The unproductive productivity debate

2012-12-03-productivity-must-be-somewhere-610As conversational topics go, productivity is hardly a barbecue stopper. Nevertheless, adopting policies that boost national productivity is really the only way for Australia to avoid a slide into national penury as our population ages and the Chinese mineral boom ends.

That’s why I was interested in an article on the subject by Peter van Onselen in The Australian a few days ago. Van Onselen raises numerous interesting points. However, I was rather puzzled by his concluding suggestion that there are grounds for optimism about the new Coalition government’s productivity reform prospects, unless it succumbs to “timidity” in which case “Abbott’s government will only be the lesser of evils” (presumably by comparison with Labor).

The most immediately obvious policy reform areas that could contribute to enhanced productivity are education and training; public infrastructure investment (especially road, rail, port and telecommunications); taxation policy; and workplace regulation.

On education and training, even van Onselen concedes that the Howard government’s record was fairly inglorious and that the early signs for the Abbott government are no more promising.

On infrastructure spending, Abbott’s electoral emphasis on “the roads of the 21st century” is matched by an equally clear refusal to countenance federal funding of rail or port infrastructure, despite the fact that both are arguably more important to productivity improvement than exorbitantly expensive tollways that just move peak hour traffic jams a few kilometres further up the road. As for telecommunications infrastructure, the jury is still out on whether the Coalition’s FTTN version of the National Broadband Network will be better for productivity than Labor’s painfully botched FTTH vision. Personally I’m cautiously optimistic that Malcolm and Ziggy will manage to conjure a workable and efficient solution.

On taxation policy, there is no way that Abbott could increase the GST rate or broaden its base during the current term of Parliament without dooming his government to an electoral defeat more certain and devastating than the one Julia Gillard inflicted on Labor. And I doubt that Abbott would have the courage/stupidity to go to an election at the end of his first term on a Howardian express policy of increasing and broadening the GST. Moreover, any other significant tax initiatives would inevitably result in his being hoist on his own petard by Bill Shorten continuously shouting “great big new tax!”.  Mind you, Rudd/Gillard’s record on tax reform wasn’t exactly a triumph, although they did manage to plug most of the more egregious middle-class welfare rorts of the Howard government.

The improbability of meaningful tax reform is more than a little unfortunate in my view. I am rather persuaded by the argument of University of Melbourne’s Professor John  Freebairn that productivity could be significantly boosted by increasing and broadening the GST and using the resulting extra revenue to abolish inefficient state taxes, reduce company tax and compensate lower income earners for the regressive effects.  However, while it might make a lot of policy sense, in the world of realpolitik it just ain’t going to happen.

The same goes for workplace regulation, where Abbott has repeatedly ruled out revisiting Work Choices, a point his chief consultant spin doctor Mark Textor emphatically underscored on ABC Lateline only a couple of nights ago. I also think that is a little unfortunate, because I strongly suspect that Australia’s abysmal productivity performance over the last few years is not entirely unrelated to the dog’s breakfast otherwise known as the Fair Work Act (although former Productivity Commission guru Dean Parham attributes the slump at least in part to the short-term effects of the investment phase of the minerals boom).((However, there are numerous useful measures that could be implemented short of reviving the much maligned individual Australian Workplace Agreements that are generally seen as the essence of Work Choices. For example: (1) exempting small business from the unfair dismissal provisions of FWA and substituting automatic employee entitlement  on termination to a fixed payment for each year of completed service; (2) simplifying and streamlining the EBA provisions of the Act to make the potentially large benefits and flexibility of an Enterprise Bargaining Agreement much more accessible and affordable for small business. ~ KP))

Whatever the cause/s, productivity under the Rudd/Gillard government averaged -0.7% per annum compared with a long-term average of +1.2%.  In a rational world we would begin focusing much more strongly on productivity-enhancing reform and stop being distracted by fourth-order issues like asylum seeker policy or whether Indonesia is or has any right to be offended by the fact that Australia spies on them rather more effectively than they spy on us. But that ain’t going to happen either.

Finally, for anyone actually interested in this topic, here are a couple of links to articles by John Quiggin rather persuasively arguing that there never really was a golden age of high productivity in Australia up to a decade or so ago, fuelled by the microeconomic reforms of the Hawke/Keating government.  Nevertheless, even if Quiggin is correct, that doesn’t deny the need to focus on productivity-enhancing reform. It just means we shouldn’t too readily embrace simplistic solutions (e.g. a mindless race to the bottom on workplace regulation – Australia will only prosper by working smarter not just cheaper).

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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stephen bartos
stephen bartos
8 years ago

Ken: good points to raise. Everyone these days quotes the Krugman quip on productivity, so I won’t, but it does matter for our future. To the ones you have here I would add:

innovation, the orphan child of the productivity debate. We can be doing much better on innovation by:
. introducing better intellectual property laws appropriate for this century;
. writing governance and other standards to encourage risk taking;
. more interchange between different sectors (public, private, academia, not for profit) to stimulate new ideas – compare with the US where this is much more common and innovation is enhanced as a result. it’s one of the areas where we can learn (I’m not recommending blindly following all US approaches)
. greater rewards for commercialisation of publicly funded research
. open access for all publicly funded research, whether done in research bodies or elsewhere.

taxpayer subsidies for owner-occupied housing, which encourage flow of funds to non-income-earning assets

Simon Musgrave
Simon Musgrave
8 years ago

How much is FWA or any labour market factor to blame for the recent performance?
Interesting numbers and analysis here, whihc suggests that the business community and the government are not asking the right questions, let alone having the right answers.

Marks
Marks
8 years ago

Reducing the number of Australia’s scientists as is happening is surely going to help productivity.

(I hope I don’t need to insert the /sarc tag here).

Tel
Tel
8 years ago
Reply to  Marks

Just a clarification, are you meaning government paid and authorised scientists, or do you mean in general people who apply the scientific method to discover new knowledge?

Marks
Marks
8 years ago
Reply to  Tel

Both.

Sancho
Sancho
8 years ago
Reply to  Marks

You’ll probably find Tel is referring to scientists who aren’t tainted by financial greed or ideological motives, such as those who work for oil companies and churches.

Tyler
Tyler
8 years ago

It was my understanding that the Work Choices period saw worse productivity performance than the FWA era to date

John Foster
John Foster
8 years ago

Ken, what does this mean: “Whatever the cause/s, productivity under the Rudd/Gillard government averaged -0.7% per annum compared with a long-term average of +1.2%.”? I guess you mean ‘productivity growth’, if so, what measure of productivity growth? If you mean labour productivity growth, 2011 and 2012 recorded the best figures since the 1990s. As I recall, the Rudd/Gillard Government, which you are trying to associate with productivity growth performance, was in power in those years! If you are using ‘multi-factor productivity growth’ produced by the ABS/Productivity Commission, their estimates are based upon an entirely shonky methodology using a raft of very unrealistic assumptions. We need to be very precise when writing about statistical constructions lsuch as ‘productivity’. I am afraid you have been very slack (not that you are alone in Australia in this regard!).

John Foster
John Foster
8 years ago
Reply to  Ken Parish

As I said in my previous post, estimates of MFP growth are dubious to say the least. Everyone quotes them with authority but hardly anyone looks at how they were constructed. You don’t have to be an economist to see that the methodology used is laughable. Also, the massive decline in capital productivity that is reported over the past two decades is equally misleading. I doubt that our businesses have been so terrible in making their capital investment decisions. There are two problems: first, the capital stock is notoriously difficult to measure, second, increases in the quality of goods and services tend not to get properly measured in GDP. In the ABS/Productivity Commission methodology these measurement problems feed directly into errors in calculating MFP growth.

In reality, the increases in labour productivity are largely due to capital-labour substitution and the re-employment of saved labour in the provision of new goods and services. This capital-labour substitution is mostly due to capital investment. Unfortunately, in the ABS/Productivity Commission methodology, this ‘evolutionary economic’ process is hidden and, thus, the role of capital investment is severely understated.

Think of it another way: does it make sense that a country that has not had a recession in two decades, and has been one of the top GDP growth countries over the last decade, would have very negative capital productivity growth and mostly negative MFP growth? Its all very damaging nonsense.

Furthermore, current business calls to have a policy that cuts wages to raise productivity are also nonsense. It is high wages in capital intensive industries that drive capital-labour substitution and resultant productivity growth. Again, this is a dynamic perspective, not the static one used by the ABS/Productivity Commission.

The bottom line is that Australia has been doing well on the productivity growth front in recent years by any international standards. It did less well in the late Howard years because Work Choices, in lowering wages, reduced the incentive for businesses to engage in productivity-improving capital-labour substitution.

Cameron Murray
8 years ago
Reply to  John Foster

+1

To point to one specific problem with the capital index measurement in MFP, there is the whole problem of measuring land by its price rather than quantity (since, you know, the land area in Australia has been roughly fixed for quite a while).

Here’s my take on that
http://www.macrobusiness.com.au/2012/06/twas-the-land-bubble-that-killed-productivity/

john walker
john walker
8 years ago

Just wondering, how much of a factor is the relative attractiveness of investing in high gear ‘investment’ property as apposed to investment in ongoing businesses? And how much of a factor is the investment choices of the big super industry, as to where they put their capital?

Crocodile Chuck
Crocodile Chuck
8 years ago

Isn’t Baumol’s Cost Disease part of the apparent problem?

As more and more of mining and mfg is automated, services compose a larger and larger share of the total economy-which are more difficult in applying technology to increase ‘productivity’.

e.g., the guy who cuts my hair takes the same amount of time as 25 years back.
http://en.wikipedia.org/wiki/Baumol%27s_cost_disease

John Foster
John Foster
8 years ago

The key point is that when an hour of labour is released because of some capital investment and this labour then does something else, such as hair-cutting, GDP rises. This raises overall labour productivity in the economy, even if the specific level of productivity in the service activity moved to is relatively low and constant.

However, it is a mistake to believe that all service sector activities are low productivity. Alan Hughes showed a few years ago that three of the top four productivity growth sectors in Australia were in services, mainly because they were capable of taking up technologies, particularly ICTs.

stephen bartos
stephen bartos
8 years ago
Reply to  John Foster

@ John Foster, can you provide a link to the Alan Hughes article? I am sure it is true, but the evidence on it would be good to see.

Tel
Tel
8 years ago
Reply to  John Foster

You also get division of labour even in hair cutting. With more competition in the industry, one shop decides to only do women’s hair, another decides to only do beards, another only does gay men wanting to lose body hair before Mardi Gras, and so it goes.

Of course, anti-discrimination might shut these dreadful bigoted bastards down, but absent government interference you still get efficiency gains, even without automation.

Tel
Tel
8 years ago

Abbott is right that the section of Parramatta Road through the Inner West is absolute crap — any time of the day or night.

He is wrong that Sydney has not been getting any infrastructure upgrades. The M7 and M2 linkage just recently got finished and it runs very nicely indeed. They seem to be bolloxing around on the M5 doing something, but it appears to be road work. Hopefully there’s a good reason for that and they get it sorted. At any rate, money is being spent on infrastructure, and we are getting results.

These are all toll roads, pushed by private investment, and Sydney has seen plenty of action. Abbott is putting his money on a safe bet, finishing the last piece in a big puzzle, following a design given to him by someone else. Also, it’s none of Abbott’s business… he has more important things like a country to run.

In comparison, the widening of the road over the Blue Mountains has been a government project going back nearly twenty years. I think they started that work when I first learned to drive, and now it’s about halfway done, or perhaps a bit more than half. No tolls, but a huge penalty on the time of the people who have to go through there (and penalty on the tax payers who don’t go that way).

There have also been quite a number of rail upgrades in Sydney, which I have already mentioned on this channel, but that’s another story.

conrad
conrad
8 years ago

“The most immediately obvious policy reform areas that could contribute to enhanced productivity are education and training”

No-one wants to fix it because no-one wants to stop the gaming. For example, if you’ve wondered why many university students can’t write even the simplest thing, it’s because in high school it’s common for someone else to write their essays and then they just memorize them (e.g., http://www.smh.com.au/national/education/by-rote-or-not-by-rote-that-is-the-question-for-english-hsc-20131013-2vgna.html). This is so common it’s not even questioned and you can have articles like the one linked above. In addition, when they used questions in one of the exams in Victoria once that couldn’t have been memorized, many “elite” schools kicked up such a fuss they simply backed down the next year. So everyone wants it. Similarly, if you’re wondering why they can’t do maths, it’s because many schools recommend students do vegetable maths (or whatever it’s called now) because TERs are not weighted for difficulty. So maths declines. Languages are another good one, where it’s entirely fine to study a second language that you actually already know.

I could go on and on here, but this sort of thing occurs across system, and it’s basically driven because people want it, which is why it is so hard to change politically and why the main things mentioned are generally only ever pay, funding and slightly more tractable issues. Be glad we have immigration if you want to increase productivity in educated people.

murph the surf.
murph the surf.
8 years ago
Reply to  conrad

What a glum assessment Conrad!
It may well be completely correct but it is a glum read all the same.

Cameron Murray
8 years ago

Does no one want to point out the AUD in this discussion? Labour productivity is basically a measure of capital in the economy, and we will only get large scale capital investment if demand for Australian produced goods increases – particularly in industries with large economies of scale.

john r walker
8 years ago

Could you explain to Me and Anne, what is “productivity” -as in what is being measured and how?

Paul Frijters
Paul Frijters
8 years ago

What John Foster and conrad said. Like them, I am not expecting a meaningful productivity agenda anytime soon.

john r walker
8 years ago
Reply to  Paul Frijters

“a meaningful productivity agenda” what would meaningful look like?