Author: John Quiggin

The Productivity Commission and National Competition Policy

John Quiggin10 Comments

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.

What I’ve been reading

John Quiggin4 Comments

As mentioned last week, <a href="https://johnquiggin.com/index.php/archives/2005/04/10/what-ive-been-reading/ “In Defense of Globalization” (Jagdish Bhagwati) , along with Diversity in Development: Reconsidering the Washington Consensus There’s a draft of a review article over the fold. Comments much appreciated.

Moving on, I’ve read an advance copy o“Freakonomics : A Rogue Economist Explores the Hidden Side of Everything” (Steven D. Levitt, Stephen J. Dubner) The book contains a chapter defending the (mildly surprising) conclusion that having a black-sounding name like DeShawn is not a disadvantage in the US, once you take account of the class, education and family backgrounds variables typically associated with such a name. My first thought is that, in view the name Levitt and Dubner have given their baby, they must be pretty confident on this point. My second is that, if you haven’t already, you should read Baby’s Named a Bad, Bad Thing
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The expected utility of voting

John Quiggin3 Comments

In the comments thread to Chris’ post on tactical voting at Crooked Timber, Michael Otsuka very sensibly suggests

I believe there’s an extensive, sophisticated social science literature on the expected utility of voting in elections which has made some progress beyond the speculations posted above. Could anyone who’s up-to-speed post a reference to an accessible summary to save us the trouble of trying to reinvent the wheel?

This brings me to one of those papers I’ve been meaning to write for years (I wrote a several drafts of a joint paper with Geoff Brennan, but we never quite converged), and which has finally (2005!) been written by someone else. The idea was to prove an assertion I’ve made quite a few times in academic papers, and here at CT, that, as long as voters have ‘social’ rather than ‘egoistic’ preferences, the expected utility of voting is independent of the size of the electorate, and potentially large enough to justify high levels of participation. You can read this paper by Edlin, Gelman and Kaplan (PDF file). There’s an excellent appendix on why the probability of a decisive vote is of order 1/n.

There’s still the question of why people vote when one side or the other is bound to win. EGK have a go at this, and in my paper[1] on the subject, I say

This approach, in which b [the social benefit of the preferred party winning] is a simple step- function, may be replaced by a more sophisticated one in which b depends not only on the party elected, but on the size of its majority. This would be consistent with the fact that there is a substantial, though normally reduced, turnouts in elections which are perceived as foregone conclusions.)

That’s not a complete solution, and I think it’s also important to consider that voting per se is considered as a social duty or as yielding social benefits, but I think it’s at least as important as expressive motives.

fn1. Quiggin, J. (1987), Egoistic rationality and public choice: a critical review of theory and evidence’, Economic Record 63(180), 10–21.

The market can stay irrational longer than you can stay solvent

John Quiggin25 Comments

Brad DeLong has a great post on the puzzle of low US interest rates (made more puzzling by the sharp decline over the past week or two). It seems obvious that this can’t last, but entirely unclear when it will come to an end. The reasons he and I (and more relevantly George Soros and Warren Buffett) aren’t betting on, and therefore accelerating, the end are argued pretty well, I think.

I’ll add my own contribution to the discussion over the fold. It’s a comparison of views of the economy based on flows of goods and services and those based on asset prices. On the former (traditional) view, the signs of impending disaster are everywhere. On the latter view, it’s sunny skies as far as the eye can see.
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Weekend reflections

John Quiggin11 Comments

This regular feature is back. The idea is that, over the weekend, you should post your thoughts in a more leisurely fashion than in ordinary comments or the Monday Message Board.

Please post your thoughts on any topic, at whatever length seems appropriate to you. Civilised discussion and no coarse language, please.

Dead horse, assume the position

John Quiggin5 Comments

In a stunningly original essay in today’s Australian, Stephen Matchett assails ” Elitist dismissal of mass entertainment as intellectual ‘prole food'”, when it is in fact, “recognisably subversive”[1]. He’s quoting one Alan McKee, who turns out to be a fellow Brisvegan and (via Google) a colleague of mine at UQ. Reading between the lines, I suspect McKee has more to contribute than this hackneyed point (he makes a valid observation about omnivorousness and cultural capital later on), but he’s not well served by this piece.

No doubt there are people out there who still adhere to the idea of a fundamental and unbridgeable gap between art and mass culture, but I’ve followed debates on this and related topics around the blogosphere for a few years now without running into them (probably, they’re waiting for this Internet fad to pass before they get a computer). The real problem now is to articulate some sort of criteria from distinguishing good from bad that does not rely on the failed assumptions of high art.

fn1. I see this point being made all the time in cult-stud writing. No doubt it explains why the recent collapse of capitalism, in the face of withering postmodernist critiques, began in the United States, the home of mass culture.

Preferential voting for Britain ?

John Quiggin21 Comments

I was thinking about Chris Bertram’s post on tactical voting at CT and I was struck by the thought: Why hasn’t Labour introduced preferential (single transferable) voting in Britain? Readers will probably be struck by the alternative question, Why should Labour introduce preferential (single transferable) voting in Britain?

My first is that this would be an improvement in democracy, both for individual constituencies and for the country as a whole. Although no voting system is perfect, preferential voting is much more likely to produce an outcome that reflects the views of the majority of voters than is first-past-the-post.

I don’t suppose that an argument like this will cut much ice with the Blair government (or most incumbent governments), so let me move to the second point. Labour would almost certainly benefit from this shift, at the expense of the Tories. It seems pretty clear that Labour would get the bulk of LDP preferences, as well as those of the Greens and minor left parties. The Tories would pick up preferences from UKIP (but this group looks like a flash in the pan) and the far-right (but this is a small group, and there are disadvantages attached to such preferences, especially if, say, the BNP demands preferences in return).

It’s true of course that the biggest benefits would go to the Liberal Democrats, since their supporters would not have to worry about ‘wasted votes’. But even here, there’s a hidden benefit for Labour. Sooner or later, there will be a hung Parliament, and the price of LDP support will be full-scale proportional representation. If Labour introduced preferential voting without being forced to, it would not only cement LDP support but would greatly weaken the case for PR.

The remaining objection is that of additional complexity. This can be overcome, in large measure by adopting the optional preferential system, where voters can indicate as many or as few preferences as they choose.

Lies and more lies

John Quiggin36 Comments

The news of yet another broken promise from the Howard government is notable only for the degree of inflation we’ve seen in these things.

Asked in September last year if the Howard Government was giving a “cast iron” commitment that bills would be rebatable at $300 or $700 after the election, Mr Abbott replied: “That is an absolutely rock solid, iron-clad commitment.”

It’s hard to see how you could get more emphatic than that, and while the government as a whole has long since lost credibility, Abbott had something of a reputation as a straight-talker[1].

Most politicians lie occasionally and nearly all governments break (or fail to fulfil) some promises, but the Howard government goes well beyond anything in Australian experience. Whatever successes he may achieve, the debasement of the coinage of public honesty is something Howard will never live down.

The result of all this is, I think, a government that can hold on to office as long as it keeps on bringing home the economic bacon, but one that will never earn really strong public support and will leave a poisoned legacy for the Liberal Party in the long run.

fn1. Of course, breaking the promise was not his idea, but if he’d been willing to put his job on the line he could no doubt have faced Costello down.

My good opinion, once lost

John Quiggin17 Comments

At Larvatus Prodeo, and at Catallaxy, they’re debating the question of whether you can dismiss an author based on ‘a brief skimming’, which I’ll take, along with some participant in the discussion, to mean five minutes of reading.

My answer to this question, which has arisen before now on this blog is “Absolutely”. At skimming or fast reading speed, five minutes gives you 5000 words, which is more than enough to conclude that a writer is guilty of gross logical or factual errors, pretentious or illiterate prose, repetition of tired and long-refuted arguments, or simple inanity. The idea, commonly put forward in defence of various indefensible types, that you can’t criticise someone unless you have read every word they have ever written is simple nonsense. It’s true that there are people who produce the odd pearl among an output more generally fit for swine. But in such cases, it’s up to their defenders to point out the gems: the volume of words is so great, and the average quality so low, that a demand to read everything is simply impossible.

I should concede that, on one or two occasions, I’ve got into trouble through misreading someone in the first five minutes, after which pride and prejudice does the rest. But in general, five minutes is enough to form a well-founded negative judgement in a great many cases.