Wednesday, June 20, 2007

Productivity takes a political beating

Productivity takes a political beating

Alan Wood: The Australian - Wednesday, June 20, 2007

ELECTION years are notable for the trivialisation of important policy issues, and lots of bad ideas for dealing with them. It would be hard to find a betterexample than the present political Punch and Judy show over productivity.

There is no doubting the importance of productivity to our national prosperity. As US economist Paul Krugman wrote in his 1992 book The Age of Diminished Expectations: “Productivity isn’t everything, but in the long run it is almost everything.”

Why? Because “a country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker” (one definition of productivity). In short, it makes us all richer.

Most people find this appealing, the exception being our self-proclaimed intellectual Left, who regard our economic prosperity as a source of universal unhappiness. So let me quote two other distinguished US economists, Alan Blinder and William Baumol: “Nothing contributes more (than productivity) to reduction in poverty, to increases in leisure, and to the country’s ability to finance education, public health, environment and the arts.” Worth having, surely?

Whether anything worthwhile will result from the present political debate on productivity is much less obvious. At the moment it is Kevin Rudd who is being discomforted over his flaky performance when quizzed about productivity on the ABC’s AM program last Thursday.

His embarrassment has been increased by the leaking of a briefing note on productivity, written by his advisers the next day. They obviously shared the view that Rudd was floundering, and also exposed a couple of painful truths Rudd has been blissfully ignorant of.

One is that Australia’s weaker productivity performance in recent years has been influenced by the fact that we have been very successful in creating new jobs and cutting unemployment. As unemployment has dropped, lower-productivity workers have been drawn into the labour force, lowering our productivity performance.

Does Labor think this is bad news? Surely not, and the impact on productivity is only short-term anyway.

Another is that there is good reason to think productivity is on the rise. I am not talking about the lift in productivity in the past two sets of national accounts; it can hop around a lot. But there is a more fundamental factor at work.

For several years we have been seeing record levels of investment, driven by the mining industry. But in the initial stage, which lasts some years, a lot of labour is employed in construction before any output comes on stream, which sharply lowers national productivity, as the Productivity Commission has shown.

We are reaching the stage where this will turn around and output (exports) rises sharply as the temporary construction employment falls, leading to a probably sharp rise in productivity. That is, we will finally see the productivity reward from the rapid rise in our capital stock in recent years.

As for trivialisation of the productivity debate, we need look no further than the other hot political issue: broadband. Rudd frequently claims Labor’s plans to extend high-speed broadband to 98 per cent of Australians is crucial to improving the nation’s productivity performance. It is, he says, a vital piece of infrastructure, or as he told the ALP’s national conference in April: “In the 19th century, nation builders laid out the railway network. In the 21st century nation builders are laying out high-speed broadband networks.”

This is surely enough to give anybody familiar with Australia’s economic history pause for thought. The railways were a great way of opening up the nation, but their contribution to our national productivity performance was sadly diminished by the fact that the states all decided to have a different rail gauge.

There is no argument that the telecommunications revolution is a big part of the new global economy story. But what will spreading higher-speed broadband across the nation do?

The ability to download movies, music, internet scams and pornography faster isn’t going to add much to national productivity.

For those who really want it, faster broadband than the 12megabits per second being promised by Labor (and the Government) is already available.

Arguments can be made on other grounds, such as social or equity ones, but not on serious economic grounds. It’s just another handout to the bush on top of the billions already transferred from urban taxpayers by vote-hungry politicians.

Any government or Opposition serious about boosting productivity through telecommunications would have broken up Telstra and focused on increasing competitive forces in the industry to make broadband access much cheaper and a wider range of technology options available.

Labor wanted to retain the bloated Testra monopoly, created by Kim Beazley to keep the unions happy, in government hands, and the Howard Government was too eager to boost Testra’s share price and votes in the bush to break it up before sale.

Not much evidence of a political class interested in productivity improvement here. The only obvious virtue of the Howard Government’s scheme is that it wastes less public money.

But the most serious blow to Rudd’s credibility on productivity is Labor’s policy to roll back reform of Australia’s labour market. Labour market flexibility has a vital role to play in improving our productivity performance.

So far Labor’s concession to criticism of Julia Gillard’s push to restore union power and influence has been to promise to do it in 2010 instead of immediately. It isn’t credible policy.

The national tragedy behind this productivity stoush is that Rudd is right; Australia’s long-term productivity performance is a matter of enormous importance.

And it is true the Howard Government has not had a sufficiently voracious appetite for economic reform, although Labor has to share the blame because of its constant opposition to reforms that have been put forward.

There is no mystery about the reforms needed: water, electricity, transport, education, skills. Both sides are putting forward new policies they claim will address them, but will they?

Not if present performance is any guide. Progress on the Council of Australian Governments’ national reform agenda in all these areas is a bad joke. A national approach is needed, but instead we have constant conflict between the federal Government and the states, where the national interest too often runs a poor second to state parochialism. Whoever wins government this year is going to have to sort out Australia’s ailing federation if we are to lift our long-term productivity performance.

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