Beware those bearing gifts of productivity growth

In a recent report the OECD praised thegovernment’s aim to "increase productivity" in the New Zealand economy.   Eversince National came into power, the catch phrase productivity has been thrownaround with reckless abandon – treated as both our saviour in the currentcrisis and the destitute child that was abandoned by the previous Labourgovernment.

However, all this talk of productivity is abit ambiguous.   If we don’t try to understand the trade-offs that are involved,and whether New Zealand as a society is willing to pay those costs for greaterproduction, the strict focus on productivity alone will lead to bad policy.

Productivity is a surprisingly vague termgiven its importance in economics.   The essence of productivity is as follows: whenan industry or an economy is more "productive", it can make more output withthe same amount of input.

This definition indicates that productivityisn’t a goal in itself.   The goal of policy should be to support domesticeconomic activity (efficiency), while ensuring that the other issues thatsociety values (equality, fairness, justice, etc) are taken into account.   Thepurpose of an elected government is to balance the often competing goals on thebasis of what it appears society wants.

An extreme example of how the single-mindedfocus on productivity is dangerous:   As a caring social planner, who believesthat society only cares about productivity, I walk into each firm across thecountry and ask who the least productive employee is.   Then I shoot them.   Fromthere our nation’s productivity increases.   I think we would all agree that sucha situation is probably not in the social interest, but it would be supportedby a single-mined focus on productivity.

The example does not have to be thisextreme for the trade-off to make sense.   If we are focused on productivity wecan achieve this goal by lowering employment, or forcing individuals to save ata higher level than they really wish to.   These aren’t satisfactory policyprescriptions, but they can be logically supported by blind support ofproductivity targets.

When the current government is discussingincreasing national productivity there are three ways this could occur throughpolicy:

  1. There is a free lunch: the previous government made some poor policies that didn’t benefit anyone, and by reversing them we can make everyone better off.
  2. They have found a way to make additional output appear out of thin air.
  3. They believe society is willing to accept less active legal and social policies in order to increase economic output.

The first case does not seem to explain theNational governments push for productivity, as they aren’t picking up wastefulpolicies and throwing them away.   Although the push to streamline governmentactivities is laudable and the marginal changes to the Resource Management Actmay be worthwhile, neither policy will provide any noticeable boost to activity.  And more importantly both these changes will cost us something in return.  

As the second potential reason is obviouslyfalse, this leaves us with only the final point:   that the government believessociety is willing to accept a little less "redistribution and equality ofoutcomes" in order to increase the size of the economic pie.

If the government truly believes thatsociety is willing to accept the potential costs associated with lower socialspending, different laws, and a smaller government in order to reap thebenefits of greater economic activity then why don’t they just say this directly?  

I fear that the government is not directlystating this trade-off because they have talked themselves into believing that itdoes not exist. In such a situation this is likely to lead to some of the costsof policy being unintentionally underweighted or ignored while the drive forproductivity is underway.

Labour got themselves into the same tanglewith their unfounded belief that increasing equality did not lead to areduction in economic activity.   We now know that much of the growth they watchedover happened in spite of their egalitarian program – not because of it.  

Both political parties are unwilling toface that, with respect to government policies, there is a fundamentaltrade-off between some social values (fairness, justice, etc) and the level ofproductive activity.   This trade-off is one of the primary reasons for theexistence of government – and yet neither of the political parties seem willingor able to recognise it.

As a result, next time we hear thegovernment discuss the importance of productivity, or we hear someinternational body talk about the goal of productivity growth, let’s try not toforget that there is a trade-off – and let’s ask exactly what this trade-off is.

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