Monday, August 15, 2011

Is economic reform worsening productivity?

The North Atlantic economies have pressing problems to grapple with, but here at home the biggest thing we have to worry about is our weak rate of productivity improvement. And we won't get far if we stick to the received wisdom it's all the fault of excessive government intervention.

If our econocrats want to preserve their monopoly over the advice their political masters seek, they need to be less model-bound in their thinking. Since it doesn't take much thought to realise ''more micro reform'' is unlikely to make a big difference, we need more lateral thinking.

Rather than merely assuming market failure wouldn't be a material part of the problem - or assuming nothing could be done to correct market failure that wouldn't make things worse rather than better - perhaps we should look harder to see if market failure is part of the story.

After all, it's the market that's failing to generate as much productivity improvement as it has in the past.

Then we could start looking for cleverer forms of intervention that don't end up being counterproductive. Here we could put a lot more effort into evaluating interventions, so as to build up our understanding of what works and what doesn't.

The acute government debt problems in the United States and Europe are a reminder of how much more fiscally disciplined our governments have been, going right back to the Hawke-Keating government with its various budget limits and targets.

It's a great temptation to give the public the ever-increasing government spending it demands, but then fail to summon the courage to make people pay the extra taxation needed to cover that higher spending.

For all their failings, however, our politicians have achieved balanced budgets on average over the cycle and have kept government debt levels - federal and state - quite low and manageable.

But could it be we've paid for our fiscal responsibility with lower productivity improvement? It seems clear we've been underspending on public infrastructure as part of our efforts to keep debt levels low, but adequate public infrastructure is needed to permit the private sector to raise its own productivity.

As well as physical capital there's human capital. As part of our abstemiousness, we've gone for several decades underspending on all levels of education and training: early childhood development, schools, vocational training and universities. Particularly universities.

If we've gone for so long underspending on human capital, is it any wonder our productivity performance has worsened? It's true the Rudd-Gillard government has loosened the purse strings in recent years, but there's safe to be a delay before that leads to an improvement.

Another possibility worth exploring is whether the microeconomic reforms of the past have had unintended consequences that damaged our productivity.

Micro reform is almost always aimed at increasing firms' efficiency by subjecting them to great competitive pressure - whether from rivals in the domestic market or from imports.

But the human animal has achieved the great things it has not only as a result of competition between us but also as a result of our heightened ability to co-operate in the achievement of common objectives. The economists' conventional model is big on competition, but sets little store by co-operation, since it assumes we're all rugged individualists. Could it be that, by greatly increasing the competition most firms face in their markets, micro reform has reduced the amount of productivity enhancing co-operation?

A further possibility is that, in turning up the heat of competition in so many markets, and in spreading market forces into areas formerly outside the market, micro reform has diminished our ''social capital'' in ways that adversely affect economic performance.

There's no place for trust, feelings of reciprocity or norms of socially acceptable behaviour in the economists' model, so they tend to under-recognise their importance. But you only have to observe a loss of trust within the community to realise the high cost that loss imposes on the economy as well as society.

The less we feel we can trust each other, the more avoidable costs we impose on the economy in spending on supervision and monitoring, security devices and security people.

Micro reform seeks to increase the community's income without paying any attention to the equitable distribution of that extra income. If higher earners end up with more than their fair share, the disaffection of those who lose out may detract from their productivity.

It seems clear the increased competitive pressure on firms has led many to take a more ruthless attitude towards their employees.

Firms are more anti-collective bargaining, more prone to laying off staff as soon as business turns down, more willing to award huge pay rises to executives without a thought as to how this might make other employees feel, more inclined to pay some workers more than their peers, more inclined to expect people to work split shifts or on weekends and public holidays without extra pay and more likely to demand unpaid overtime (which last does increase measured productivity, however).

Is it so hard to credit that all this might have made workers less co-operative and productive rather than more?

In the Treasury Secretary's recent speech on our poor productivity performance, Dr Martin Parkinson nominated health and education as the next candidates for major micro reform. He's right, there's plenty of scope for improvement.

But these are service-delivery sectors where it's the performance of professionals that's crucial. And economists' notions about what motivates people and how you encourage excellence are so blinkered - they assume money is the only incentive and key performance indicators work a treat - that you'd have little confidence their ''reforms'' would make things better.