Tuesday 6 March 2012

Grow for it!

New Zealand, population 15 million. That's the target for 2060 in a new NZIER working paper making the case for substantial New Zealand population growth.
A population target of 15 million by 2060 (2.5 times that now projected) is not only “feasible”, it is also likely to be sufficient to achieve the benefits from scale. It would allow four main cities with a population of three million or more each. This would foster competition within New Zealand to create conditions amenable to building local firms that can foot it internationally. It would bring New Zealand’s population into close proximity of the Netherlands (but still nowhere near the population density of that country).
There's an awfully good case to be made for growth. Ed Glaeser's recent book makes a compelling argument that ICT is far more a complement to than a substitute for density - it makes everything better, but it makes New York better faster than it improves New Zealand. Australia will continue to benefit from agglomeration effects; stagnation relative to Oz fuels out-migration and worsening outcomes. Bill Kaye-Blake says we're doing fine given our distance - and he's right.
This changes the tone of the policy recommendations. It isn’t about claiming that the institutions (the tax system, the science system, the education system) are messed up and need to be fixed. Instead, it is about recognising that we’re pushing this economy uphill and asking what tools might help.
I think increased immigration should be on the policy agenda as a tool that can help in that context.

New Zealand is shifting immigration priorities to de-emphasize the family route and pull in migrants from higher up the income ladder. TVHE reminds us of the harm we do to poor foreigners abroad by such moves; we also do harm to ourselves to the extent that lower skilled workers are complements to high skilled labour - I'd certainly appreciate lower-cost domestic help.

The best counterargument is that there are potential external costs from lower-skilled immigration if we expect that income correlates with intelligence, intelligence is heritable, and intelligence matters for the long-term quality of policy in a democratic system and for overall productivity. Here's Garett Jones on how IQ matters.

So it's not crazy on the face of it to try to encourage high skilled immigration to New Zealand if we care about outcomes here rather than overall global welfare (I care about the latter, but that's me). But I would note that income will be a poorer proxy for IQ or skill differences if we're looking at individuals in a pooled international cross-section than within countries. Moreover, there's no real "lump of migrants" beyond which we can't accept more people. Why not make it easier for high income, high skilled people to move here while keeping the current family immigration route?

Potential policy moves that encourage immigration, and especially higher-skilled immigration? First on my list would be immediate permanent residence for any foreign student completing a Bachelor's degree at one of the New Zealand universities. This will not only boost foreign student enrolments (helping to cross-subsidize domestic students) but also provide a nice selection mechanism for those who are most likely to really make a contribution. We could also draw in high skilled American migrants by not losing our comparative advantage in civil liberties and sane copyright legislation.

Complementary to increased immigration would be fixing local land use policy that forces up housing prices, but that's also well worth doing for its own sake.


  1. I would agree wholeheartedly with the suggestion that poor, unskilled immigrants should be allowed to immigrate, if the minimum wage were significantly reduced or abolished, and if social welfare entitlements were lower and/or much harder to access.

    As it stands, our high minimum wage would see a lot of these people living on welfare. While that would probably increase their standard of living relative to what it was pre-migration, it would effectively further reduce the standard of living of tax payers.


    1. If you take the moral position that the welfare of those within the borders currently matters more than the welfare of those currently outside the borders, then your position holds. Otherwise, the gains to the winners outweigh the losses to the losers.

      I'm not here saying fully open borders, though I can make that argument too. But immigration on the scale NZIER's proposing isn't that tough to integrate.

  2. "This would foster competition within New Zealand to create conditions amenable to building local firms that can foot it internationally."

    What? Is this some sort of infant industry type argument? Why do we need to "subsidise" firms via a population increase to make them competitive, they are either competitive on the world stage or they are not. If firms need a big market to, say, move down their AC curve then why must this be an internal market, why isn't the world market enough for them to take advantage of economies of scale?

    1. All you need are transactions costs in moving to export markets, Paul.

      It's a bit odd to see market thickening via relaxed regulations as a subsidy to firms.

      But I do take more seriously the agglomeration effects in large cities. Small is costly.

    2. But why would transaction costs to move into export markets depend on the size of the NZ population? How does a larger internal market lower transaction cost for export markets? And even if in the short run firms make losses, because of a small internal market, while they expand their level of production can't these losses be covered by, say, a venture capitalist or bank or other investors, who believe in the long profitability of the firm?

    3. Specify that moving to export markets has a reasonable fixed cost component and the result is fairly obvious.

      But think of it more in terms of agglomeration. When you have lots of small companies in complementary areas bundled into decent sized cities, cool stuff starts happening. I'll lend you my copy of Glaeser's book once I've finished reviewing it for the Press...

    4. "Specify that moving to export markets has a reasonable fixed cost component and the result is fairly obvious."

      I'm missing something here. If its a fixed cost in the normal sense of the word then its a production cost and not a transaction cost and if its a fixed transaction cost then as its fixed its independent of the size of the NZ population. Even if its a production cost then if firms need a big market to move down their AC curve then why must this be an internal market, why isn't the world market enough for them to take advantage of economies of scale? What difference does it make if I sell my output in Auckland or Sydney?

    5. Maybe I'm wrong here, but here's how I'm thinking of it.

      You run a firm up to its natural size for the local market. Expanding internationally is a risky move and has a lot of costs in figuring out the regs for accessing external markets, figuring out the transport logistics, all that stuff. If the natural size for your firm here is pretty small, you don't have an in-house legal team to sort this stuff out - you have to go and hire somebody to figure out how to export to some markets, work out how to do tariffs, standards compliance - all that crap. That kind of a fixed cost is more easily borne by a large than a small firm. That's all.

  3. No - I am absolutely against increased immigration.

    You need look no further than the UK and Europe to see the "benefits" that opening the floodgates to immigrants brings.

    Have those who favour massive immigration ever considered that many of those who come here may not have the same "warm fuzzy" values that they do? This is particularly the case with Muslims - they owe allegiance to Allah, not to a country.

    A number of Islamic leaders have **openly stated** that the purpose of Islamic immigration to Western countries is to undermine them and eventually take them over.
    They also use their very high birthrates towards the same end.

    If anyone can show me an example of a single country in the world in which the positives of massive Muslim immigration outweigh the negatives, I would be very surprised.

    1. NZIER's saying 2.5% per year. That's hardly floodgates.

      If I announced that the purpose of Canadian immigration to New Zealand (almost half our Department is Canadian or has Canadian ties) is to take over the country by taking over Treasury so we can get a captive market for maple syrup, that would hardly make it so.

  4. I was surprised that NZIER published that piece as it stood. In effect, it asserted that a higher population would much us better off, in per capita income terms, rather than demonstrated it. Very little of the agglomeration/increasing returns literature even attempts to grapple with the issue of cross-country income differences - the focus is usually on income differences between regions within countries.

    There is, for example,very little engagement with the question of whether the dramatic slowing in migration into the US post World War One did anything to impede the economic performance of the US economy - most would say not, and certainly Alexander Field's recent book highlights the very rapid TFP growth in the 1930s. Closer to home, the modelling work BERL did for the pro-migration Dept of Labour did not generate any productivity gains (output per hour) and the 2006 Australian Productivity COmmission report concluded that gains from migration appeared to flow exclusively to migrants (which is world welfare enhancing, but not an obvious reason for self-interested NZ voters to favour it).

    Papers like the NZIER one also fail to grapple with the question of where the new migrants would come from (and thus deal with a different question than one of whether we might be better off with 15m people if local birthrates rose). As NZ is no longer one of the highest income countries (unlike the 19th C when the opportutnities here were as good or better than anywhere) we will tend to have to attract people from countries poorer than us. As individuals many of them will be very good, but we still can't simply ignore the fact that the institutitonal quality of those countries is far inferior to that in NZ, and immigrants vote - will they all vote for NZ type institutions (rule of law etc) or will we tend to converge to institutions that impede higher per capita incomes.

    And all this is even before considering the savings/investment and real interest rate and real exchange rate dimensions of this question that I posed at the Treasury/RBNZ macroimbalances conference last year (and which the Savings Working Group's report also touched on).

    1. I'm coming at the question more from the agglomeration side. We just don't have the population to get any decent-sized metro areas.

      Post WW1 in the US, you had lots of farm boys leaving for the city as tractors started replacing horses - slacking off in foreign migration to cities was met with increased internal migration.

      I'll have to get the Field book; haven't read it.

      I think I gave a potential strategy on the "Where would the migrants come from" question. Giving an easy route: Student Visa --> Graduation --> Permanent Residence helps shift us towards higher ability migrants without having to clamp down on family visas.

      The voting question is a harder one - it does argue for mechanisms more like my "Get a degree in NZ, get permanent residence" route than opening up more family migration from Pacific Island countries. Or, for changing the electoral legislation so permanent residents don't get to vote (or, some new permanent residence category for new migrants identical to the current PR category but without voting rights).

  5. If you look at Christchurchs hill suburbs, you see that over the years they have "self organised" whereby a developer using other peoples money outbids a prospective buyer because he is going to add two more town houses where there was just a wide garden. People tell me the area up Taylors Mistake Road is "terrible" (for example). This would all play out well in economic terms however, so in terms of population growth being good and making us wealthy you would be correct.
    The benchmark home for a worker used to be the equivalent of the state house in Mandeville Street (complete with enough garden to feed a family) now it is the cheek by jowl "affordable" as in

    At the end of the day we will have a lot of poor people in boxes and a rich elite who enjoy a lifestyle that was available to all up until the 1980's.