A guest blog by Australian economist Winton Bates

In a comment on Treasury’s Living Standards Framework (posted on July 13) Roger quoted my suggestion that it would be hard to find a better indicator of relative living
standards as perceived by New Zealanders and Australians than net emigration to Australia. I had argued on my blog that net emigration to Australia would be a reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards.

However, the reliability of net migration as a living standards indicator is not beyond
dispute. Claims have been made (in this paper, for example) that migration motivated by the prospect of increased income might not bring greater happiness. There does
not seem to be much evidence in support of such claims, but even if migration tends
to make people less happy that would not necessarily mean that decisions to migrate are mistaken. It is possible for migrants to decide that it is worthwhile to make the sacrifices associated with moving to unfamiliar surroundings in order to provide greater opportunities for their children.

Is there evidence that migration from New Zealand to Australia is actually motivated
predominantly by the prospect of achieving higher material living standards? The existence of a substantial income differential in Australia’s favour makes this the most obvious motivation, although other factors are also relevant. For example, Statistics NZ has estimated that since the devastating earthquake at Christchurch on 22 February, there have been 4,900 ‘permanent and long term’ (PLT) international departures from that city compared with 3,000 during the same period in 2010.

The chart below suggests that the variation from year to year in net PLT departures from New Zealand to Australia is related to the push factor of unfavourable perceptions of the New Zealand economy. The consumer confidence indexes used in the chart (from Roy Morgan Research) indicate respondents’ perceptions of current and future financial conditions of their families and nations. There has obviously been fairly close correspondence between the consumer confidence indexes for Australia and New Zealand over the past decade. The chart suggests that more New Zealanders have tended to migrate to Australia when economic prospects have generally been perceived to be dismal in New Zealand, even though this has coincided with periods when Australians have been similarly dismal about their own economic prospects.

Is there any evidence that New Zealanders achieve higher living standards when they
migrate to Australia? Perhaps the strongest evidence is that New Zealanders keep migrating to Australia and that the numbers departing usually far exceed the numbers returning. If the experience was generally an unhappy one, it would seem reasonable to expect that the message would get around among potential migrants and migration would decline.

Available evidence suggests that the migrants to Australia are generally fairly happy. One study found that the proportion of migrants from an English-speaking background who were happy or very happy was about the same as for Australian-born respondents. I know of only one survey which has focused on migration from New Zealand to Australia, that by Alison Green, Mary Power and Deannah Jang in 2005.  These authors surveyed New Zealand migrants, mainly living in southern Queensland, and a group of New Zealand residents (stayers) who had links to Australia (e.g. through visiting family or living there). As might be expected, the survey results suggest that the migrants were
less satisfied with life in New Zealand than the stayers. The level of satisfaction of migrants with life in Australia was much the same whether or not they were dissatisfied with life in New Zealand. The authors concluded that the migrants were generally highly satisfied with their decision to relocate.

I have yet to find a reason why net migration should not be viewed as a reliable indicator of relative living standards in Australia and New Zealand.



Respected Australian researcher Winton Bates has posted an interesting graphical investigation into the relationship between international measures of freedom and well-being.

His paper concludes that the evidence supports the view that the overall relationship between freedom and well-being is positive.  He further finds that increased feelings of individual agency do not seem to be associated with more selfish behaviour.  “If anything, the opposite seems to be the case.”

The chart below from his paper illustrates one of the associated relationships – the percentage who have low levels of life satisfaction is much higher among those who feel that they have little ‘freedom and control’ and the percentage with high levels of satisfaction is much higher among those who feel that they have a great deal of ‘freedom and control’.

The chart is based on data for about 80,000 respondents in 57 countries from the 2005 World Values Survey.


In May the Treasury published a paper Working Towards Higher Living Standards for New Zealanders.

It corresponds loosely with similar exercises by the OECD (on which I blogged recently) the IMF, the US Treasury and the Australian Treasury.

It’s not immediately obvious what’s new in the Treasury’s thinking.  The paper makes the conventional points that GDP as a measure of welfare has its limitations and that in framing policy, factors such as equity, environmental quality, the benefits of leisure and social cohesion need to be taken into account.  All these have been well-accepted principles of public policy in New Zealand for as long as I can remember.

Somewhat more prominence is given to individual rights and freedoms than in past Treasury writing.  However, the authors’ grasp of relevant concepts seems a little unsteady.  At one point the paper observes:

Some of the rights and freedoms that institutions should protect can be considered absolute and should not be traded off for another person’s wellbeing.  For example, the United Nation’s Universal Declaration of Human Rights (United Nations, 1948), to which New Zealand is a signatory, sets out rights that are intended to be alienable and indivisible.

But this is immediately followed by the claim that “the right to one’s property is not an absolute right.”  Presumably the authors have not stumbled on Article 17 of the declaration which reads:

(1) Everyone has the right to own property alone as well as in association with others.

(2) No one shall be arbitrarily deprived of his property.

Australian economist Winton Bates (who spent some time in the New Zealand Treasury) blogged on the paper here.  He makes a good point when he says:

… it would be hard to find a better indicator of relative living standards as perceived by New Zealanders and Australians than net emigration to Australia. Net emigration to Australia seems to me to be a highly reliable indicator because the preferences that people show about where they live must be heavily based on their assessments of living standards.

The relevance of this indicator was not considered in the paper.

At the launch Treasury was asked how its new framework differed from the OECD’s framework for its New Zealand reviews.  No differences were identified.  The operational significance of the new framework appeared to be a blank space.

Winton Bates observed that:

In launching the framework the Treasury Secretary, John Whitehead, certainly did not try to hide the fact that an important objective of the exercise, as he sees it, is to bring about a shift in the way NZ Treasury is perceived externally. He said:

“Misperceptions of the role Treasury has played since the 1980s have limited our ability to be persuasive when talking about what matters most for living standards.  Some have never got beyond believing that we are the root of all New Zealand’s economic evils.  Others see us as little more than the defenders of fiscal virtue …”

Winton commented:

I find that baffling. In the 1980s the NZ Treasury played an important role in saving that country from economic ruin. Why is that not more widely understood and appreciated in New Zealand?

I find that baffling too.  The Treasury seems to be at pains to tell the outside world that it is much nicer than people think.  As a demonstration of how nice it is, it will acknowledge that GDP is not a fully satisfactory welfare measure.  And because it is fundamentally nice it deserves a better hearing and more influence.

This seems a Quixotic hope.  If Treasury is doing its job properly it will not be loved – by interest groups seeking political favours, and by ministers and government departments whose spending plans are thwarted.  What the Treasury should aspire to is not love but respect – for the quality of its work on behalf of taxpayers, consumers and the community at large.  It has lost a good deal of respect on account of sub-standard work in recent years.  There is ground to be made up.





The OECD has recently come out with this survey of well-being indicators in OECD countries.

We all know that GDP/head isn’t everything.  But it’s amusing to see governments in countries that are economic losers wanting to focus on other elements of well-being. Sarkozy in France with his happiness trope, aided and abetted by Joseph Stiglitz, is a case in point. Unfortunately for people like Sarkozy, the happiness literature suggests that happiness seems to correlate quite closely with income and wealth!

I’m somewhat underwhelmed by the OECD’s metrics.   The criteria touch on the importance of individual liberty, but only somewhat tangentially.   Consultation is regarded as more important than consent or compensation in matters of taxation and regulatory takings. Induced state dependency is apparently OK if the dependents feel happy and secure in their dependency. (This notion comes through again in the ‘Work-life balance’ section where too much work is more likely to be a bad thing than too much leisure in terms of OECD norms.)

No distinction seems to be drawn between satisfaction through achievement and satisfaction from stupor-inducing drugs, dissolute living, or armchair-TV sloth. There is a ‘feel good’ aspect to the OECD’s approach.

Australia comes out on top on governance – because it has such a high voter turnout.  Is this convincing when voting is compulsory in Australia?

I doubt that public policy making can be improved by the new measures. The imperative for political parties is to get re-elected. Providing them with a richer set of measures than GDP is not going to alter this imperative. They are still going to be in the game of using other people’s money to buy votes from their target constituencies.

I would prefer to use market measures rather than surveys to assess the relative attractiveness of countries. For example, indicators of actual and suppressed demand for residency, country by country, should provide useful information. The United States is the No 1 country in the world for immigrants.  The net migration flow is from New Zealand to Australia. Not everyone finds the United States or Australia attractive but migration patterns tell us something about the preferences of people at large. 

Others have poked holes in the OECD’s analysis. A comment on the Marginal Revolution blog reads as follows:

I did a Principal Component Analysis on the OECD’s model. Maybe unsurprisingly in the SWPL-based weights in this model, the United States only comes out on top if I prefer:

–   high income
–   no community
–   bad education
–   bad environment
–   high governance
–   poor health
–   no life satisfaction
–   poor safety
–   poor work life balance

However, after having lived in and worked for many years in four other OECD countries, on three different continents, my experience has been exactly the opposite.  So I decided to come and live in the fifth country, the United States.

The amount of hidden bias in these international organisations like OECD, WHO and UN is truly astounding.

Australian economist (and author of several Business Roundtable studies) Winton Bates has also blogged on the OECD’s well-being indicators here.

I am not sure the OECD’s better life index is meant to be fun. But I have had some fun playing with it. The index is interactive. The fun comes from giving different weight to 11 different criteria (or topics as they are described by the OECD) and then observing how this affects rankings of well-being of OECD countries.

Bates plays this game and concludes that New Zealand comes out quite well on all rankings, although consistently after Australia.  Then he concludes:

Having had some fun, the more serious question that comes to mind is whether a focus on the OECD’s well-being indicators (and other similar constructions) is likely to distract political attention away from much-needed economic reforms to improve the economic strength of some economies. For example, if well-being indicators suggest that people in some lovely country (New Zealand comes to mind) tend to enjoy living standards substantially higher than other countries with comparable per capita GDP levels, there may be a tendency for the government of that country to become complacent about establishing conditions more favourable to further improvement of living standards.

How true! As one expatriate wrote to me recently about New Zealand:

Things are just too easy, too comfortable; we are too isolated and too willing to leave important things to the government, even when their lack of competence is well understood.

It seems to be a combination of laziness and an unpreparedness to think things through (even when they’re not working). Being first class is not the Kiwi way (we prefer to muddle through and complain).

We’re not on our own. The big government disaster that is California is losing businesses and people to more dynamic, low-tax states such as Texas. But hey!, life’s a beach in California and dynamic industries like those in Silicon Valley survive against the odds.  A crisis may not happen soon. As Adam Smith famously put it, “There’s a lot of ruin in a nation.”

The Treasury has been playing a similar game.  I will blog on that soon.



Government Size And Economic Growth

My reading of Treasury material in the last decade on whether high government spending harms economic growth is that size doesn’t matter in its view – the public sector can in principle spend taxpayers’ money as well as they can spend it themselves.

This view implicitly holds that the government is not constrained by problems of information and incentives.  Therefore if there is a problem it is only because not enough is being spent on ‘productive’ categories of spending and too much on ‘unproductive’ categories.  Treasury papers have also been at pains to make the trite observations that government spending can be too low as well as too high, and that the quality of spending matters, which of course it does.

Treasury has never engaged with a point the Business Roundtable has made countless times, namely that no OECD country with government spending over 40 percent of GDP has achieved sustained annual per capita GDP growth of 4 percent or more – the kind of growth rate necessary if New Zealand is to climb back to the top half of the OECD income range (the last Labour government’s goal) or to catch up to Australian income levels by 2025 (the current government’s goal).

This month the Treasury has released the paper Government and economic growth: Does size matter?  It is a slight advance on previous efforts.

In its two reports to date, the 2025 Taskforce has been in no doubt that the answer to this question is ‘yes’.  It said in its first report:

Our judgement, informed by a reading of the international historical experience, is that it would be almost impossible to achieve the sort of sustained transformation of our growth performance with the size of government at current levels (around 45 percent of GDP).

In its latest paper the Treasury still cannot bring itself to endorse this obvious conclusion.

The Treasury paper appears to be poorly researched.  For example, it does not cite a 2010 book by Andreas Bergh and Magnus Hendrekson on the very same topic, Government Size and Implications for Economic Growth.  The key conclusion of these authors is that in rich countries, a 10 percentage points increase in tax revenue as a share of GDP (say from 30 to 40 percent) leads to annual economic growth being between one half and one percentage point lower – a large reduction.

Even more curiously, the paper does not cite the study How Much Government: The Effects of High Government Spending on Economic Performance published by the Business Roundtable.  The author was Winton Bates, previously a senior official in the Australian Productivity Commission, a consultant at the New Zealand Treasury, and an adviser to the 2025 Taskforce.  Bates’ “conservative” estimate was that “a reduction in government spending from 40 to 30 percent of GDP could be expected to add about 0.5 percent to the rate of growth of GDP over about a decade.”

A subsequent Business Roundtable study by Bryce Wilkinson Restraining Leviathan, which had much to say on the subject, is also not cited.

Nor, when it comes to discussing public sector productivity, did the paper cite the Business Roundtable study overseen by former Treasury secretary Graham Scott, Productivity Performance of New Zealand Public Hospitals 1998/99 to 2005/06, authored by Mani Maniparathy.  It concluded, among other things, that overall productivity of personnel in public hospitals actually decreased by 8 percent in the five years to 2005/06.

The paper even fails to note research that the Treasury commissioned itself from Australian economist Ted Sieper which argued that the provision of public goods and a modest safety net  in New Zealand would require government spending of no more than 14-15 percent of GDP.

The following table from the 2025 Taskforce’s second report shows that this is not an unreasonable estimate.  Government spending today is as high as it is largely because of the level of government spending on ‘social assistance’.  Much of this spending presumes that governments can spend taxpayers’ money on health, education and welfare services better than individuals and households.   This presumption took over the Western world around the 1960s, as has been documented by Tanzi and Schuknecht. It is dubious to say the least.

Click to enlarge

Furthermore, the Treasury’s examination of the ways in which government spending may harm growth is much too narrow.  Winton Bates noted that “Big government adversely affects economic performance in many different ways”, and listed some as follows:

  • When the range of services provided by the government extends into areas where it has no competitive advantage the cost of services tends to increase.
  • High levels of government spending on goods and services (including public sector employment) often involve waste of resources.
  • Excessive regulation imposes large compliance costs on businesses and individuals.
  • Attempts to regulate the macro economy using counter-cyclical fiscal policies do not necessarily have intended effects and may lead to worse economic outcomes over the longer term.
  • Redistribution of income has adverse effects on the incentives of the intended beneficiaries, including possible changes in norms of behaviour leading to greater welfare dependency.
  • Increases in government spending tend to encourage wasteful lobbying activities by suggesting to interest groups that governments are likely to be responsive to their pressures.  As a result, much government spending – in areas such as health, education and retirement incomes – provides private goods for the benefit of middle-income families and is funded by the same people. Such government funding of private goods displaces more efficient private arrangements.
  • The deadweight costs involved in raising additional revenue rise more than proportionately as the amount of revenue increases. When account is taken of deadweight costs associated with both taxation and delivery of benefits it is likely that these costs are equivalent to more than half of each additional dollar of government spending in New Zealand.

The Treasury’s focus is almost exclusively on deadweight costs and public sector productivity.  The omission of any material discussion of rent-seeking, and public choice issues in general, is extremely important.  The Treasury’s general framework presumes that governments spend money in order to overcome ‘market failures’ and fails to consider the more plausible proposition that they spend money in order to get re-elected or to favour their most important constituencies.  There is no assessment of the level of spending that could be justified on genuine public interest grounds.  Basically, incentives in the government sector are not a problem, so the paper implicitly assumes.

Another serious weakness of the paper is that its benchmarks are OECD countries in their modern, typically big-government, form.  Nowhere is there any recognition of the current reality that the majority of the Western welfare states are in deep economic trouble and the model may well prove to definitively broken.  The 2025 Taskforce in its first report pointed out that the average OECD country:

… isn’t the only model.  In several high-performing Asian economies (Singapore, Hong Kong and Taiwan), themselves with diverse political systems and spending imperatives, total government spending as a share of GDP has consistently been less than 20 percent.

These high-income countries, and other emerging economies, are more likely to offer lessons for New Zealand than the ‘old’ OECD.

Another frame of reference (missing in the paper) would be the performance of today’s OECD countries when the share of government in their economies was much smaller. In the 1950s and 1960s, for example, many of these countries had government spending ratios of around 25 percent. They also enjoyed much faster growth rates.

There are sundry other problems with the paper.  In discussing the Baumol hypothesis for creep in the size of government, it fails to consider why it did not apply in local government for at least a century.  It accepts ‘merit goods’ as a justification for government spending whereas many economists have jettisoned this idea.

Needless to say, there are useful observations in the paper.

It is dismissive of the Wilkinson and Pickett inequality argument and is supportive of privatisation.  It also mentions the bias toward big government of MMP:

The larger the number of parties forming the government and the higher the frequency of elections, the stronger this tendency. It also seems more prevalent in cases of proportional rather than majority-based election systems (for example, see Persson and Tabellini, 1999, 2002).

Overall, my judgment is that the paper is an advance on earlier Treasury work in the area.  But that is faint praise. Both theory and evidence indicate that government spending around New Zealand’s level is seriously detrimental to growth.  I hope some New Zealand academics join in with critiques.

Can we catch Australia by 2025? Yes we can, but …

There have been the usual mixed bag of reactions to last week’s 2025 Taskforce report.

Some were facile to the point of being cringe-making, focusing not on the substance but on the presumed political acceptability of the report.

There were exceptions in the regular media, including an article by Rob Hosking in the National Business Review and editorials in the Dominion Post and The Listener.

Taskforce chair Don Brash has also written a good response in Muriel Newman’s electronic newsletter.  I liked the title, ‘Can we catch Australia?  Yes we can, but …’

As I understand it, David Farrar has largely given up on the MSM for serious public policy discussion and thinks the blogosphere is the place to be.

He may be right if this post by Winton Bates is any guide.

Bates is a highly respected Australian economist, formerly a First Assistant Commissioner in the Industries Assistance Commission (now the Productivity Commission), and author of several Business Roundtable research studies and a background paper for the Taskforce.

He begins with a discussion of economic geography explanations of economic under-performance, saying:

Since the Taskforce presented its first report last year, Philip McCann – an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy … [T]his is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success.

Bates initially asks, “How does the Taskforce respond?” and observes:

… it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

Then Bates adds his own observations:

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

The Sydney point – at around 4 million, Sydney’s population is similar to New Zealand’s – is particularly telling.  I find the McCann thesis (also adopted at least in part by the New Zealand Institute) unconvincing.

Bates goes on to discuss the ‘lucky country’ explanations for Australia’s performance:

The Taskforce pours cold water – correctly in my view – on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

It could be added that ‘Fortress Australia’ was also an under-performer prior to its mid-1980s economic reforms, despite its mineral endowments.

Finally, Bates gives his own view on why Australia has done better than New Zealand (even though post-reform New Zealand has kept pace with the average growth in per capita incomes in OECD member countries as a whole):

… I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth …  For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries – via impacts on the real exchange rate as well as tax rates …  It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

University of Canterbury economists Paul Walker (Anti-Dismal) and Eric Crampton (Offsetting Behaviour) also blogged on the 2025 Taskforce report

The full report is available here.