The economics of immigration in NZ

by Virginia Larson / 31 January, 2017

New Zealand has an economics-based immigration programme; it’s not about delivering more colourful, culturally diverse communities, even if many of us like those results. It’s supposed to make us all wealthier. That’s where Wellington economist Michael Reddell focused his attention and found, on the contrary, that after 25 years of these large, “planned” inflows of immigrants, we’re no better off at all. He unpicks the numbers with Virginia Larson. 

Can our immigration policy be debated without descending into accusations of racism and jingoism?

I’d like to think so. Accusations of racism are mostly just cheap slogans. I heard [Immigration Minister] Michael Woodhouse at the National Party conference in July saying, “All the people who are opposed to immigration – it’s just racism and xenophobia.” I guess he was having a go at Winston Peters. But most of the discussion around my ideas has been on the economic analysis, without too much rancour. There might be some legitimate debates about what sort of people should be coming to New Zealand. But they’re not my issues.

 

Robert Muldoon once said, famously, that New Zealanders “wouldn’t know a deficit if they fell over it”. Is the government hiding or fudging some ulterior financial motive for why it’s holding fast to our immigration intake of 45,000-50,000 a year?

The fair point the National government makes is their policy is much the same as that of the previous government. The target level of non-citizen immigration has been pretty stable for about 15 years. The current total levels we’re seeing – around 70,000 a year – partly reflect the high levels of New Zealanders choosing not to go to Australia now, and those returning.

The question I’m trying to push the government on is whether that base level of 45,000-50,000 non-citizens each year is sensible? Are we – New Zealanders as a whole – getting any gains from this? I’ve done the OIAs, I’ve asked Treasury and MBIE for any work they’ve done in the last few years on the economic benefits of immigration. There’s nothing hidden. They just haven’t got any substantive analysis or evidence to support current policy.

Roger Partridge, chair of [business-funded economic think-tank] The New Zealand Initiative, wrote a column recently celebrating the great gains from immigration – claiming “countless studies” showed immigration increased the prosperity of the host nation. I responded, saying there was no such evidence in New Zealand. He conceded my point and said, “I never claimed there were any New Zealand studies… just overseas ones.”

 

Doesn’t the money these immigrants bring into the country make the economy look better?

It’s not so much that they bring money in. Some do, but most don’t bring much. It’s that they need somewhere to live, they need roads and shops. Their needs stimulate domestic economic activity. Consistent with this, Reserve Bank research over the years has always shown that when immigration numbers are up, interest rates also tend to rise because the increase in the population boosts spending by more – at least in the short-term – than it boosts the available resources in the economy. There’s a short-term sugar rush each time immigration surprises us on the upside.

 

So this is simply consumption-led growth?

It’s consumption and investment, but it’s not the sort of productive investment that builds export-oriented businesses. The key critical issue is, are we lifting GDP per capita? In fact, we’ve had the worst productivity performance of any advanced economy in the past 60 years.

This is not a judgment on how hard New Zealanders are working. But it seems to reflect the fact we don’t have the opportunities that would provide top-notch living standards in New Zealand for a large number of people. When you’re this remote, it’s difficult to build really top-notch businesses. Even if you build them – and we have some very smart, entrepreneurial people here – those businesses are going to be more valuable if you relocate them to Silicon Valley, or London or Hong Kong, because you’ll be nearer your markets, nearer your competitors, nearer the resources you need to make a complex, sophisticated business work.

 

You point out that New Zealand has one of the largest planned immigration programmes of any country in the world; that the US, for instance, issues green cards at about a third (per capita) of the rate we grant residence approvals. You’ve suggested we drop the annual intake to 10,000-15,000 people. So who’s currently benefiting from our very high rates of immigration? Who’s losing?

Exporters are losing. Even though kiwifruit growers or dairy farmers may get slightly cheaper labour, that just partly offsets the higher exchange rate; high rates of immigration tend to push up both interest rates and the exchange rate.

It’s the firms in the non-tradeable sectors who are benefiting most from mass immigration: firms servicing the domestic economy, doing things like developing fast-food franchises and building houses. There’s this really important distinction between the tradeable and non-tradeable sectors. The bit that’s competing with the rest of the world – the tradeable sector, the basis of our long-term prosperity – has been badly affected. We’ve skewed the whole economy towards meeting the domestic needs of the country. Per-capita output in the tradeables sector hasn’t increased for 15 years now.

Immigration drives up house prices. That benefits people holding onto land, and the generation about to sell their houses and retire from Auckland to Te Awamutu... But young people are losing because they can’t get into housing.

Of course, most immigrants are gaining, because if they weren’t they wouldn’t come here – or they’d go home again. What you can’t get directly from the national accounts data is the impact of the immigration policy on New Zealanders. So you have to approach the issue indirectly; I point out there’s just no evidence that in 25 years of this large-scale immigration policy, we’ve had faster per capita growth than other countries. So, if the immigrants are gaining, which they probably are, it suggests those ordinary Kiwis are probably losing. We’re richer than we were 25 years ago, but not as rich as we should be.

None of this is to criticise the immigrants. Far from it. They’re doing sensibly what our ancestors did, pursuing their best opportunities. My criticisms are of the policy-makers, not the immigrants.

If you cut back annual non-citizen immigration numbers to 10,000-15,000, individual employers mightn’t like it, but suddenly we wouldn’t need to devote so many resources to building houses and roads. Interest rates would be lower – and New Zealand interest rates have been far higher than other countries’ over the past 25 years. Lower interest rates would mean a lower exchange rate. The lower exchange rate would make it more economical for those export-oriented businesses to be based in New Zealand, creating jobs for the people displaced from building houses, roads etc. You’d still have the disadvantages of distance, but to some extent you’d compensate for that with the lower exchange rate.

Currently, we’re just bringing in people and, in effect, dumping them in Auckland. We don’t force them to stay there, of course, but if you’re a migrant from China or South Africa, you’re going to stay in Auckland because that’s where the Chinese and South African communities are concentrated.

Auckland, though, really doesn’t export stuff. The way countries – especially small countries – get rich is to export stuff. What you see in Auckland instead, besides the busy construction industry, is a proliferation of takeaway bars, cafes and $2 shops. And it’s there in the numbers: GDP per capita in Auckland is surprisingly low relative to the rest of the country.

In most countries, incomes in the biggest cities are far higher than those in the rest of the country. In Auckland, the margin is surprisingly small, and shrinking.

 

Aucklanders are certainly aware of the thousands of extra cars on the road. I’m not sure this is really boosting quality of life in the city.

Yes, you have to ask what the big gains are from this mass influx of people into Auckland. If the city’s GDP per capita growth was growing much faster than the rest of the country, you might say, hey, congestion is bad; it’s getting tough living here, but my income is growing rapidly. But incomes aren’t rising rapidly.

 

There’s also extra pollution and pressure on the land. Yet the Greens support our immigration programme?

It puzzles me why the Greens fall into line on immigration policies. They rightly highlight water pollution issues and carbon emissions – but don’t question pulling ever more people into New Zealand. To maintain our living standards with more and more people, we need to export more and more stuff: putting pressure on, for instance, extracting more milk from pollution-creating cows.

Is it because the Greens don’t want to be branded as racist?

Perhaps, but they’d surely be at less risk of this than other parties. I can see why Labour might be fearful of being accused of playing the Winston Peters card. But the Greens are so far on the left, worthy side of politics – they could easily argue that our environment is precious and we can’t afford to put more pressure on it through increased population. They could credibly say this without being branded as anti-Asian, xenophobic or whatever.

 

In a recent press release, BusinessNZ was again banging on about the lack of skilled workers. But is our immigration policy actually bringing in skilled workers? And doesn’t the current level of immigration suppress wages for everyone?

All too few of our migrants are really highly skilled. The numbers are clear on that. As for wages, if you’re in an occupation with a lot of migrants – a chef, or restaurant manager or a dairy farm worker – yes, your wages are suppressed because of the competition from those immigrant workers. People say Kiwis won’t do these jobs. At those wages, they won’t. But if you took away the immigration option, you’d force the wages higher and more New Zealanders would shift back into those sectors.

For the whole economy, in the long run [this immigration influx] is depressing GDP per capita. But in the short run, it probably boosts demand and employment, especially in the non-tradeable sectors.

One of our challenges is that if you were really energetic and entrepreneurial and wanted to migrate somewhere, you wouldn’t come to New Zealand. Much as it’s a reasonable place to do business, there just aren’t large markets here – compared with the US or even with Australia. For the foreseeable future, we’re going to have a natural resources-based economy. No more natural resources are being made, and we simply don’t need lots more people to make the most of them. Instead, we need a few really smart people applying their talents to those industries; improving productivity in agriculture, for instance. It’s all about playing to our strengths.

Tourism is not a high-value, high-productivity growth business, no matter how John Key and Steven Joyce talk it up. Export education is not our great saviour, either. It’s mostly centred at these second- or third-tier institutions, often offering low-quality tourism and business management courses – some of which seem to be little more than an immigration rort, a pathway to residence for people who just aren’t that highly skilled.

Few politicians seem to want to face up to the fact that New Zealand’s productivity growth is lousy. That’s what I find most depressing; this belief that if the politicians say loudly enough, “Success story, success story!” it will somehow change the reality. Maybe it helps [them] get re-elected next year, but surely what you want is a legacy of actual success for your grandchildren?

 

Some people say we’re selling off our houses and land as if they were export earnings?

Which is not necessarily a problem, as long as we’re not making it harder for New Zealanders to build and buy. It’s not that we’re short of land in New Zealand. Urban areas take up one per cent of the total land area; if we doubled that to two per cent and a bunch of foreigners wanted to buy houses, I’d have no objection to that. My objection is when the land-use system is so rigged, it’s very difficult for New Zealanders to get into houses in the first place.

 

At the moment, though, even if there aren’t many foreign buyers, when they’re willing to pay well over the CVs, those high prices at the margins have a disproportionate effect on prices generally, don’t they?

Yes, if you have a fixed supply of something then any boost to demand, even if it’s quite small, can have a big impact on price. And our laws mean it’s very hard to keep an ample supply of buildable land available to keep prices down.

 

Bill English, asked recently what advice he’d give a first-home buyer in Auckland, said “Patience.” But he’s in a government doing little to slow galloping house prices.

Maybe English is right, and those Auckland buyers should wait. But there’s no guarantee that prices will fall much from their current levels. I think he’s partly expecting that immigration numbers will turn around; that if the Australian economy picks up, you’ll once again see New Zealanders flocking there, and that will ease the pressure on house prices.

Do you think Australia’s economy will pick up?

I don’t expect a particularly strong rebound. There are still large risks around China and Europe.

 

Key and English have blamed Auckland Council for the housing bubble; they’ve tried to suggest the Reserve Bank has answers.

The government’s comments about the Reserve Bank seemed like pure political opportunism, shifting the headlines for a day or two. The Reserve Bank rightly says it can’t make any material difference to house prices, all it can do is make the banks a bit safer.

I have more sympathy with councils than I used to. When the Productivity Commission brought out their report last year, they highlighted that in most new subdivisions these days, there are covenants in place that you have to sign up to when you buy the land, and they restrict what you can do with it. In a sense, zoning and restrictions on density in individual suburbs are a lot like that; historically, people used local authorities as the equivalent of what’s now done by covenants. These people may be called Nimbyists, but they have an existing interest in their neighbourhoods and I think it’s quite reasonable for them to say, collectively, we want to remain a low-density, low-rise community. If that attitude really did crowd people out of buying houses, it would be an issue. But it needn’t do so.

I drove into Auckland from Kumeu recently and was quite struck by how much empty land there was only 20km from the CBD. There’s no real shortage of land, even in Auckland. But there are regulatory restrictions that stop the physical imprint of the city from growing; also planners and councillors who think they should tell people what sort of places they should live in. As long as you don’t restrict the ability of a city to grow out, you don’t need to think about overriding people’s existing rights and forcing a high-density suburb on them. The problems aren’t about citizens, but about bureaucrats obstructing choice.

 

So you subscribe to housing think-tank Demographia’s view that opening up land supply would solve a lot of problems? But aren’t Demographia’s shining examples, like Houston and Atlanta, luckier in terms of geography, having wide open spaces – not being squeezed onto an isthmus like Auckland?

It helps. But take a city like Hamilton. There’s no geographic constraint on growth there. Or Hastings, Palmerston North or Christchurch. They could grow out. Yet house price to [household] income ratios there are often about five times to one or even more. They should be three times, as they are in those US cities.

Houston is interesting case because it’s actually densifying towards its centre – but not because anyone’s forcing it to. Residents are deciding they can make a profit by selling their property to a developer who can throw up three townhouses on the site, and they can move to an outer suburb with more space. The roads and the infrastructure all work. In both Houston and Atlanta, the population has doubled in the past 30 years and real house prices haven’t increased at all.

Density in Auckland is quite high by New World [North America-Australasia] standards. And as cities get richer, the evidence is they tend to become less dense. Look at New York 100 years ago – it was full of tenements, with 10 people living to a room. As it got richer, people wanted more space. We hear this line that we’ve got to learn to live more on top of each other. Well, why? As we get richer, we want more space. A lot of people want a backyard for their kids.

At the moment, Auckland Council argues it has enough urban-zoned land for, say, the next 15 years, to which the response should be, but look at the land prices. They just aren’t falling. Clearly your rules are still facilitating a small group of people holding onto the land and releasing it when it suits them.

Not everything is straightforward. You have to sort out how to get transport and infrastructure costs allocated properly. In Houston, they use what are, in effect, differential rates; a big developer puts in its own infrastructure and levies differential rates on people in that community over the next 30 or 40 years.

 

But your first advice to government would be to lower immigration rates. Clearly, that could be done fairly quickly?

We really should fix up the land use rules. But even if we did, immigration numbers should be cut back. That can be done quickly – on Monday afternoon, after Cabinet. It just takes a decision by the Immigration Minister. It doesn’t need legislation, doesn’t need a debate in the House.

What’s your view on land taxes and capital gains taxes?

I think it’s mostly a spurious issue. I don’t believe capital gains taxes are good economics or make much difference. There’s no doubt that the combination of regulatory restrictions and [expanding] population is giving a windfall gain to existing property holders. But even then it’s overstated. If you own your house in One Tree Hill and it’s suddenly worth a million dollars, and it was worth $500,000 five years ago, you’re still living in the same house. The only way you’re better off is if you sell the house and move to Taihape. But you can’t because the jobs aren’t there and your friends aren’t there. Those kinds of gains are only of much value to investors.

Nowhere in the world have capital gains taxes solved these [housing bubble] problems. When land prices are going up so quickly, there’s still a lot of money on the table, even with the tax taken out. Also, no one is really willing to tax the capital gains of owner-occupiers. No one is willing to tax on the annual revaluation, only when you sell. In Australia, capital gains taxes have created this lock-in situation, where people hold onto property for as long as possible to avoid crystallising that capital gains tax liability.

I’m more sympathetic to land taxes. The practical problems are things like the political backlash from farmers. We had a land tax in New Zealand from around the time of the land wars to 1991. It was whittled away, so by the time it was abolished by David Caygill, the only things it applied to were forestry and urban commercial buildings.

It’s also easy for people to argue land taxes aren’t fair – asking pensioners to pay a large tax out of a low income, for instance. In any case, in many ways rates are a land tax, particularly in Auckland now because land is the biggest component of the property price. The real issue should be fixing the regulatory framework and, if you can’t do that, at least cut back the population pressure.

 

You say reducing immigration would immediately reduce the property prices. But what about the people who have just bought houses in Auckland at these high prices?

If you’re concerned about that, you could still pull back immigration to some extent. Instead of going to my 10,000-15,000 a year, start by reducing the target to 30,000. If house prices fell 10 to 20 per cent, it wouldn’t be the end of world for anyone. And then you might just let inflation reduce the real value of house prices over time.

As my old boss Arthur Grimes [former Reserve Bank chief economist, now senior fellow at Motu Research] was saying a few weeks ago, if you’re going to do serious reform, there are going to be some losers. But the sooner you do it, the fewer the losers. Arthur’s point was, even if house prices fell by 40 per cent, that would only unwind the increases of the past four years. Only a small minority of Aucklanders have bought their first house in the past four years. If the house was bought on an 80 per cent LVR mortgage and it fell 40 per cent in value, well, a couple in their 30s would be underwater, but they’d have 35 years of working life left to pay off the loan. The only reason anyone would be kicked out of their house is if they lost their job and couldn’t service the mortgage. The people who’d be badly affected by a 40 per cent drop are the very highly leveraged investors who bought in the past couple of years.

I object to the vilification of investors; they’re just pursing their own interests. But there’s no political sympathy for them and nor should there be. It’s like the days when we took off import licences or closed down the car assembly industry. People took a risk and lost money, but you could say they had it easy for decades. We wanted and needed a more efficient economy.

We need to focus much more on the people who are truly missing out [in housing] – the young, but disproportionately the poor young, the brown young. If you come from a wealthy Auckland family, you can still get into your first home because your parents will go guarantee for you. But if you’re the kid of some family with parents each working two jobs and struggling just to get by... they can’t do anything for the next generation. The current situation automatically skews things against the already disadvantaged.

 

Neither National nor Labour seem really to want to do anything about this.

They want different outcomes, but they don’t seem to want to do what’s required. That’s why neither Key nor Andrew Little would come anywhere near Arthur Grimes’ question about how far they want house prices to fall. There’s a sense in New Zealand that falling house prices is a national catastrophe. Perhaps, people look to the US experience in the past decade and say if house prices fall you have a major financial crisis, and we don’t want that here. No one has adequately done the job of saying we’re different from the US. Our banks are well capitalised. They’re not being forced by the government to lend to low-quality borrowers, which was a lot of what went wrong in the US.

Historically, Labour is the party of the working class. And it’s the working class who are the ones suffering most in the current situation. It should be an easy win for a political party, especially a broad-based, working class-oriented party to question the claims about the economic gains from immigration. If they could show there are real gains from immigration, there’d be a real tension: you could argue, on the one hand house prices are going up, but we’re getting these income gains. However, there’s just no evidence over 25 years – indeed, over the whole 70 years since World War II – that we’ve had gains for New Zealanders across the board from immigration.

I have people emailing from time to time, saying it’s all about John Key and Steven Joyce enriching their mates. I don’t think it’s anything to do with that. I think they genuinely believe the story they’re running, reinforced by the lines fed to them by the bureaucrats. But it’s easier for them to go with it, because the people who are most benefiting from the current situation are probably more likely to vote National than Labour.

 

We’re officially a bicultural country. But I don’t hear much noise from the Maori Party – from any Maori groups – about these high levels of immigration.

I think Maori are losers in two senses: the pressure on wages for relatively unskilled people – disproportionately Maori – and high housing costs. But also, the more people you bring in, particularly from non-Anglo backgrounds, well, they have no reason to respect the bicultural model. I don’t understand why the Maori Party raises no concerns about immigration levels. In a sense, what the high levels of immigration over decades have done is made Maori even more of a minority in their own land – on the periphery culturally and subordinated politically. The numerical imbalance between “the rest of us” and Maori shifts further and further each year.

 

You’ve spent more than 30 years doing economic analysis and policy advice, at the Reserve Bank, and as a special adviser at the Treasury. You’ve also been New Zealand’s representative on the board of the International Monetary Fund. Are your views out of step with the establishment: the Reserve Bank, Treasury, mainstream economists?

I think on housing my views are distinctly mainstream. Where I’m out of step is on immigration. There is a pretty strong pro-immigration consensus among economists. It isn’t universal, but it’s widespread. I hate the term “neoliberal establishment”, but economists are almost socialised to believe free trade is good (which it is), and almost by extension therefore that the free movement of people is good as well. Few have stopped long enough to step back and ask, where’s the evidence that people in their own countries – New Zealand in particular – are benefiting?

On housing, as I’ve said, I agree with Arthur Grimes that we need to see big falls in house prices. But Arthur argues that we should override some people’s interests, and just build, build, build, because he thinks we need lots more people coming in. He’s a believer in the Big Auckland strategy. I’m not.

Surprisingly, [Reserve Bank deputy governor] Grant Spencer in a recent speech openly questioned whether the immigration policy was working. And Treasury has raised some concerns about the working holiday programmes and whether we’re getting the right levels of skills coming in, so they’re uneasy there. But they’re still deep believers that we benefit from immigration as a whole.

I think there is some unease about the lack of evidence of benefits for New Zealand, but as a group New Zealand economists are pretty pro-immigration. It wasn’t always so. For decades after World War II, economists here were quite sceptical, typically arguing what I’m saying: more people made the economy bigger but didn’t make us individually any better off.

 

What would rally people and politicians?

The New Zealand environment seems ripe for someone who could galvanise these issues. I’ve tried to raise them on narrow technocratic-economic grounds, but you don’t really shift the public mood on those sorts of arguments. Unfortunately, it may take a populist movement. You could imagine someone galvanising Maori, the young, the poor.

I’d hate to see ugly sentiments – anti-Chinese, anti-Indian – be the basis for overdue policy change. But in a sense, the more you run with the current immigration policy, the more you risk creating the pre-conditions for an ugly populist movement.

 

This was published in the September 2016 issue of North & South.
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