The Productivity Commission again

The Productivity Commission looks into topics the government of the day asks them to.  The current government asked for a report on issues around the “future of work” (a favoured topic of the current Minister of Finance when he was in Opposition) and the final report is due out next month.

The Commission has released a series of five draft reports looking at various aspects of the issue.  Late last year I wrote quite critically about one of those reports in which the Commission championed the case for a larger and more active welfare state, claiming that by adopting such policies New Zealand’s productivity performance might be improved.  As I noted

What it boils down to, amid various reasonable insights, is a push for a much bigger welfare state, allegedly in the cause of lifting average New Zealand productivity (and sustainable wages), without a shred of evidence or careful considered analysis connecting one to the other.    It is the sort of thing you might expect a political party to come out with –  the Labour Party conference, for example, is meeting shortly –  but not so much independent bureaucrats supposedly focused on productivity.

It was one of the less impressive pieces I’ve seen from the Productivity Commission.

Just recently I noticed the Commission announcing the release of the last of its draft reports.  I was a little surprised that they were allowing only just over two weeks for submissions (they close next Monday if anyone is interested).  When I finally read the latest draft, “Technology adoption by firms”,  I was less surprised: there was very little of substance there (including only about 20 pages of core text).  There was, of course, a summary recapitulation of the argument that people who lose their jobs should get from the state.

Beyond that, and as often with the Commission, there were some interesting perspectives and charts.   They have apparently had some new research done (as yet unpublished) on the implications of land-use restrictions for worker mobility, and there are a couple of charts from that forthcoming paper but (a) it is hard to know what to make of them without seeing the underlying paper, and (b) there is no sign they done anything cross-country thinking on the issue (bad as land use restrictions often are, it seems unlikely that they explain much about New Zealand –  or Auckland –  economic performance relative to Sydney, London, San Francisco, Hong Kong or wherever.  It is a hobbyhorse cause of the Commission’s – and one I mostly agree with them on –  but the case for a strong connection to New Zealand aggregate productivity performance is poor (and our labour market functions pretty well as it is).

Of course, since the focus of the paper is on firms (mostly private entities) and the question seems to be why those firms operating in New Zealand don’t invest more heavily in technology (or, I suppose, why there aren’t more such firms), the answer surely has to be (when all boiled down) “because the risk-adjusted returns to doing so don’t seem sufficiently attractive”.    And yet I don’t think that line appeared at all.  Nor, therefore, is there any sense that we should assume firms, and their owners, are already doing what is in their own economic best interests.    If so, the focus should be less on individual firms – although perhaps case studies can sometimes enlighten –  and much more on the wider economic policy settings (and any exogenous constraints- remoteness possibly being one of them).

Some regard for history might be helpful too. The Commission suggests on a couple of occasions that policy stability can be important, which is no doubt true in the abstract, but might offer less than they suggest in a country where economic policy has been pretty stable for most of the last 25 years, but that particular stable policy regime has not been accompanied by good economic performance.  Materially different and better outcomes are likely to require some quite different policy approaches.

Instead, what they have to offer is really not much more than a grab-bag, not supported by much.  Perhaps it was telling that of the two case studies mentioned in boxes in the draft report, the one on Weta never mentioned the massive taxpayer subsidies to the industry/firm, and the other Zespri never seemed to mention that export monopoly Zespri has, even though the Commission has often pointed to the importance of competition and easy entry and exit.

At the policy level, it was notable that three whole-economy variables/tools did not get a mention at all.  There was no mention of the real exchange rate, even though ours have unfolded this century in ways quite out of step with productivity growth differentials.  There was, as far I could see, no mention of company tax rates, even though ours are now quite high by international standards, particularly as they affect overseas investors.  And despite the scale of New Zealand migration, there was no mention –  good or ill –  of how the system might be affecting firm incentives to invest.    Foreign investment doesn’t even get much of a mention, other than to note the way the recent foreign buyer restrictions might be limited new housebuilding.

And of what was there was fragmentary at best.   Thus, we are told that “increasing emissions prices” “would encourage technology adoption by firms”.   Quite possibly so, but with no way of knowing whether the resulting technology adoption would be good for the economy or otherwise (one of the Commission’s messages is that we should embrace technology to lift material living standards).  Higher minimum wages can also encourage “technology adoption”, as firms try to substitute away from the now artificially more expensive input.  All sort of regulations can require investment in new technology, but that isn’t –  simply by assumption –  a good thing from a living standards/productivity perspective.

We are also told that strengthening something called the “national innovation system” would help, but  –  as was the case when the government brought back R&D subsidies –  no serious attempt to analyse why the returns to private firms to invest more heavily seem to be not-overly-attractive (when there are other countries, without subsidies, that see high private R&D spending).

We are told that targeted government intervention can have a role.  At times you get a sense that here they are pandering to the government, citing the “industry transformation plans” that are currently in the works (actually, I hope they are pandering there). But they go on to attempt to spell out examples of “successful targeted interventions” in New Zealand’s history.  Their first item is “industry training” –  it is no more specific than that, so I can’t quite tell what they mean.  And the second is this

encouraging technology development, diffusion and adoption in New Zealand’s agricultural industries (eg, the establishment of experimental farms, a “farm extension service” to spread good practice, and research institutions such as Lincoln Agricultural College, Massey University and the Department of Scientific and Industrial Research)

Even if you thought these were all success stories –  I don’t claim the specific knowledge to know –  they date from 100 years ago (DSIR founded in 1926) or even 150 (Lincoln founded in 1878).   It isn’t exactly a compelling narrative of modern “targeted interventions”.

Much of the rest is similarly scattergun in nature.  I’d happily see some regulatory reform around genetic modification, perhaps there is a case for competition policy changes (but the Commission doesn’t really claim to know –  “competition laws have not been fundamentally reviewed to assess their suitability for the digital age”).  Perhaps legislation around “consumer data rights” has a place, but they don’t seriously attempt to link this to obstacles to business investment.  And so on.

It isn’t that I think most of the specific policy suggestions are wrong –  some may be, most probably aren’t, some I’d support quite strongly –  but that they are little more than grab-bag of favoured measures, not well-grounded in any compelling narrative about New Zealand’s economic underperformance, and the obstacles to matching our strong labour market performance with a highly productive overall economy.  The Productivity Commission has been around for almost 10 years now, and we really should have been able to hope for more.   But I guess some of the issues get awkward (for Commissioners and their masters) and politically uncomfortable, so it is easier to play at the margins.  Amid the championing of personal political/policy preferences, there will probably be the odd bit of interesting analysis, perhaps some useful peripheral reforms, but the core challenges will be no closer to being addressed.

But then it isn’t as if the Prime Minister and Minister of Finance want anything much different –  unless some magic fairy dust somehow conjured up better outcomes –  and there was that sadly telling quote the other day from the man who would be Minister of Finance.

How will doing more of what we’ve done for the past three decades finally make us wealthy? I asked. Goldsmith offered no explanation.

 

11 thoughts on “The Productivity Commission again

  1. The Productivity Commission referred to the Hsieh study but not to the work Enrico Moretti has done on elastic housing supply and productivity.

    There is a summary here of Moretti’s work and the implications in my opinion for NZ.
    View at Medium.com

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  2. A taxi driver in Queenstown asked “where did all the Indians come from. They have taken over the Taxi business. Likewise Alexandra, they own the pubs etc?” This seems to be a send migrants to the region’s policy (result of). But these people are motivated and likely above average intelligence compared to your unemployed Kiwi. In other words cultural differences. How is this good for New Zealanders. Haidt points out that morality is about the overall community well being (local not international).

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  3. Have read the Productivity Commission’s draft report on “embracing technology”

    Un-impressive – yes it’s a report written by academics and civil servants talking about wellbeing and mediation platforms (had to look that one up) – try this

    What is a Mediation Platform?
    “Mediation platforms centralize access to multiple networks in one SDK integration, leveraging an optimization algorithm to determine which mediated network can fill the developer’s inventory with the highest CPM”.

    My mate Tamati Whakarewa didn’t have a clue

    It would be helpful if the Commission identified which sectors of the economy are under-developed and which sectors could benefit from what technologies. One assumes they are not talking about mechanisation

    Most technological advances come out of America – so what direction are they going in – what major advances have they achieved in the last 2 years?

    Imagine the rolling of eyes as that report is presented to cabinet – another Productivity Commission report destined for the bin – Wellington should set up a mirror-commission comprising ex-business managers who have had manufacturing and other business experiences – then compare the two reports

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    • The 2018 figures are entertaining.

      Top – Professional, scientific & technical services (some of this will be R&D) – high per capita immigration rate needs professional services to plan, design & implement the capital growth

      2nd – Rental hiring & real estate services – NZ’s love affair with housing – high per capita immigration rate & free capital gains.

      3rd – Construction – building that infrastructure & housing for the high per capita immigration rate

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      • 20 billion on real estate agents? What really surprised me is that the value of agriculture to GDP went from 12% in 1972 to 7% in 2018. Apparently that excludes a whole lot of inputs, but if they’re measuring the same things, agriculture isn’t as big as it’s made out to be.

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      • Minsk, of course farming has grown much bigger in dollars terms but not in percentage terms. Remember you are dealing with percentage of a much larger number in 2018 but unfortunately we have reached peak farming especially in Dairy and therefore as a percentage contribution it will get smaller as other services rise. As we do not count the number of cows and we only count human monkeys in productivity calculations, Dairy has always been seen as highly productive. Just add a cow and calculated productivity rises.

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  4. One could take this a bit further:

    If we consider productivity as a rate of return on investment, then the top 3 seem to include limited productivity.

    Top – Professional, scientific & technical services – this is effectively a regulatory overhead and a cost – the only potential productivity return comes from, e.g., roading, if our travel times are improved (and assuming we also use that additional time productively), or any commercial R&D component.

    2nd – Rental hiring & real estate services – again this is effectively a regulatory overhead, a cost, and a middleman

    3rd – Construction – building assets that depreciate and wear out is not productive, but of course we need those facilities to be productive in, e.g. an office.

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