In the wake of yesterday’s news that New Zealand’s economy has entered a ‘technical recession’ in per capita terms, the OECD’s chief economist, Catherine L. Mann, gave a bizarre presentation arguing that while New Zealand’s record immigration program has lowered per capita GDP in the short-run, it would be great for the economy in the longer-term. From Interest.co.nz:
Immigration has caused GDP per capita to stay weak, which has affected our spending power today. But that same immigration will become an asset and help drive future growth – you’ve just got to harness it right…
Mann’s presentation to media in Wellington had just contained a load of warnings on why having a downward trend in GDP per capita was cause for concern…
The reason GDP per capita is low in New Zealand is down to the denominator. “Because of the immigration; the per-capita part”…
“It makes a difference today in terms of spending power, but if we think about the source of economic growth in a longer-term perspective, then the source of growth coming from immigration – educated workers supporting the capacity of the economy to grow in the longer term – this is clearly an asset for New Zealand going forward”…
“The fruits of all those people coming in are only going to gain over time as people enter their middle age earning years.”
In fact, New Zealand is experiencing benefits already. These people are generally skilled, higher-earning and working. They’re a factor in our lower unemployment rate, high participation rate and high employment rate.
We’re already seeing the benefits flow through to GDP. “It’s only when we look at GDP per capita that the denominator stands out”…
“For New Zealand, there’s an additional question mark over the projection period [2017-18] because…GDP per capita in the projection is actually lower than previous periods. Why is that? It’s because of immigration,” Mann said.
“Very large immigration is the denominator of GDP per capita.”
It might sound concerning, but there could be a happy ending.
Immigration means “great potential.” Potential going forward to increase the capacity of the economy to deliver on promises. That’s the good part. “But it might take some time.”
[Mann’s] argument was that per capita growth was just slowing “mechanically” because we’d acquired so many more people, and were forecast to keep on doing so. Of course, she said – advancing no story for why – this would weaken per capita GDP “arithmetically” in the short-term. But – and here I scurried to write down as much as possible her actual words – because we were taking in so many more people to work and study, who would add value, bring fresh ideas, and create new businesses we were creating the underpinnings of a longer-term stronger economy.
Apparently, high levels of immigration were now bad for per capita income in the short-term, but would be good in the long run. It was pretty much the opposite of the conventional New Zealand evidence – that demand effects exceed supply effects in the short-term. But set even that to one side for the moment…
Because, in fact, she reckoned she had evidence that we were already seeing significant benefits. And what form did these benefits take, in the assessment of the chief economist of one of the world’s premier international economic agencies? Why, it was wage increases… And what was her story to explain this? Why, it was the immigrants. We were bringing in highly skilled immigrants, who will be earning higher wages…
Many of you will no doubt be wondering about this alternative universe… Here’s an alternative – much better – measure of real wage inflation for New Zealand. It uses the private sector LCI (analytical unadjusted measure) adjusted for the Reserve Bank’s preferred measure of core inflation, the sectoral factor model. There is some short-term variability, so I’ve used annual average increases.
Not much sign of the recent high rates of wage inflation the OECD’s chief economist was touting. The QES – an actual compensation measure – is even weaker.
Of course, there isn’t much sign of the really highly-skilled migrants either. Mann seemed to have forgotten that the OECD skills data – which they use quite a bit in this report – shows that while New Zealand’s immigrants are relatively highly-skilled compared to migrants to other countries, they are on average less highly-skilled than the natives. There hasn’t been a sudden change in immigration policy in the last couple of years that has generated some step-change increase in the skill level of migrants.
A sceptic sitting near me whispered, “just drink the Kool-Aid Mike”.
I was puzzled by all this, and waited for the question time at the end of her presentation. I asked Mann quite what her optimistic take was based on – that while immigration would apparently be denting per capita GDP now, it would soon lead to an acceleration. After all, I noted, we’d had large immigration inflows for decades, and on the numbers she had presented we’d had the lowest productivity growth and lowest real per capita GDP of the countries she had shown. I wondered if she could explain her optimism in terms that took account of New Zealand’s experience over the previous 30 years or so (not my chosen period, but the one she was using in her own presentation).
It was a pretty astonishing response. She argued that this was an “immigration-driven economy”, and asserted that the skill characteristics of the immigrants were high, repeating that the evidence for this was the high real wage increases we’d seen in the last couple of years. Moreover, she asserted, the pre-recession period wasn’t that relevant because we had so many more immigrants now (and presumably could therefore expect much larger future real economic gains)…
[Mann] seemed to have a doctrine, and patched together something that superficially appeared to make the data fit the doctrine… I’ve seen quite a few leading international economic agency senior officials in my time. This was one of the worst performances from such a senior person I’ve ever seen… when she lapsed into advocacy and cheerleading for New Zealand’s immigration policy, without getting fully familiar with a credible story that fits the New Zealand data and experience, she probably did herself, and the cause, more harm than good.
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Of course, Mann also conveniently ignored other negative externalities associated with New Zealand’s mass immigration program that unambiguously lower living standards of incumbent residents. You know, basic stuff like:
not being able to afford a home in Auckland, where most migrants settle and the median dwelling price is more than $NZ1 million;
being stuck in traffic: Auckland’s traffic congestion has hit crisis levels as the city’s population has swelled; and
environmental degradation.
Basically, economists like Mann have an almost religious belief in never-ending population growth and will bend evidence to support their view, while completely disregarding the costs.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
