Why Do So Many Of Us Feel We Can't Get Ahead?

In recent months, we have seen a rash of strikes – teachers and nurses in particular, with other sectors suggesting that they may strike also unless the people who work in those sectors get a substantial wage or salary increase. Of course, people say, that’s what you’d expect when we have a Labour- New Zealand First Coalition Government. They’re a worker-friendly government, so naturally there’ll be more strikes.

I don’t doubt that there is some truth in that view. But it is also true that a great many people feel that their real incomes have barely increased at all in recent years. How can that be, given that the economy has been growing quite well recently?

Yes, the economy has been trucking along pretty well by the standards of other developed countries, leading one overseas observer to refer to New Zealand as a “rock-star economy”. And that growth has been kind to those who own shares in companies serving the local market, or who own property. Companies which supply goods and services to the local market tend to benefit when the overall economy grows; land-owners tend to benefit when more people want to buy homes or buildings.

But for other people, particularly wage and salary earners, aggregate growth has no particular advantage. What wage and salary earners are primarily interested in is not whether the total size of the economy is expanding but whether their own income is rising. And that depends not on total growth but on per person, or per capita, growth.

And per capita growth has been very low in New Zealand for a number of years.

The trite answer to why per capita growth has been very low is to say that growth in productivity, or output per person, has been low. Productivity growth has been slow compared with past decades in most developed countries recently, but New Zealand’s productivity growth has been low for many years, and is lower now than in almost any other developed country.

Once upon a time, there was an expectation that in developed economies output per person would increase by at least 1 per cent annually, sometimes by quite a bit more than 1 per cent annually. By contrast, over the last six years output per person in New Zealand has risen by a total of 1.5% - an annual rate of about 0.25% - while output per person actually fell over the 12 months to last June.

In many ways, that’s a puzzle. New Zealand ranks well on most measures of the ease of doing business; we have an established and largely corruption-free rule of law; we are open to the world and willing to adopt new technology; and we have a relatively well-educated population, though with a regrettable tail of demotivated and largely illiterate people. Being relatively poorer than most other developed countries now means that we have the advantage that we can in principle grow more quickly simply by copying the technological and institutional developments that other countries have shown to work.

Not long after the John Key-led National Government came to power in late 2008, I was asked to chair the so-called 2025 Taskforce to provide advice to the Government on how New Zealand’s per capita income could catch that in Australia by 2025. At that stage, Australian per capita income was about one-third higher than that in New Zealand. It still is. The Government took absolutely no notice of the recommendations in the two reports which the Taskforce prepared, and as far as we could see had no alternative plan to accelerate per capita growth.

The number of policy changes which would contribute to a faster rate of productivity growth is large. Three of my priorities would be reducing the corporate tax rate to encourage more investment (we now have one of the highest corporate tax rates in the world); stream-lining the process for approving foreign investment in New Zealand (we now have a foreign investment regime regarded as one of the most hostile in the developed world); and totally re-making the Resource Management Act to reduce the time, money and risk involved in getting approval to make a new investment of almost any kind.

I am also persuaded that one important way of increasing productivity growth, and so income per capita, would be a radical reduction in immigration. To those serving mainly the domestic market, a reduction in immigration seems daft – they gain from strong aggregate growth, which is of course quite different from strong per capita growth.

But a high rate of population growth, driven by a rate of inwards migration which is among the highest in the world relative to our small population, almost certainly reduces productivity growth. Why? Because in order to provide the houses, roads, schools and hospitals which a growing population requires, a great deal of investment must be made in what economists call “capital-widening”, rather than in the “capital-deepening” (more capital per worker) that can drive increased productivity.

And with a limited pool of domestic savings, this high need for capital-widening investment tends to mean that interest rates are a little higher here than those overseas – with the consequence that our exchange rate has a persistent tendency to be over-valued. In turn, this means that there is less investment in export-orientated sectors of the economy – the very sectors where productivity growth tends to be fastest.

So it may well be that a sharp reduction in the number of immigrants allowed into the country is the quickest way of getting a lower exchange rate, less investment in “capital widening” and more investment in the export-orientated sectors of the economy. That in turn could lead to a faster increase in productivity and higher per capita incomes for those who, understandably, feel that they’ve been left behind by the aggregate growth we’ve seen over the last decade or two.

Don Brash November 2018