he price of oil is stlll around $50, and there’s no reason to expect it to fall in a hurry. In particular, if China revalues the renminbi yuan, as is commonly expected, there will be a corresponding fall in the effective price of oil, both for suppliers and for consumers in China and other countries that revalue, for any given $US price. This probably doesn’t matter much on the supply side – everyone is pumping as hard as they can and will probably keep doing so. But China’s demand is probably quite price sensitive, and a reduction in the price could keep demand higher, even in the face of a slowdown in exports to the US.

The other thought that occurred to me relates to climate change. Although there are a variety of ways in which we could mitigate climate change, the simplest would be to double the price of carbon-based fuels. This would certainly reduce demand significantly in the long run (I’ll try and update this with some estimates soon). On the other hand, there’s a lot of concern about the short-run macroeconomic impacts of such an increase.

Well we’ve seen a doubling of oil prices, and substantial increases in coal and gas prices over the past few years, and any macroeconomic impact is undetectable amid the general noise. The cases aren’t perfectly comparable of course, notably

* the rising price has been driven by increased demand, not imposed exogenously

* the effect of rising market prices is to redistribute income to oil-producing countries, and increase trade deficits. This effect wouldn’t arise with carbon taxes and would be much smaller with tradeable permits

Still, the evidence is against the idea that higher energy prices would bring the economy to a grinding halt. Rather, the response so far seems to be a textbook case of orderly adjustment, as people gradually shift away from gas-guzzling vehicles, look again at energy saving options and so on. So far the response has been small, but over time (if supply declines and prices stay high) more substantial responses can be expected.

My Fin article last week (over the fold) was about telecommunications, and included the statement

It is true that prices have fallen, but … the rate of decline is no more than would have been expected from technological change…. [the outcome is] common to infrastructure reform in general. Although employment in the infrastructure services sector was slashed during the reforms of the 1980s and 1990s, and labour productivity rose impressively, household consumers saw little if any benefit. The gains were swallowed up by an explosion in the numbers and pay of senior managers, by increased rates of return demanded by investors in the new and riskier and environment and by various forms of ‘rebalancing’, which typically benefitted business at the expense of households.

This point is neatly confirmed by the PC report on National Competition Policy, which shows that households are paying higher prices for nearly all infrastructure prices as a result of reform, mainly because of shifts in costs from households to business.

The PC report notes declining average prices for most infrastructure services. However, as with telecommunications, there was, in most of these cases, a long-standing trend of declining prices before reform began. There’s no evidence to suggest that average prices have fallen faster (or in cases like urban transport, risen less) than would have been the case without reform.

The absence of any net change in average prices, relative to trend means that the effects of infrastructure reform have been almost entirely distributional. The losers have been household consumers of infrastructure services and workers in infrastructure industries. The winners have been senior managers and capital owners in the infrastructure sector and business consumers of infrastructure services. Presumably, businesses have passed on some of the savings to their consumers. And, in the case of publicly owned infrastructure services, households benefit in their capacity as members of the public.

Overall, though, it’s not surprising that there has been little enthusiasm from Australian households for another round of reform. The last round produced plenty of pain, and not much in the way of gain.
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I spent a good deal of my academic time in the 1990s arguing with the Industry Commission (now the Productivity Commission) about their estimates of the benefits of microeconomic reform and, in particular the ‘Hilmer reforms’, enshrined in National Competition Policy. My main target was their estimate that NCP would raise Australia’s national income by 5.5 per cent relative to the level that would be obtained without reforms. I suggested that the likely benefits were less than 1 per cent.

In their latest report, available as a PDF download, the PC splits the difference, claiming a net benefit of 2.5 per cent. Reading a bit more closely, the ground they’ve conceded is even greater. The PC estimates cover not only NCP but the entire program of microeconomic reform including tariff reform, financial deregulation, labour market reform and so on. And, whereas the earlier estimates were for a five-year time frame, with more to come in future, the PC implicitly concedes that Australia’s productivity growth, after rising substantially between 1993-4 and 1998-9 fell back to the historical average rate, or below, from 2000 on.

One point on which the PC is holding its ground is that of work intensity. I’ve argued consistently that the upsurge in measured productivity in the middle and late 1990s was due, at least in part, to increases in the pace and intensity of work. They say

Further, contrary to the contention of some commentators (see, for example, Quiggin 2001), greater work intensity — manifest in longer working hours and an increased pace of work — does not provide a credible explanation for the sustained improvement in Australia’s productivity performance. The impacts of changes in hours worked are explicitly accounted for in measures of productivity growth. And claims that the productivity improvement would be temporary because of an unsustainable pace of work are inconsistent with the extended period of strong productivity growth that has been observed in Australia.

This argument fails because the supporting premise “an extended period of strong productivity growth” is false. As I’ve already observed, above-average productivity growth ceased after 1998-99. This is exactly consistent with a once-off increase in work intensity.

There’s some fancy footwork going on with levels and rates of change here. I’ve asserted that productivity growth based on increased work intensity is unsustainable in the sense that while you can increase work intensity for a few years, the process has to come to a halt. If the higher levels of intensity are maintained, productivity growth will return to its previous rate, but the increase in productivity level will be maintained. A stronger notion of ‘unsustainable’ is that the increase in effort will be reversed, and productivity growth will be below-average until the temporary increase in levels is lost. There is some evidence of a reduction in work intensity over the past few years, but it’s clear that much of the increase in the 1990s has been sustained.

What’s left in the case for microeconomic reform is not the productivity gains that were originally[1] promoted but the proposition that microeconomic reform has contributed to our good macroeconomic performance over the past fifteen years. There are a lot of problems with this claim. Most obviously, we were well into the micro reform push when the 1989-90 recession began. More importantly, our current strong performance seems heavily dependent on low interest rates, and it’s hard to see how these can be sustained with a large trade deficit and an expanding current account deficit. Still, this is one area where I’ve been overly pessimistic in the past, and we’ll just have to wait and see whether we can get back on to a sustainable trade path without a recession or serious slowdown.

fn1. Actually, this isn’t quite right. In the early 1980s, microeconomic reform was promoted on macroeconomic grounds, as providing the increased flexibility that would permit a sustained macro expansion without running into export bottlenecks and current account deficits (at that time, assumed to be unsustainable). These claims were abandoned after the 1989-90 recession and attention focused on productivity growth.