Our economy has become unbalanced and is in danger of slowing to a halt. But not to worry. The Reserve Bank is determined to ensure that, should we sink under the sea, we won’t have had an inflation problem to worry about.
This is the week we fix our productivity problem, but how far we get remains to be seen. The problem is that, while improving the efficiency with which the economic machine converts inputs of raw materials, capital equipment and human labour into outputs of goods and services has been the way we’ve raised our material standard of living over the past two centuries, there’s been no improvement in this productivity for a decade.
But if that’s the problem, we still have a problem: no one wants to accept responsibility for fixing the problem. That’s for the government to do. Even the Reserve Bank wants to pass the parcel to the government.
Last week, while finally cutting the official interest rate by a click, the Reserve lamented the need to lower its assumed annual rate of improvement in productivity from 1 per cent to 0.7 per cent, with governor Michele Bullock noting there was nothing the Reserve could do about productivity.
The weirdest thing about this episode is the way the business lobbies have got away with portraying the lack of productivity improvement as having been caused by the government. It’s as though productivity is something created on the Cabinet room table, the product of good – or not-so-good – policy decisions.
You’d never know that the figure for national productivity improvement is largely the summation of what’s happening in all our farms, mines, factories and offices. By how much have each of them become more efficient at doing what they do.
But no one ever bothers to ask the bosses – or even their Canberra lobbyists – why they’ve stopped getting better at what they do. If they did, they’d be told it was all the government’s fault. Too much regulation and red tape, too high taxes and too little freedom to change their employment arrangements.
Yeah, sure. You get closer to the truth when you remember Sims’ Law. Rod Sims, the former competition watchdog, never tired of explaining that improving their productivity was just one of the ways businesses could increase their profits.
So, why has productivity improvement stalled? Because businesses have found other, easier ways to increase their profits.
To be fair, there are other, more technical reasons that help explain the lack of productivity improvement. One is our continuing shift from capital-intensive goods to labour-intensive services: it’s easier to use better machines to achieve more output per hour than it is to speed up humans.
Another reason is our recent growth in employment in the “non-market sector”, particularly aged care. When the taxpayers are covering much of the cost, it’s hard to measure productivity. And when the care objective is as much about quality as quantity, it’s hard to replace a motherly nurse with a robot.
But the debate in the lead-up to tomorrow’s economic reform roundtable has done much to clarify the chief cause of the productivity pause. The main way we’ve made workers more productive is by giving them more and better machines to work with. Labour-saving technology keeps advancing.
However, Treasury tells us that, as a share of gross domestic product, business investment in equipment and structures is lower than it was in the early 2000s.
So, why have businesses slackened in their efforts to make their workers more productive? Most likely reason: because the increased “concentration” of many industries – more of the market served by fewer big firms – has reduced competitive pressure and given those big businesses greater freedom to keep their prices high.
This brings us back to the Reserve Bank. Last week it was at pains to point out that its reduction in the assumed annual rate of productivity improvement from 1 per cent to 0.7 per cent meant that average annual earnings can’t grow by more than 3.2 per cent – down from the previously assumed 3.5 per cent – without stoking inflation.
What? Sorry, this is the risk-averse, conventional thinking of a bookkeeper, that puts avoiding inflation ahead of getting productivity improving and the economy, growing. It’s saying I’m responsible for inflation; productivity is someone else’s worry.
It’s also thinking that’s biased in favour of business, at the expense of households – the people whose interests businesses are supposed to serve. It’s saying that businesses must be free to make profits any legal way they see fit: if this is bad for their employees and the households they come from, tough.
The pro-business bias comes from the neoclassical model of the economy every economist carries in their head, which assumes that businesses respond rationally to the incentives they face. No, they don’t. They’re just as susceptible to fads and fashions as the rest of us – fashions reinforced by the sharemarket and its analysts. “Everyone’s doing X, why aren’t you? What’s wrong with you?”
In the Reserve’s case, the pro-business bias coming from the model is reinforced by it having a board stacked with businesspeople but, at best, only one person coming from the employees’ perspective. As well, the Reserve consults extensively with businesses, while not bothering to talk to the union side. (Little wonder their forecasts for wage growth are so consistently wrong.)
So profits growth is unconstrained, while big pay rises are a terrible worry because they could add to inflation. Trouble is, the economy is circular: when business fattens its profits at the expense of its workers, those workers turn into households that don’t have as much to spend on the things businesses are selling.
When you tolerate businesses fattening their profits by finding ways to keep their wage bill down, you’re helping them cut their own throats. But no one will be able to accuse you of letting inflation get away.
Back on productivity. One big reason businesses haven’t been investing much in the labour-saving technology that increases their productivity is that they’re not paying a lot for their labour. Use generous pay rises to raise the cost of labour relative to capital, then watch our productivity improve, retrospectively justifying the generous pay rises.
The Reserve needs to switch to a “growth mindset”.
