left for Australia in March, down from 600 in February..” So it’s not ‘us’ that’s bulking out your 400k….

    • Janet,
      You claimed “I chuckled at the detailed analysis ‘A net 400 people left for Australia in March, down from 600 in February..’ So it’s not ‘us’ that’s bulking out your 400k….”

      But what you would have been looking at is NZ departure card information, where those indicating that they are leaving ‘permanently’ indicate their citizenship.

      This fails to capture those who have used NZ as ‘a backdoor’ entry to Australia. They got NZ permission to reside in NZ, then once they had residency, they move to Australia. On the departure card, they still show their original citizenship.

      So I think you are ‘crowing too loudly’ at NZ having only a modest impact on Australian immigration. And btw, I agree with thrust of article. Anyone who has sat in Sydney traffic ‘knows’ that high levels of immigration do not lead to greater income per person. Higher immigration may lead to larger consumer markets for large corporations, but the benefit is essentially limited to those larger corporations, and do not flow to the individual citizen. In Australia’s case, with a lot of hard-currency income derived from extractive and rural industry exports, which are employers of small work forces, the more immigration, the more ‘mouths’ one needs to ‘spead’ the mining and rural benefits to.

      And the other point that the article missed was that Australian (and NZ) cities rank incredibly well in livability indexes every year. And not one city of over 5m residents ranks well (anywhere in the world) on such indexes, as life just gets harder to live in large cities, with slower transport times, more congestion, worse air quality etc etc. So just why have Australian politicians always pushed for a large immigration intake, when it is ‘known’ to result in a net worse situation for all the electorate? If political donations were outlawed, it would be one of the first areas where policy would change to reflect the views of the electorate, rather than the aspirations of the corporate donors.

  3. Some nicely veiled comments about race. However immigration is much more than dry economic arguments about wealth,housing and productivity.From the graph it looks like the locals are getting out and Asians are moving in. Given humanities wonderful record of different races all living harmoniously together, one has to wonder what the future holds for countries that embark on policies of mass immigration from societies and cultures fundamentally at odds from that of the host nation.
    Further, one has to ask who exactly signs off on these policies given that at no time have the populous ever been asked if they agreed to them or not.Both NZ and Australia are at risk of repeating the mistake of the European countries which implemented these policies and are now dealing with the entirely predictable social and economic problems.
    It would seem our ” leaders” have SFB.

    • GraemeHarrison

      I completely agree with your argument that the populus needs to be consulted about how populous they want their nation to become (note different spelling for Latin term for ‘the people’).

      In matters of health, all advanced OECD countries use evidence-based determinations to decide what medicines and treatments will be paid for by the public purse (excluding the USA as it does not yet have a public payer in health). So it just doesn’t matter if some researcher ‘claims’ that a particular treatment ‘ought’ to work – the government demands to see evidence that it (in real practice) does actually work (or indeed is the best possible course of action).

      But with immigration, we have theoreticians claiming that certain medieval belief systems ‘ought’ be compatible with modern democratic values… and it just turns out that such belief systems can be at complete odds with modern values. Some ‘holy books’ turn out to deal far less with ‘invisible friends’ (deities and their worship) and far more with how civil society ought be administered… and are in effect an anti-democracy manifesto… stipulating that society must be run as a theocracy, that barbaric rituals and punishments must be followed, and a whole plethora of values that are anathema to a modern humanist approach. And modern societies might be able to tolerate anti-humanist values, but it is hard to tolerate the fast growth of a significant minority who are ‘devoted’ to anti-democratic principles.

      Part of the ‘evidence-based’ analysis might be to measure the levels of violence in the source countries, and also to measure how well each migrant group actually ‘fits in’ in the host country.

      And if the government’s own security advisers recommend spending an extra billion or two on domestic spying, because of a few preaching hatred of Western values/peoples, then that cost should also be taken into consideration in deciding the best outcome regarding immigration sources. This type of hard-nosed factual analysis should be applied to all potential immigrant groups, to discern what works ‘in practice’.

  4. @ Graeme Harrison. It’s nice to know I’m not Robinson Crusoe. The Koran explicitly advocates theocracy so it is no good beating around the bush with political correctness and pretending there is such a thing as Islam Lite. Your comments are insightful. Check out the Q Society for considered analysis of Islam or if you haven’t already read Christopher Hitchens who sums this ideology up as well as anyone I have read.I get absolutely pissed off with claims that any discussion about these vital issues is racism and reserve the right to give offence to those with thin skins who claim offence when you offer a point of view.Section 18 c as it stands is rubbish and needs amendment.

    • Actually, my suggestion of evidence-based analysis for detailed immigration quotas is broader than religion. I think the analysis should be on ‘any’ variables that might make people better or worse immigrants. So, while religious/cultural is one variable, so is ethnic/nationality, as is age/skills etc.

      So, when I heard that a gang of at least five Tongan youth and young adults went into a NSW school ground a few years back, wielding machetes, looking for violence… my first thought was that a ‘feedback loop’ is missing to mediate such anti-societal values. So, if Tongan culture, once uprooted and transplanted to Western Sydney means that they no longer have control of their youth, then a feedback loop would dictate that the quota for Tongan migrants would be lowered for a few years. That way, their own elders could explain to the relevant youth why it was so bad to be promoting ethnic group violence, esp in a school setting.

      I prefer Dawkins to Hutchens on Islam, but I would point out that there are a number of diverse religious groups who have a fixed policy that prohibits their sons and daughters from marrying ‘ordinary Australians’. I think the prohibition against inter-marriage is most dangerous. In the Balkans, there were Christian and Muslim villages that were closely located, and interacted, but which had failed to inter-marry over a half-millennium, due to a religious prohibition. Then as soon as someone stirred up hatred of ‘the other’, they all knew who ‘the others’ were, and killed them. With all the Southern European migration to Australia post-WW2, within two generations, one can no longer work out who ‘the other’ is. But some of the newer (and older) groups who refuse to allow inter-marriage, are intent on remaining ‘other’ to Australian society.

      So each of the three major Abrahamic religions has sects which are avowed against integration. Examples include various Christian Brethren groups, the more orthodox Jewish groups, and Islam. So, rather than picking some religion, perhaps it is better to simply analyse and rank them, based on their policy particulars. So, if all potential migrants were asked “Are you entirely neutral on whether your son or daughter might marry any other Australian, irrespective of race, colour, creed (religion) etc?” then we could ‘rank’ migrant groups. And to prevent any group game-saying the right answer, but not practising such impartiality, one need only do an analysis of their group over time, to see if they are harmonising, and to the extent they wish to not harmonise, they (as then Australian citizens) could elect to so do, but the migration quota for others with their attributes would be diminished in proportion to the non-integration observed. That is an evidence-based approach – accepting that people may game-say the right answer, but that this is not the end of the story, as the levers that control quotas are thereby adjusted to stop a flood of other game-sayers following.

      And this type of debate should be allowed to continue. The law should be very strict on prohibiting anyone preaching or inducing violence. But Muslim-apologist Waheed Aly was way off the mark in a recent s18C story of his on The Guardian. He claimed that one could not apply normal Australian values to measure causing offence to someone/group, but that one needed to use the values of that group to see if one was causing offence. That is bending Western democratic values to accommodate Medieval values. That would prohibit Danish cartoons about the Prophet, any negative speech about the religion, or indeed, even mentioning his name in Australia! Australians do need to be mindful of Islamic values if they visit an Islamic country, and I agree with that. But similarly, if Muslims elect to live in a Western democracy, they must accept those Western democratic values, or elect to leave. On that point Waheed Aly got a huge ‘fail’ from me. In Europe, as staff in certain department stores will not handle non-Halal meat, all meat is now Halal. As Muslim children need to eat only Halal meat, all meat in some public school zones is now all Halal. Muscular Islam is forcing itself on various European countries, and from the French and German experience, it takes only a 3-5% Muslim minority for their to be a significant push for an ‘Islamic France’ or an ‘Islamic Germany’, with Sharia Law being introduced in stages. And the push-back by the non-Islamic majority in those countries is now very significant.

      The civil war in Islam has been running since the murder of the first Caliphs appointed after the Prophet’s death. But except for this 900 years of internecine violence, Islam can survive in Muslim-majority countries. But it always has violent explosions in non-Muslim-majority countries. The news of the last few days from CAR is that all Muslims there have been told to leave or be killed. CAR does not have ‘Western values’ against which Islam may have clashed. It is just ‘us vs them’ – believer vs infidel. On an evidence-based analysis, one would mark-down Islam for its failure to peacefully co-exist in sub-Saharan and sub-continent nations, where Western values were not an issue.

  5. David Barnes

    Graeme Harrison. Thank you for your comprehensive reply. Mine a bit shorter due to my medieval typing skills. I agree with your comments and for the need for evidence based policies on immigration.It is sound and ” common” sense to do more than emphasise numbers over type. But evidence and politics? For this reason I wouldn’t expect such an approach to be adopted.
    Further, I suspect current policies are being driven by utopian fantasists who would prefer to shut their eyes to the experience of countries that have tried the lets invite everybody here regardless approach.
    Since the invention of the telescope and microscope you would hope religion and particularly the fundamental variety could have been forced onto the back foot but alas there isn’t much evidence for that.
    These notions belong to the infancy of our species but they endure primarily I think because of a fear of death. As Hawking says religion is for people who are scared of the dark.
    Everywhere people face the dangers of delusion as Dawkins, Hitchens, Harris, Krauss and before them Russell and Einstein and many others have pointed out.