Home > Economics - General > The surge we didn’t have

The surge we didn’t have

November 10th, 2005

My piece in today’s Fin is about the productivity blip – I posted an extract a couple of days ago, and now you can read the whole thing, over the fold.

One of the enduring myths of the Australian public policy debate has been the claim that the micro-economic reforms of the 1980s and 1990s generated a surge of productivity growth. This claim is constantly used as a basis for suggesting that, whatever the problem, the answer is that more reform is needed.

Claims of a productivity surge were first generated in 1998 when the Australian Bureau of Statistics published experimental estimates of multifactor productivity growth (the term ‘multifactor’ refers to the fact that capital as well as labour inputs are taken into account) showing a stunning productivity growth rate of 2.4 per cent for the period after 1993-94, around double the historical average.

Not surprisingly, these estimates were greeted with enthusiasm. Commentators claimed that microeconomic reform was transforming Australia into a ‘New Economy’.

The initial ABS estimates were subsequently revised downward to yield a productivity growth rate of 1.8 per cent for the period 1993-94 to 1998-99, compared to a historical average rate of 1.2 per cent. This increase could have been explained as a once-off cyclical recovery from the very low productivity growth rates of the preceding years, encompassing the ‘recession we had to have’. However, such a prosaic explanation was rejected, particularly by the Productivity Commission, which staked its case for microeconomic reform on the ‘New Economy’ thesis.

Another possible explanation was that the increase in measured productivity reflected the increase in work pressure and work intensity that was obvious to all in the mid-1990s. This claim was also dismissed.

Although productivity growth slowed from 1998-99 onwards, the decline was explained away as the result of a variety of temporary factors, from drought to the disruptions associated with the introduction of the GST. These would, it was claimed, work themselves out over the course of a productivity cycle.

The latest National Accounts, released on Monday, should settle the question once and for all. ABS now identifies the period from 1998-99 to 2003-04 as a complete productivity cycle and reports that ‘During the most recent MFP growth cycle (1998-99 to 2003-04) MFP grew annually, on average, by 1.0% – slightly lower than the long term average between 1964-65 to 2003-04 of 1.2%.’ The acceleration of productivity growth in the mid-1990s was not sustained.

The results for 2004-05 are even worse. Productivity actually declined 1.7 percentage points. For the entire period since 1993-94, when the productivity surge supposedly began, the average rate of productivity growth has been 1.2 per cent, the same as for the entire period since 1965. The ‘productivity surge’ of the mid-1990s was, at best, a temporary blip.

It might be argued that the period since 1993-94 has at least seen a reversal of the declining productivity trend that had prevailed until then. But, as a plea in defence of micro-economic reform, this is rather like the man accused of killing his parents, who pleaded for leniency on the grounds that he was an orphan.

The low point for productivity growth was the period from 1984-5 to 1993-4, when micro-economic reform was well under way, and when substantial benefits were already being claimed. In 1989, Paul Keating observed that if you went into a pet shop, the parrots would be squawking about micro-economic reform, and claimed to be ‘bringing home the bacon’ from that process.

If productivity growth generated by microeconomic reform does not explain the generally strong performance of the economy over the past decade, what does explain it? Thanks to a combination of good luck and good management, Australia has not suffered a recession since 1991 (unlike New Zealand, where monetary policy was bungled at the time of the Asian crisis). The idea that, to enjoy strong growth, we should try to avoid recessions, may seem obvious, but that does not make it wrong.

In the last couple of years, another factor has come into play. Thanks to strong demand from China for mineral exports, our terms of trade have improved dramatically, to levels unparalleled since the commodity boom of the early 1970s. As a result, the value of output per worker has improved much more than physical productivity. This favourable shock may or may not persist, but either way it has nothing to do with microeconomic reform.

Particular instances of microeconomic reform should be assessed on their merits. The claim that microeconomic reform is a primary source of productivity growth has been tested empirically, and shown to be false.

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  1. Terje Petersen
    November 10th, 2005 at 21:17 | #1

    I think we should reduce the tax burden in order to reduce the tariff on inter-household trade, increase specialisation and lift productivity. However historically I don’t think we have every tried reducing the overall tax burden for any significant period of time.

  2. November 11th, 2005 at 10:14 | #2

    I think Australia’s good productivity performance during the nineties was due to a combination of factors:

    – info-tech applied to retail and warehouses
    – micro-eco labour markets
    – Chinese demand for minerals
    – sound fiscal and monetary policy

  3. Dogz
    November 11th, 2005 at 10:24 | #3

    As per my comment the other day, labour productivity has continued to grow dramatically, while capital productivity has declined. If this is, as I suspect, in large part due to the inefficient capital deployment generated by the housing boom, then your conclusion:

    “The claim that microeconomic reform is a primary source of productivity growth has been tested empirically, and shown to be false.”

    is surely false, or at least surely not supported by an argument that lumps labour and capital productivity growth together.

  4. Tim Dymond
    November 11th, 2005 at 11:17 | #4

    JQ says:

    ‘Another possible explanation was that the increase in measured productivity reflected the increase in work pressure and work intensity that was obvious to all in the mid-1990s.’

    If this is the source of labour productivity then an alternative term for micro-economic reform would have to be ‘squeeze them until the pips squeak’. How much micro-reform can a human body take?

  5. jquiggin
    November 11th, 2005 at 13:47 | #5

    Dogz, I didn’t choose MFP as the measure on which to focus, the Productivity Commission did. Looking at labour productivity doesn’t change the story significantly in any case. It grew even more rapidly back in the 60s – more capital deepening.

  6. Dogz
    November 11th, 2005 at 14:38 | #6

    The problem with these debates is the use of single statistics which are compared across decades? How does it make sense to pick one number, and then compare 2005 to 1965 using that number? The world was completely different then.

    Microeconomic reform increases competition between industries. That has to improve “productivity”, regardless of the impact on the chosen statistic. Of course, if your political predisposition is towards bloated, state-owned enterprises with big fat tariff protections, then you’ll find a way to use the statistics to build a case against microeconomic reform.

    I find this “throw-away” analyses that you do JQ entirely unconvincing, because they always look like they are performed at just a superficial enough level to support your political stance, not done with view to actually understanding the phenomenon in question.

  7. jquiggin
    November 11th, 2005 at 15:05 | #7

    Dogz, I suggest you read the papers on my website (search for “productivity”), the PC papers to which they refer, and my book Great Expectations, then rejoin the debate.

    As I said before, the point you raise in your first para should be directed to the PC, which set the terms of the debate, not to me.

  8. Ian Gould
    November 11th, 2005 at 16:06 | #8

    “Of course, if your political predisposition is towards bloated, state-owned enterprises with big fat tariff protections, then you’ll find a way to use the statistics to build a case against microeconomic reform.”

    And, of course, if your political idsposition is to attacking working conditions in the name of “reform” you’ll ignore any statistics that don;t assist your case.

    I defy you to find any general policy statements from John in favor of either state-owned enterprises or tariffs.

    While John opposes the sale of Telstra (I happen to disagree with him on that) if you read his comments without ideological blinkers you’ll see that that opposition is driven primarily by what he perceives as the underpricing of the asset, not any general prejudice in favor of state ownership.

    I know it gives you a warm inner glow to categorise everyone who dares to disagree with you as Stalinist puppy-rapers but some times it just isn;t so.

  9. dave
    November 11th, 2005 at 16:41 | #9

    LOL.

    Should “Stalinist Puppy Raper” be the left wing equivalent to RWDB? Throw in a Jack Strocchi “Wet” maybe and we have Wet Stalinist Puppy Raper – WSPR.

    Sorry for remaining off topic, John.

  10. Dogz
    November 11th, 2005 at 16:44 | #10

    “Dogz, I suggest you read the papers on my website (search for “productivityâ€?), the PC papers to which they refer, and my book Great Expectations, then rejoin the debate.”

    Is that just for me or must anyone who wishes to contribute the debate first clear those considerable hurdles?

    “As I said before, the point you raise in your first para should be directed to the PC, which set the terms of the debate, not to me.”

    Either you agree with the PC’s definition of “productivity” or you don’t. If you don’t, hiding behind “well they set the terms” doesn’t wash – you’re a Federation Fellow in Economics after all, you don’t need the PC to tell you how to define productivity.

    “And, of course, if your political idsposition is to attacking working conditions in the name of “reformâ€? you’ll ignore any statistics that don;t assist your case.”

    No, my political disposition is towards reality. There’s no way I’d be able to fly from Adelaide to Cairns today for $150 if not for microeconomic reform. Nor pay $50 per month for 20Mbit/s internet access. Nor pay $15,000 for a new car.

    “I know it gives you a warm inner glow to categorise everyone who dares to disagree with you as Stalinist puppy-rapers but some times it just isn;t so.”

    I know it gives _you_ a warm inner glow to categorise everyone who dares to disagree with you as “someone who gets a warm inner glow from categorising everyone who dares to disagree with them as Stalinist puppy-rapers” but some times it just isn’t so.

  11. Dogz
    November 11th, 2005 at 17:38 | #11

    I’ve read half-way through this one: http://www.uq.edu.au/economics/johnquiggin/JournalArticles97/Hilmer97.html
    so I guess under standing rules I get to make another comment.

    You make a lot of assertions in the (first half) of that paper about how competition won’t affect prices much. That seems plain wrong. Telecoms is a good example: I pay less than 2c per minute for telephone calls to the US (I pay essentially 0 for a VOIP call but that is a technology, not competition, driven change). There is just no way I’d be able to call internationally for 2c per minute if Telstra was still the monopoly provider. I also have 20Mbit/s broadband at home. That only happened because Telstra’s competitors got so jack of Telstra dragging its feed over upgrading broadband above 1.5Mb/s , they started installing their own DSLAMs into the exchanges (note – all Telstra had to do was flick a switch and we’d have had 8Mb/s from the get-go), . The mere existence of such competitors came through microeconomic reform.

    And you also assert that the dominant impact of microeconomic reform will be negative:

    “Furthermore, it is argued that the dominant flow-on effects of microeconomic reform will be negative, arising from the fact that at least some of the workers directly displaced by reform will be permanently displaced from the employed labour force.”

    Now, looking around (yes, I was alive in 1997), I’d say this is just wrong too.

    I can’t shake the feeling that you _want_ microeconomic reform to have failed, because your political persuasion lies with big state/union controlled monopolies. It certainly hasn’t succeeded everywhere, but most failures are due to the reforms not actually introducing the necessary competition (eg – the privatisation of South Australian electricity is a joke).

  12. Ian Gould
    November 11th, 2005 at 17:51 | #12

    “No, my political disposition is towards reality.”

    If you get to create a wildly inaccurate misrepresentation of other people’s views and then berate them for it, surely I can do likewise?

  13. Ian Gould
    November 11th, 2005 at 17:54 | #13

    “You make a lot of assertions in the (first half) of that paper about how competition won’t affect prices much. That seems plain wrong.”

    Do the words “average price level” mean anything to you?

    Would you like me to cherry-pick for you some of the areas where prices have increased significantly in the past decade?

  14. Dogz
    November 11th, 2005 at 18:47 | #14

    “Would you like me to cherry-pick for you some of the areas where prices have increased significantly in the past decade?”

    I am not cherry-picking, I am picking prices in areas that have been subjected to (successful) microeconomic reform: car industry, airline industry, telecomms, etc. I can’t think of an industry subjected to _real_ competition that has exhibited significant price increases not attributable to a large increase in input costs. But if you’ve got some examples Ian, I am all ears.

    You should read JQ’s papers on the subject if you think I am creating a “wildly inaccurate misrepresentation of his views”. Although of course you are free to berate me all you like. Just don’t question the constitution.

  15. jquiggin
    November 11th, 2005 at 18:52 | #15

    Dogz, you can’t pick out a single price that’s fallen and focus on that – other charges such as for connections have risen. You have to look at the average price for a bundle of services. That has fallen (as I note in the paper) but at the same rate as prices fell for the 70 years of so before deregulation when there was a public monopoly. Details are in the book and you can follow up at the ACCC.

    As for employment effects, most of the jobs lost were by full-time males, and despite a reasonably good macro situation, the FT employment rate for males remains very low by historical standards.

    Finally, looking at the productivity numbers that have actually been recorded by ABS it’s apparent that I overestimated the aggregate impact of reform.

    Anyway, keep reading and commenting and I’ll keep on responding.

  16. jquiggin
    November 11th, 2005 at 18:59 | #16

    As regards bias, I suggest you read the reports to which I am responding. They have an obvious bias in favour of reform, and, in responding, I am therefore taking a position of disbelieving any claim they make until it is proven, at least on the balance of probabilities.

  17. Dogz
    November 11th, 2005 at 19:13 | #17

    Connection fees and line rentals are the exceptions that prove the rule: they are the things over which Telstra still has a monopoly. I seriously doubt those aspects of telecomms subject to competition have fallen in price at the same rate prices fell before deregulation. In fact, if, as you say, the whole bundle has fallen at the same rate, then it must be the case that the components of telecomms subject to competition have fallen at a much faster rate. Again, treating the whole bundle together is a dubious use of an aggregate statistic that masks the underlying reality. And prices aside, there’s also the restraining effect of a monoploy provider – we’d still be on 1.5Mb/s broadband if Telstra had their way.

    Are you really claiming that overall the dominant flow-on effects of micro reform are negative?

  18. jquiggin
    November 11th, 2005 at 20:26 | #18

    Dogz, if you think computing a price bundle, rather than cherrypicking the prices that suit your argument, is a bad idea, you should avoid ever discussing GDP, the CPI and so on. And if you can convince the economics profession of the validity of your argument, you’ll be in line for the Nobel prize.

    Obviously, when you expose a monopoly to competition in some of its activities, and regulate aggregate returns the monopolist will raise prices in the monopoly areas and compete vigorously in other areas. If you can wish the monopoly out of existence that’s no problem. But Telstra doesn’t have a legal monopoly over connections, and hasn’t had one for a decade or more – it maintains an effective monopoly because this is a natural monopoly activity.

    Telstra’s restrictions on broadband were the strategic actions of a dominant firm – a monopolist would have no reason to hold back technical progress. You can read Peter Swan on this – noone would suspect him of being a closet socialist.

  19. Stephen L
    November 11th, 2005 at 21:51 | #19

    Dogz reference to being able to call the US for 2c a minute interests me. I have a friend who is an expatriate American, and last year he spent the night calling Ohio to get registered Democrats out to vote.

    I expressed astonishment at the cost. He said that it was cheaper for him to do this from Melbourne than it was for his friends living in safe states of the US to do the same thing to swing states.

    So much for the low cost of the US telecomunications system, one I imagine is far less given to monopolies than ours.

    But the real kicker was when his partner chimed in. It’s cheaper for her to call her parents in southern California from Melbourne than it was for her to call them from Northern California (where she lived previously), despite the array of telecommunications companies competing for business on such calls.

    No idea why this is the case, but it suggests to me that competition does not always deliver low prices, particularly in areas of high technology and substantial infrastructure.

  20. Paul
    November 12th, 2005 at 08:18 | #20

    Dogz says “I can’t think of an industry subjected to real competition that has exhibited significant price increases not attributable to a large increase in input costs.”

    Banking

  21. Dogz
    November 12th, 2005 at 08:35 | #21

    “Dogz, if you think computing a price bundle, rather than cherrypicking the prices that suit your argument, is a bad idea, you should avoid ever discussing GDP, the CPI and so on. And if you can convince the economics profession of the validity of your argument, you’ll be in line for the Nobel prize.”

    Oh come on, that’s a strawman. I am not saying all aggregate stats are useless, but if they mask an underlying phenomenon that you are interested in, you do need to look deeper. In the case of telecomms reform, the bundle price masks the very real gains in the areas subject to competition. If I take your approach of only looking at the aggregate, then I’ll conclude that the telecomms reforms are bad. But if you look underneath, you’ll concude that where real competition was introduced the reforms worked as intended. Hence, if anything, we need to be thinking about how to push those benefits into the other areas not yet subject to competition.

    And if pointing out that aggregate statistics can mask the underlying impact of microeconomic reforms is Nobel-prize-worthy, then perhaps economics deserves its “dismal science” moniker.

    Stephen L, your friend needs to get himself a calling card – eg http://www.callingcards.com. You don’t get 2c a minute through your standard long-distance provider. The calling card companies buy up wholesale long-distance “bandwidth” (for want of a better word – it is not internet bandwidth). The downside is that because the bandwidth is oversold, it can occasionally get congested, but redialing a couple of times usually gets you through.

  22. tirah jyoman
    November 13th, 2005 at 17:56 | #22

    ‘Thanks to a combination of good luck and good management, Australia has not suffered a recession since 1991 (unlike New Zealand, where monetary policy was bungled at the time of the Asian crisis).’

    It’s not as if this the Australian economy hasn’t been subject to adverse shocks since 1991. Could be that various reforms made the economy more resilient to adverse shocks? Shocks similar to the Asian crisis, world recession, drought and high oil prices led to macro unstability in the past.

  23. jquiggin
    November 13th, 2005 at 22:02 | #23

    tirah, if so why didn’t NZ, which had even more radical reforms, exhibit the same resilience?

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