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Parham vs Quiggin on productivity

November 14th, 2005

Dean Parham of the Productivity Commission has written to the Fin to criticise my piece on the (productivity) surge we didn’t have. His letter, with some responses, is over the fold.

Quiggin wrong on productivity

growthJohn Quiggin’s “The surge we didn’t have” (Opinion, November 10) adds another twist to his apparent determination to find no upside to Australia’s productivity performance or policy reforms.
He reverts to his earlier no-productivity-surge position by observing that productivity growth since 1993-94 has been no more than the long-term average.

I’m not sure what “reverts” means here, but at least we seem to be in agreement on the key point. Productivity growth since 1993-94 has been no more than the long-term average.

How can this be when the official Australian Bureau of Statistics estimates show two underlying productivity growth rates since 1993-94 – one between 1993-94 and 1998-99 that is almost a full percentage point above the long-term average (and if that is not a surge, what is?) and the other between 1998-99 and 2003-04 that is only slightly below the long-term average?

The relevant stats. The long-run average rate of multifactor productivity growth is 1.2 per cent, the rate between 1993-94 and 1998-99 was 2.0 per cent, and the rate from 1998-99 to 2003-04 was 1.0 per cent, for an average over the ten years between 1993-94 and 2003-04 of 1.5 per cent. That’s a net gain of 0.3 percentage points a year (well within the range of error indicated by the history of revisions to this series) or a cumulative impact of 3 percentage points. It only takes one bad year, like 2004-05 when productivity fell by 1.7 per cent (a shortfall of 2.9 percentage points) to wipe out the entire effect and that’s what happened. I can’t see

It could only be if you broke with established convention and included the decline from the 2003-04 peak over the past year. By definition, declines occur after peaks and it is way too early to say whether last year’s result has any structural significance. That result should be set aside.

I don’t agree with this convention. There is no economic basis for the notion of productivity cycles. In the present context the effect has been to allow the PC not to mention the slowdown in productivity growth after 1998-99 on the basis that the cycle wasn’t complete (there have been occasional mentions in newspaper articles). As a result, until last week, the debate was based on data that was seven years old. If the “convention” is accepted, last year’s productivity decline will be ignored until some time around 2010.

While he didn’t mention it, one of the developments that Quiggin identifies helps to explain why productivity went negative in the last year. In response to higher commodity prices, miners have done a lot of investing and hiring of labour in the exploration and development phase of production. But the expected increase in volumes has not come through in the data as yet. And so the short-term drop in mining productivity is likely to turn into a longer-term increase.

This is a fair point. So, maybe we will see some above-trend productivity growth in the future. The fact remains that, over the period from 1993-94 and 2004-05 there has been no extra growth, and performance in the first decade of micro-economic reform was well below the long-term average. I’m not sure, by the way, how much of the extra capital investment in mining made it into the 2004-05 data – many of the projects I’m aware are at a fairly early stage – but presumably Parham has some data on this. I’ll check.

It’s worth noting at this point that 18 months ago, Parham was pointing to different temporary factors, such as drought, and predicting a rapid resurgence of productivity growth. Although we haven’t yet had a complete recovery from drought, the big adverse impact was in 2002-03. The recovery from drought boosted productivity growth in 2003-04 and drought had little or no impact on growth rates in 2004-05.

Quiggin attributes any signs of strong performance since the early 1990s to the good luck of avoiding recessions (and, recently, higher commodity prices), rather than to policy reforms. Does he really believe that a more open, competitive, flexible and innovative micro-economy has not encouraged and enabled businesses to be more productive and has not assisted macro policy settings in ensuring a more stable macro-economy?

Some reforms undoubtedly have had this effect. But others, such as reliance on private infrastructure investment and the bungling of telecommunications policy have done the opposite. As regards the macro-economy, New Zealand reformed more vigorously than we did and it didn’t help them when Don Brash mismanaged the monetary policy response to the Asian crisis.

And where is the empirical testing that micro-economic reform is not a primary source of productivity growth?

It’s always hard to prove a negative, but it’s particularly hard when there is no extra productivity growth to explain.

Anyway, I expect the argument will continue for years to come, but as far as I’m concerned, the evidence is pretty conclusive. To repeat Productivity growth since 1993-94 has been no more than the long-term average. Having made this point yet again, I’ll probably leave it alone for a fair while, at least as far as the Fin is concerned. However, no doubt Dean and I will cross swords again at some point in the future.

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  1. conrad
    November 14th, 2005 at 11:46 | #1

    I wouldn’t buy the argument about recovering from a drought.

    If you try and farm a desert, then you will never recover properly from drought, particularily if the extremely low rainfall years are becoming more common thanks to global warming, as seems to be the case at least with areas affected by the El-Nino.

  2. Dogz
    November 14th, 2005 at 11:56 | #2

    Well, at least you responded to Parham.

    “the bungling of telecommunications policy”

    The only bungling I can see is not pushing competition far enough. I just received a nice letter from Telstra informing me that my line rental will increase. There’s no justification for that at all, except that they _can_ do it because I have no other provider to go to. Every area of telecomms subject to competition has seen a dramatic reduction in prices.

    “Productivity growth since 1993-94 has been no more than the long-term average.”

    The counterfactual matters here. What would the growth have been without reform? What if the reforms had been successfully applied across the board, generating real competition in all areas? You want to conclude that micro-reform has been unsuccessful, because you want all those full-time do-nothing jobs back (who knows why – I still remember the Telstra inspector that used to come out and stand around doing nothing for 2 hours when you got a new phone line connected. That’s where the full-time jobs come from).

    The onus is on you to demonstrate where effective competition has failed to reduce prices or generate other gains for the consumer. Otherwise, your arguments are simply a smokescreen, and it’s not doing your credibility any good at all.

  3. November 14th, 2005 at 12:49 | #3

    “It’s always hard to prove a negative, but it’s particularly hard when there is no extra productivity growth to explain.”

    A logical and empirical sacking. Ouch!

  4. Dogz
    November 14th, 2005 at 13:01 | #4

    “It’s always hard to prove a negative, but it’s particularly hard when there is no extra productivity growth to explain.”

    Another cleverly crafted response that conveniently ignores the question.

    What Parham asked was: “And where is the empirical testing that micro-economic reform is not a primary source of productivity growth?”, which can naturally be interpreted as asking for empirical tests of the impact on productivity of individual microeconomic reforms. Eg, if you take a service with a government-granted monopoly and open it up to competition, is that service more productively delivered? A negative result would be a service that is less productively delivered as a result of reform. I can think of specific examples of the latter, but they are rare. In the overwhelming majority of cases, competition improves productivity.

  5. Dave Ricardo
    November 14th, 2005 at 13:09 | #5

    ” “the bungling of telecommunications policyâ€?

    The only bungling I can see is not pushing competition far enough ”

    What about the bungling that saw half the country have both the Telstra and Optus HFC cables strung past their house while the other half had none?

  6. Terje Petersen
    November 14th, 2005 at 13:35 | #6

    QUOTE: What about the bungling that saw half the country have both the Telstra and Optus HFC cables strung past their house

    RESPONSE: There goes that natural monopoly argument. If you have two cables slung past your house then where is the tendancy toward monopoly?

  7. Razor
    November 14th, 2005 at 13:57 | #7

    Have I been banned?

  8. Razor
    November 14th, 2005 at 13:57 | #8

    Nope, must be a problem on the Bush Lied thread.

  9. Dogz
    November 14th, 2005 at 14:06 | #9

    “What about the bungling that saw half the country have both the Telstra and Optus HFC cables strung past their house while the other half had none?”

    At some level there is a natural monopoly, at least for wired access. There’s not a lot of point in having multiple providers stringing cables. So yeah, it was a screw-up.

    IMO, the best thing the govt can do with telecomms is to identify the smallest possible piece of infrastructure that cannot realistically be “unmonopolized” (eg, cables), and have a small government department oversee the tendering and monitoring of contracts to maintain that infrastructure, and to examine proposals for extending the infrastructure. The department itself should be overseen by a board consisting of telecomms execs and public representatives, who then report to the relevant minister. That way all stakeholders have input into how the monopoly infrastructure is run and developed, but you get the efficiency of having the private sector actually maintain the infrastructure. And you take away the power of a private player to extract monopoly rent – line rentals should be set so as to cover the maintenance and admin costs and no higher.

  10. jquiggin
    November 14th, 2005 at 14:08 | #10

    Razor, my host rejects some comments with key words relating to c*s*nos and also v**gra – there may be others. Only option is to resubmit with these words removed or edited.

  11. Ian Gould
    November 14th, 2005 at 16:27 | #11

    RESPONSE: There goes that natural monopoly argument. If you have two cables slung past your house then where is the tendancy toward monopoly?

    When one of the participants suffers heavy losses, withdraws more-or-less entirely from content provision over the cable network, sells substantial assets (its pay TV programming rights) to a company 50% owned by the incumbent and the “competing” companies appear to enter into a tacit agreement to refrain from building further competing infrastructure?

  12. November 14th, 2005 at 16:38 | #12

    So everybody agrees that we had above average growth in productivity between ’93 and ’98 and below average productivity growth between ’98 and now. Parham suggests that the latest numbers are too early to interpret and explain but that the earlier numbers can be explained by the micro-reforms of the 80s. I think he probably is expressing the majority view among economists.

    I can tentatively suggest a possible reason for below average productivity in the past five years — the highest taxing, highest spending, highest regulating government in Australia’s history.

    Also — the closer you are to worlds-best-practice, the less easy growth (through immitation) for economies to exploit. And perhaps international factors could play a part in the explaination.

  13. Homer Paxton
    November 14th, 2005 at 18:50 | #13

    JH, I am in great sympathy with you.

    do you know where one can get those figures from over the net on John Whitlam’s reign as PM

  14. tirah jyoman
    November 14th, 2005 at 19:13 | #14

    DP: While he didn’t mention it, one of the developments that Quiggin identifies helps to explain why productivity went negative in the last year. In response to higher commodity prices, miners have done a lot of investing and hiring of labour in the exploration and development phase of production. But the expected increase in volumes has not come through in the data as yet. And so the short-term drop in mining productivity is likely to turn into a longer-term increase.

    JQ: This is a fair point. So, maybe we will see some above-trend productivity growth in the future.

    Dean is probably being a bit optimistic here. Firstly, mining productivity has been falling for a few years now, and it’s not clear when this expected increase in volume will materialise. Further, suppose you have a permanent increase in the price of your output, and increase the variable inputs (capital and labour) while the other input (holes in the ground) remains fixed. Would the marginal product be lower? If this is a reasonable description of the mining industry, then perhaps we shouldn’t expect productivity in this industry to return to their late-1990s level.

    Secondly, productivity has been weaker (in many cases productivity fell, in other cases productivity growth eased) in all 12 market sector industries. Mining explains only a small part of the overall fall in productivity.

  15. jquiggin
    November 14th, 2005 at 19:26 | #15

    While parallel cable rollouts were the biggest single waste of money, the satellite rights auction fiasco was more amusing. In an excess of competitive zeal, the government didn’t require a deposit, or evidence of capacity to pay, with the result that the top 20 or so bids came from an arbitrageur, Albert Hadid, and $2 companies he had established. He pushed his luck too far, and ultimately got wiped out in dealings with a US group, but the development of this technology was set back years.

    Stewart Fist discusses this.

    http://www.pc.gov.au/inquiry/broadcst/subs/sub018.pdf

    Then there was the shutdown of the first analog network and its expensive and technically unnecessary replacement by CDMA (all in the interests of competition), the partial privatisation of Telstra, the HDTV farce and many more.

  16. tirah jyoman
    November 14th, 2005 at 19:28 | #16

    John,

    I was going to reply to the previous post, but this is probably just as good a place. You say: ‘As regards the macro-economy, New Zealand reformed more vigorously than we did and it didn’t help them when Don Brash mismanaged the monetary policy response to the Asian crisis.’

    Firstly, NZ’s macro performance (in terms of economic growth, employment and inflation) has been pretty impressive, the Brash-induced recession notwithstanding. And the NZ recession of 1998 was caused by a monetary policy mistake – you say so yourself.

    Secondly, NZ’s productivity growth rate has been lower than Australia’s. But this is mainly because NZ hasn’t had much contribution from capital deepening. According to a bunch of NZ Treasury papers, their reform process has made labour much cheaper relative to capital, which may explain a weaker rate of productivity growth. But in terms of social wellfare, surely strong employment growth, particularly among the disadvantaged groups in South Auckland, isn’t a bad outcome.

  17. November 14th, 2005 at 19:45 | #17

    Homer — I’m not sure where other people get their stats… I use commonwealth budget data (www.budget.gov.au) and adjust for the changes of the new tax system (TNTS).

  18. Terje Petersen
    November 14th, 2005 at 20:59 | #18

    QUOTE: Then there was the shutdown of the first analog network and its expensive and technically unnecessary replacement by CDMA (all in the interests of competition), the partial privatisation of Telstra, the HDTV farce and many more.

    RESPONSE: Just for the record this was ALP policy inherited by the current Howard government. Mandating technologies was something that the Liberals were dead against when they were in opposition. Then when they got into government they mandated that Telstra make ISDN available in every corner of the nation for data. Now if that was not a duplication of infastructure then blow me down. At the time I worked in Network Provisioning at Optus and the senior marketing managers were quite adamant that we would never sell basic rate ISDN or push ISDN as a data product. It was just too 1970s and better technologies were on the horizon. I am sure that many at Telstra must have felt the same way.

    It should also be noted that the deployment of CDMA was wasteful mainly in terms of handsets. As I understand it most of the core network infastructure was merely switched off, an upgrade card was added and it was switched back on to become CDMA. It was not like the whole network deployment had to be done again. Does anybody have any upgrade cost figures?

    Later the coalition also mandated the technology for digital TV.

  19. Terje Petersen
    November 14th, 2005 at 21:03 | #19

    QUOTE: I can tentatively suggest a possible reason for below average productivity in the past five years—the highest taxing, highest spending, highest regulating government in Australia’s history.

    RESPONSE: John Humphreys is correct in both relative and absolute terms. Howard is a socialist who mouths free market rhetoric. He seems to believe free trade is something that happens between nations, never to be promoted between Australian households. The trade tariff wedge between Australian households would easily proximate 100% even before red tape is considered.

  20. Harry Clarke
    November 14th, 2005 at 21:14 | #20

    Its interesting how the views pan out as a function of politics. The bureaucrats who sell microeconomic reform don’t stint themselves on proclaiming its virtues, the socially concerned (like JQ) who seek to emphasise investment in education and in computer technology as determinants of prosperity see the claimed benefits of reform as a charade. Finally, Libertarians like John Humphreys support the micro-reform story but say its benefits are dimmed by the oppressive tax system.

    I think the evidence backs JQ. In particular the widespread increased use of computers is more closely associated with productivity growth on a disaggregated industry basis than micro reform. And John H those people out there earning middle incomes probably have reasonably strong income effects from any tax rises. They will work harder (as I do) in response to mounting tax bills. In a prosperous society income ceffects become increasingly strong.

  21. Terje Petersen
    November 14th, 2005 at 21:19 | #21

    QUOTE: They will work harder (as I do) in response to mounting tax bills.

    RESPONSE: Harder is not more productively. That is the stupidity of the taxes makes us work harder school of thought. If I tie one arm behind your back life will also be harder but you will not be more productive. Your output will not rise. Your well being will not improve.

    Personally I have droped my output back to four days a week because my EMTR is over 70%. 30 cents in the dollar is simply not worth the sacrifice of time with the family and garden.

  22. jquiggin
    November 14th, 2005 at 21:23 | #22

    Terje, telecomms bungling was certainly bipartisan. I remember having a stoush with Michael Lee over cable duplication.

    Thanks for the CDMA info – I wasn’t aware of that.

  23. Ernestine Gross
    November 15th, 2005 at 00:29 | #23

    While I agree that aggregates do not reveal the whole story, I would argue it is a little late now to complain about their limitations in assessing the benefits or otherwise of micro-economic reform as practised. I recall ‘micro-economic reform’ was motivated by macro-economic objectives. The link to ‘micro-economics’ was provided by a method known to me as ‘hand-waving’. Since then the changes in the institutional environment (a version of micro-economic reform) have continued to be justified in terms of “the economyâ€?, as represented by typical variables in macro-economic models.

    On the face of it John Quiggin’s point stands because if the aggregate measure of productivity gain was considered relevant in the earlier period then it should be considered relevant now. Whether the measure makes sense in term of the objectives of individuals in the economy – ie the micro-economic perspective – is another question.

    Any ‘productivity measure’ which results in an ‘improvement in productivity’ when there is clear evidence that there has been wastage of resources (eg doubling up on cabling) is meaningless because it contradicts the basic idea of ‘efficient resource allocation’ as conveyed in the phrase ‘waste not want not’. I am unable to find on the web the equations underlying the productivity measures used by the ABS and I can’t be sure from the verbal description exactly what data enters the calculations and how. However, it seems that prices are included. If this is indeed so, then it is difficult to distinguish between changes in productivity and changes in wealth distributions.

    If aggregates don’t matter, then I would suggest an unbiased study can’t ignore HIH. I have yet to find anybody who has used HIH to illustrate the success of increased competition.

    A recent South Australian Industrial Relations Commission Wage case is interesting. It seems the argument for the existence of a productivity improvement was lost on the quality of the expert evidence provided on behalf of the union. http://www.austlii.edu.au/cgi-bin/disp.pl/au/cases/sa/SAIRComm/2005/26.html?query=%5e+parity+arbitration+pay+case+%20south+australia+2004#fnB21

  24. November 15th, 2005 at 02:10 | #24

    Harry: Its interesting how the views pan out as a function of politics.

    Or perhaps politics is a function of views.

    By calling Q “socially concerned” as a defining feature, you seem to imply that the Parhams and Humphreys’ of the world aren’t. The good old “you’re evil” line of argument. Yawn.

    If I wrote that Quiggin was defined by being a socialist but my defining feature was that I actually cared about people then you would see the obvious bias.

    We don’t have to philosophise about the impact of taxes on the economy — we can look at evidence. That evidence suggests a negative relationship. Taxes and regulation turn otherwise profitable businesses into unprofitable businesses — decreasing competition and innovation.

  25. Harry Clarke
    November 15th, 2005 at 06:49 | #25

    Terje,

    Point taking about working harder. Productivity should be delinked from notions of increased effort. But data will reveal output/worker increasing if people work harder and inputs not adjusted. Indeed your reasoning (and JHs) are subject to the same issue. You can’t say that if taxes make you work less hard that your productivity has declined but you will observe output/worker increasing unless again input measures are adjusted.

    By the way, why the need for the word ‘stupidity’ in your remarks. Take a valium.

  26. Dogz
    November 15th, 2005 at 11:23 | #26

    Of course aggregate statistics can be useful. I never claimed otherwise. And I would be the last person to defend poor policy in the name of microeconomic reform. However, the intent of micoreconomic reform is to improve productivity through competition, and where competition has successfully been introduced (not botched), the overwhelming evidence is that it works. The problem with the agggregate stats is they mask the effect of the successful reforms.

    JQ’s original argument was:

    “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.”

    This statement is misleading, if not downright contradictory. If instances of microeconomic reform should be assessed on their merits, then drawing conclusions about the impact of microeconomic reform on productivity from aggregate statistics is doing exactly the opposite. Such conclusions are at best irrelevant when one knows that the aggregate lumps together the impact of successful reforms with botched ones.

    All JQ has done in response to this point is assume that I don’t know what I am talking about, erect and demolish strawmen, and refer me to his papers and book. Well, I don’t have the book but the papers didn’t say anything to change my view.

    JQ, you’re not that smart; some of us could give you quite a hiding on the mathematical front. So instead of lauding it over me with your academic arrogance, why don’t you climb down from your ivory tower and address the point.

  27. Dogz
    November 15th, 2005 at 11:24 | #27

    Of course aggregate statistics can be useful. I never claimed otherwise. And I would be the last person to defend poor policy in the name of microeconomic reform. However, the intent of micoreconomic reform is to improve productivity through competition, and where competition has successfully been introduced (not botched), the overwhelming evidence is that it works. The problem with the agggregate stats is they mask the effect of the successful reforms.

    JQ’s original argument was:

    “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.�

    This statement is misleading, if not downright contradictory. If instances of microeconomic reform should be assessed on their merits, then drawing conclusions about the impact of microeconomic reform on productivity from aggregate statistics is doing exactly the opposite. Such conclusions are at best irrelevant when one knows that the aggregate lumps together the impact of successful reforms with botched ones.

    All JQ has done in response to this point is assume that I don’t know what I am talking about, erect and demolish strawmen, and refer me to his papers and book. Well, I don’t have the book but the papers didn’t say anything to change my view.

    JQ, you’re not that smart; some of us could give you quite a hiding on the mathematical front. So instead of lauding it over me with your academic arrogance, why don’t you climb down from your ivory tower and address the point.

  28. Terje Petersen
    November 15th, 2005 at 11:32 | #28

    QUOTE: Point taking about working harder. Productivity should be delinked from notions of increased effort. But data will reveal output/worker increasing if people work harder and inputs not adjusted. Indeed your reasoning (and JHs) are subject to the same issue. You can’t say that if taxes make you work less hard that your productivity has declined but you will observe output/worker increasing unless again input measures are adjusted.

    RESPONSE: Yes but the benefits equation does change the inputs and the nature of specialisation. If I earn more (tax cut) I will outsource more things to specialists like cooking meals, doing tax returns, mowing lawns, investment management, car repairs, home renovations etc, etc.

    What you seem to miss is that taxes are a trade barrier between households. The effect the terms of trade and in so doing they reallocate our efforts. I do childcare in part because my EMTR says that the terms of trade between me and a child care worker are shocking. Despite the fact that I could easily earn many multiples of what a child care worker earns in wage terms. Taxes misallocate our time so that we no longer work according to our comparative advantage. And this loss of specialisation is a major disruption to the inputs. I may actually work harder with a higher tax rate but I don’t work on the same things or in the same manner.

    QUOTE: By the way, why the need for the word ‘stupidity’ in your remarks. Take a valium.

    RESPONSE: My apology. It was typed in haste and I retract it.

  29. jquiggin
    November 15th, 2005 at 11:40 | #29

    I don’t think anyone would disagree with the proposition that successful microeconomic reforms have been beneficial and botched ones have not. This is true by definition. So if that’s your point, we don’t disagree.

    Similarly when some prices fall and others rise, the price reductions benefit consumers and the increases hurt them. Again, I agree there have been price reductions and they have been beneficial (if you disregard the offsetting price increases).

    The main point of dispute, though, has been whether, aggregating over the successes and failures, there has been a substantial positive net impact.

    I think it would be reasonable to count only the successful reforms if you could show that ex ante you had warned of the likely failure of those that were botched. I issued such warnings in a number of cases, such as cable duplication, but did not get much support from advocates of microeconomic reform at the time. Perhaps you can point to some examples?

  30. Dogz
    November 15th, 2005 at 12:19 | #30

    “I think it would be reasonable to count only the successful reforms if you could show that ex ante you had warned of the likely failure of those that were botched. I issued such warnings in a number of cases, such as cable duplication, but did not get much support from advocates of microeconomic reform at the time. Perhaps you can point to some examples?”

    Well, not being a public figure such as yourself, I cannot point to any public warnings of my own. But I have made such observations in private, at the time of the so-called “reforms”. I too thought the double cable rollout was stupid as it was happening (a duopoly does not competition make, so what were we going to do, roll out 8 sets of cables?). I thought the electricity privatisation was just dumb, and said so at the time (where’s the competition?). In SA it had to be done to get the huge debt hangover from the State Bank collapse off the books, but it hasn’t benefited consumers at all. I wrote to Allston at the time of the digital TV legislation, lambasting the lack of consumer benefits. More recently, I wrote to Howard concerning the cross-media ownership changes, making the point that in return for the Packer/Murdoch gifts he should at least do something for the consumer like issue more free-to-air and satellite licenses or relax the rules on “datacasting”.

    The simple litmus test I use is whether the reform will introduce real competition or not. Creating a dupoloy does not induce much competition. Applying that litmus test to the microeconmic reforms predicts pretty well those that were botched.

    On a more general note, does anyone believe that you get real competitiion with anything less than 6 players in the same market? You only have to look at the major banks, colesworth, the oil companies and the original Telstra/Optus dupoloy (to name but a few) to see that it takes a lot more than two to tango when it comes to competition. One of the reasons I have often felt that prices are so much cheaper in the US (in real terms) is that in most markets they have way more players and hence genuine competition.

    One of the problems you probably face, JQ, in getting your viewpoint taken seriously is that you are advocating a socialist agenda, so people are (rightly or wrongly) suspicious of your motivation in pointing out problems with microeconmic reforms. Your commentary on the subject suggests that instead of geniunely trying to help the reform process, you would rather derail the whole thing in preference for the status quo of large, inefficient union/state controlled enterprises.

  31. Dogz
    November 15th, 2005 at 12:21 | #31

    test

  32. derrida derider
    November 15th, 2005 at 12:46 | #32

    “In response to higher commodity prices, miners have done a lot of investing and hiring of labour in the exploration and development phase of production.”

    But is this quantitatively likely to drive down aggregate labour productivity? Surely mining, being capital intensive, is just not a big enough employer to drive australi’s aggregate labour productivity up or down much.

  33. Terje Petersen
    November 15th, 2005 at 13:00 | #33

    QUOTE: I think it would be reasonable to count only the successful reforms if you could show that ex ante you had warned of the likely failure of those that were botched. I issued such warnings in a number of cases, such as cable duplication, but did not get much support from advocates of microeconomic reform at the time. Perhaps you can point to some examples?

    RESPONSE: Out of interest which successful microeconomic reforms did you advocate in advance?

    And price risers may hurt some consumers but they may be a great improvement. If a free market in higher education caused the cost to rise and the result was better pay for teachures, and better quality teachers would that be a bad thing? You can’t look just at prices.

    For libertarians its hard to even point at productivity. If more freedom means we all go to the beach more and work less I would not judge that a bad thing. Liberty is an end not just a means. In essence liberty has utility above and beyond the other outcomes it delivers.

    My feeling has always been that Socialists tend to treat humans as a means, not an ends. A socialist policy maker may see that less people drink alcohol as a result of an alcohol tax policy and then judge the policy against that ends (ie their own), ignoring the loss of liberty and the fact that the people may not be really happy about the high cost of booze even if they are more “productive”.

    Having said that I don’t think Howard has delivered in the freedom stakes. He is just different to the ALP not necessarily better. He is still the custodian of big interfereing government.

  34. jquiggin
    November 15th, 2005 at 13:04 | #34

    RESPONSE: Out of interest which successful microeconomic reforms did you advocate in advance?

    GST including exemption for food was one, where I think I actually had some influence, and I was certainly well in advance.

    http://www.uq.edu.au/economics/johnquiggin/news94/Fightback9212.html

  35. Homer Paxton
    November 15th, 2005 at 13:20 | #35

    exempting food was reform?

    I bet those on higher incomes who gain the most from it thank you from the bottom of their stomachs.

  36. Terje Petersen
    November 15th, 2005 at 13:35 | #36

    QUOTE: GST including exemption for food was one, where I think I actually had some influence, and I was certainly well in advance.

    RESPONSE: That was like a reform of something that was not even policy yet. I must complement you on being so very quick off the mark. I do wonder though why people think that retailers of food should pay less tax than other businesses and whether they should pay less company tax on the same basis. But I suppose we shouldn’t really digress.

  37. harry clarke
    November 15th, 2005 at 14:14 | #37

    John Humphries, I described JQ as ‘socially concerned’ as he is. I assume your perspective is one of extreme individualism with minimal role for the state in redistribution and achieving social justice — in fact only to abolish all laws seeking such measures through state-based interventions. I didn’t see any implication that you are evil and did not suggest so.

    However I don’t see Australian capitalism or the Australian worker population facing stagnation and destruction as a consequence of taxes. What I see is a society with reasonably high standards of social justice, reasonable egalitarianism and a reasonably good environment that is well-endowed with the public goods I value. I also observe widespread material prosperity.

    Having lived in Asian cities for a decade and put up with high pollution, horribly congested roads, few city parks, no local public libraries, lousy education with few opportunities for those who are poor I see virtue in having a significant role for government and for paying my taxes.

    Not opposed to debating an efficiency-based argument for tax cuts but can’t accept what I see as the libertarian fantasy that all our ills are related to the size of the state and the tax base.

  38. conrad
    November 15th, 2005 at 14:40 | #38

    “The main point of dispute, though, has been whether, aggregating over the successes and failures, there has been a substantial positive net impact.”

    Exactly the same sort of pragmatic analysis could be made against publically funded transport infrastructure, but I don’t see you making them.

  39. Terje Petersen
    November 15th, 2005 at 15:41 | #39

    QUOTE: However I don’t see Australian capitalism or the Australian worker population facing stagnation and destruction as a consequence of taxes.

    RESPONSE: People survived in the Soviet Union. I think things would be better without the current high levels of tax in Australia. That is not to say that I am living in misery or that workers face physical desctruction here. I would say though that we undermine community and all its benefits with the high degree of statism we impose. We also limit our material well being and our opportunity to self actualise.

    QUOTE: Having lived in Asian cities for a decade and put up with high pollution, horribly congested roads, few city parks, no local public libraries, lousy education with few opportunities for those who are poor I see virtue in having a significant role for government and for paying my taxes.

    RESPONSE: Why not try some time in high taxing Niger or Ethiopia. In the former your salary has to exceed US$16 per week before you get taxed at 50% and in the latter farmers that profit at more than about US$80 per week face a marginal tax rate of 80%. I think I would choose Asia.

    Such comparisons are of course flawed to a large extent, because there is a difference between income and wealth. Countries like Australia have had a longer tradition of liberal values than places like Asia so we have more accumulated capital (ie public and private infastructure). The current tax rate is not really the best indicator. Its the cumulative effect over time.

  40. Dave Ricardo
    November 15th, 2005 at 21:58 | #40

    “Why not try some time in high taxing Niger or Ethiopia.”

    At last, something we can all agree on – we definitely don’t want to turn the place into Ethiopia and Niger. Mind you, since these are two of the most wretched places on Earth, with possibly only Sudan and the Congo any worse, this is not setting the bar very high.

  41. jquiggin
    November 15th, 2005 at 22:16 | #41

    Conrad, I don’t follow your claim. I ‘ve argued that, on average, privately funded transport infrastructure was more expensive than public. You say “Exactly the same sort of pragmatic analysis could be made against publically funded transport infrastructure, but I don’t see you making them.”

    How so? One aggregate claim must be right and the other wrong.

  42. conrad
    November 16th, 2005 at 07:00 | #42

    I agree with you that public transport infrastructure _can_ be cheaper than private infrastructure (and it is in many countries). It is just that, in Australia, it never gets built anymore (say, defined as the last 15 years), despite obvious demand, or when it does, it gets built to satisfy vote buying requirements, rather than need. I also think that if the goverment actually built something obviouslly decent (like, say, a proper fast-train connecting Sydney and Brisbane), people might think differently about it. In any case,

    Here are 3 failures, partially or fully funded either the federal or state goverment. I don’t see how the first two could ever be succesful, since they are going through some of the least populated areas on Earth.

    Darwin->Wherever train (federal + private; probably done as an election bribe)
    Melbourne->Bendigo (Victorian state;done as an election bribe)
    Sydney chatswood->Epping line (part of which was postponed indefintely — NSW State, and over budget; probably a good idea before being messed up).

    If I remember correctly, some of the light-rail conversions in Melbourne were succesful and publically funded (St Kilda & Port Melbourne tram lines ) — but that was almost 20 years ago.

    Are there good examples of recent, unequivocally succesful, on budget, public transport infrastructure (excluding roads) in Australia built ? i.e., In Australia, recently public transport infrastructure investment has been a great success, as witnessed by XXXX.

  43. Ian Gould
    November 16th, 2005 at 08:33 | #43

    >>On a more general note, does anyone believe that you get real competitiion with anything less than 6 players in the same market?

    Unfortunately the size of the Australian economy means that we simply can’t support six players in many sectors.

    Ports is, arguably, an example of where we have too many competitors (due to past government interference). Australia could probably function much more effectively with only three or four major ports, with eacjh one operating at much higher capacity and able to invest more.

    Meat processing is another area where there are too many participants – there are individual meatworks in the US which process as many carcasses in a year as the entire Australian pork industry.

    Fortunately, there’s an entire branch of economics devoted to working out whether a particular concentrated market is operating in line with competitive principles and establshing regulation to promote competition in such markets.

    Yes this regulation has an economic cost – but its less that economic cost of momnoploy profits from unregulated non-competitive product markets.

  44. Ian Gould
    November 16th, 2005 at 08:36 | #44

    Terje: For libertarians its hard to even point at productivity. If more freedom means we all go to the beach more and work less I would not judge that a bad thing.

    Terje. productivity is measured in terms of output per hour worked. So, working fewer hours is consistent with higher productivity if output per hour worked increases significantly.

    One of the regular posters here, and I apologise for forgettign which one, has pointed out several times that. per hour worked, the French are the msot productive people on the planet.

  45. Ian Gould
    November 16th, 2005 at 08:41 | #45

    Terje: People survived in the Soviet Union. I think things would be better without the current high levels of tax in Australia. That is not to say that I am living in misery or that workers face physical desctruction here.

    The problem with this argument, as I’ve pointed out previously, is that Australians enjoy one of the highest standards of living in the world – substantially ahead of such lower-taxing countries as the US and Japan and its economy is growing as fast as or faster than those economies.

    From first principles, most peopel would tend to agree that, all things being equal, lower taxes are good. However the empirical evidence seems to suggest that all things aren’t equal and that Australians tax levels aren’t having any observable negative impact on the economy.

  46. Ian Gould
    November 16th, 2005 at 08:42 | #46

    Conrad, take a look at the South-east busway in Brisbane,

  47. November 16th, 2005 at 10:20 | #47

    hey — why was my comment removed? Am I being censored now?

    Anyway — Harry you have double standards. I am also socially concerned but you imply otherwise because I have a different political philosophy to Quiggers. Society and government are not the same thing.

    And high taxes do not cause prosperity. Prosperity causes high taxes.

    Quiggers has argued previously that this is because people have a increasing marginal propensity to buy government goods (health, education). I agree with Schumpeter that it is the logical consequence of democracy (and that democracy in turn is a logical consequence from wealth, which is a logical consequence from liberalism).

  48. Terje Petersen
    November 16th, 2005 at 11:04 | #48

    QUOTE: However the empirical evidence seems to suggest that all things aren’t equal and that Australians tax levels aren’t having any observable negative impact on the economy.

    RESPONSE: Empirical they arn’t having any observable positive effects. We had tax cuts in the last budget, are we now worse off? I think not. Time for more tax cuts.

  49. conrad
    November 16th, 2005 at 11:58 | #49

    Ok, I looked up the cost of the SE Busway, which was apparently $520 million, which isn’t exactly huge compared to some of the rail project wastes — the Chatswood to Epping train line, for instance, is apparently hundreds of millions over cost by itself. That is why the Epping->Paramatter part of the project was scrapped.

    What I’m saying is that if you add the political corruption part into the cost of public infrastructure (whether direct, such as inefficient train routes being chosen to buy votes rather than move people, or indirect — such as jobs for boys contracts), and the inability to sue the company responsable if things get messed up, then, based on recent experience (like hundreds of millions of dollars being lost in project overruns in both Victoria and NSW), then that adds up to quite a decent percentage of the costs of these projects. It is of course hard to estimate corruption costs, but it certainly trades off with cheaper public financing and being able to run a service without making a direct profit.

  50. Terje Petersen
    November 16th, 2005 at 22:03 | #50

    What concerns me with the Chatswood to Epping rail line is that the original cost benefit analysis seemed to have been done on the basis of a Chatswood to Paramatta rail link. When the politicians in the closing minutes of the planning decided to go only as far as Epping they effectively halved the costs. However I am not aware that there was any formal reassesment of the benefits. It would be naive to assume that they were merely half as a large part of the benefit from the original proposal was the fact that it closed a gap in a potential rail loop. I suspect that the benefits are a lot less than half.

    I have heard rumour that AMP owns most of the land in the rail corridor (eg Macquarie Shopping Centre) and that it will still get all its expected benefits. But thats just a rumour.

  51. Ernestine Gross
    November 16th, 2005 at 23:00 | #51

    Re Chatswood-Paramatta rail-link.

    The original cost benefit analysis (Environmental Impact Statement) attracted the attention of a resident in Ku-ring-gai. The resident went through it with a fine comb and discovered that the benefits, measured in travel time saved, could be achieved if and only if the trains would not stop at several of the planned train stations.

    I used to use this case in class to encourage MBA students with an interest in becoming consultants not to under-estimate the intelligence and dilligence of residents.

  52. Rod Pinna
    November 17th, 2005 at 02:44 | #52

    Conrad: On public transport, the metropolitan rail system in Perth has been a success. The following page

    http://wwwistp.murdoch.edu.au/publications/e_public/Hope4future/cstudies/planningandtransport/trains/trains.htm

    has an interesting graph comparing performance for Perth and Adelaide.

  53. jquiggin
    November 17th, 2005 at 06:14 | #53

    Conrad, the Alice Springs-Darwin railway is a PPP. Of course, it was a lousy project however financed, but it would probably not have been built if explicit public finance had been required.

  54. Terje Petersen
    November 17th, 2005 at 06:41 | #54

    I have often wondered if there is not a strategic defence component to the Alice Springs to Darwin railway. Such that it was never worth it except as an insurance policy in the event that we ever need troops and Tanks in the North quickly.

  55. conrad
    November 17th, 2005 at 07:08 | #55

    Terje : excluding the early part of the Chatswood->Epping train line, I think most of the land is actually owned by Macquarie University (all the parkland that the M2 is on — basically everything past the Macquarie Centre) and a bit by the State government (Land Cove National park). Also, I was also under the impression that the Epping->Paramatter part was cancelled after cost overruns in the first stage of construction.

    John : I realize the Darwin->no-where was a PPP. However, it is a good of example of why slightly more cynical people might argue that the goverment should be involved in as little as possible in terms of infrastructure development (which I agree, is different to whether the various state governments can build and run things efficiently once the potentially corrupt routes have been decided) .

  56. Terje Petersen
    November 17th, 2005 at 19:18 | #56

    Conrad I am not sure of your point. I was talking about private land in the geneneral vicinity that might expect to be more valuable if their was a commuter train near by.

    When construction started I lived about 5 minutes walk from the new Dehli road station so I was very conscious of the start of construction and the announcement that the plug was being pulled on the Epping to Paramatter component. The start to construction and the change of plan happened pretty much within a month of eachother.

  57. Tom N.
    November 24th, 2005 at 13:42 | #57

    SAUL ESLAKE’S VIEW*

    Dean Parham has done some outstanding work explaining the sources of the improvement in Australia’s productivity performance since the early 1990s. His work consistently shows that this was largely the result of policy reforms aimed at exposing the Australian economy to greater domestic and international competition.

    It follows from Dean’s work that the the deterioration in productivity performance since 2003 may be due to the absence of any significant productivity-enhancing reforms since the late 1990s.

    It’s also worth wondering whether this deterioration might not be at least in part due to an explosion of productivity-stifling regulation in two areas over this period – security and corporate governance.

    As a few moments spent in any airport or any large building accessible to the public will confirm, there are now employed across Australia tens of thousands of people who do absolutely nothing (or at least, nothing which contributes to lifting productivity) except prevent those who are doing something from doing it as quickly or as cheaply as they otherwise would – in the (I would argue) mistaken belief that this will reduce the likelihood of people dying in a terrorist attack.

    In much the same way, following the sequence of corporate scandals and collapses in the US, Australia and elsewhere in the early years of the current decade, governments and regulatory agencies have required businesses to employ thousands of additional people to produce reports that hardly anyone will ever read, in the (I would argue) mistaken belief that this will result in better standards of corporate governance and fewer corporate scandals.

    I’m not suggesting that the explosion of regulation in these areas is the sole cause of the deterioration in productivity growth since it started (the ABS provided some other plausible explanations in its commentary on the June quarter national accounts). And I accept that it would be very difficult to quantify the impact of such regulations on productivity growth. But I think Dean Parham would be performing a service to the nation if he attempted to do so, and I would encourage him to take up the challenge.

    __________

    * Copied from the comments thread to Parham’s article “Gains From Reform” at On-Line Opinion (http://www.onlineopinion.com.au/view.asp?article=3868).

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