The future of economic productivity inducing economic reform

Saul Eslake asked a bunch of people for comments on the recent Grattan Institute study of productivity and I sent him back a long email which I reproduce with some editing here. Nothing very surprising for people who are regular visitors here, but perhaps worth posting in case it provokes any thoughts.

• We’ve done a lot of micro-economic reform in basic goods and services and it’s driven productivity up.
• There’s only a bit more to do here.
• What we do to follow up on that brings in sectors like health, education, government services of various kinds.

 
These areas are different in a variety of ways:

• They are areas in which government is much more inextricably involved than they are in lots of the more easily ‘privatisable’ areas.
• They’re areas in which it’s not nearly as clear how to reform things (though there are admittedly some self evidently destructive things that one can reform – like egregious incentives to cost shift in health).
• They’re areas in which it is difficult and sometimes essentially impossible to measure productivity.
• Indeed, I was intrigued by a blog post I recently blogged about myself that many of these sectors are not just producers of ‘credence goods’ to a substantial extent, which is to say they produce goods which the customer may never know the quality of (even after consuming them). They are goods where the practitioners are feeling their way also. A teacher for instance often doesn’t know what works but plugs away doing the best they can.

• There’s a sense in the paper that ‘reform’ is fairly unproblematic, and I think the well of unproblematic problems is drying up. This amounts to more than saying that the low hanging fruit has been picked – though it has mostly been picked. It also means that further progress requires a lot more thought – not just action and bemoan  – or to change the metaphor the low hanging fruit has to a substantial extent been picked.
• That having been said there are many areas of potential micro-economic reform that have barely been spoken about.  To give just one example, our legal system is a ramshackle mess requiring people to bet their life savings on resolving disputes, many of which could be solved much more fairly, quickly and cheaply by a better designed system.  That would have huge benefits for many other areas of economic activity where a range of rigidities exist simply because the legal system is so dysfunctional.  Anyway I’ve set out some possible areas in the attached piece I did for Crikey a while back.

Regulatory reform is currently virtually useless. 

As someone steeped in this stuff from the World Bank said to me in a recent e-mail, the system may work to tackle bad regulation in maybe 2-3% of cases.  Otherwise it simply imposes an additional layer of regulation on the process of regulation making. It would be nice if this were not the case, as it’s hard to argue with the basic rationale of regulatory impact analysis, but it’s very hard to find evidence of it working.

Further given the importance of regulation, its significance as potentially one of the most efficient forms of action (not requiring the very costly collection and then allocation of funds), it is a strange state of affairs where we focus exclusively on trying to get our regulatory system in the best shape it can be in almost exclusively by deploying our ‘economic reform’ energies on reducing regulation – rather than optimising it (though of course in some areas optimising it will be reducing it.)

I’ll give two simple examples of what I mean.  When we regulated that people had to provide their banks with their TFN it was a sensible bit of regulation but badly implemented. It’s now quite a barrier to competition as you run around proving your ID whenever you change banks, making appointments and all the rest. Yet it’s pretty obvious that if you’ve done it once that’s enough. So banks should simply send on your ID documentation when you switch banks. Regulation should require them to do so.  If it did it could make a substantial improvement to productivity (both because the banks are the least cost means of transferring the ID and also because it would intensify competition). But you won’t find this regulatory tweak if you’re spending all your time trying to read all regulation against the grain trying to act as a check on over-regulation. I don’t recall any references to this kind of optimisation in the various documents produced by official regulation review bodies.

Another example is the regulation of financial advisors. We regulate them within an inch of their lives, and there’s disclosure regulation all over them, but no-one troubles them to (for instance) keep sample portfolios to demonstrate how capable or not at what they are advising others to do.

We think about improving regulation as deregulation rather than as optimising regulation.