Business

More lifting going on than most realise

A second former econocrat has joined former secretary of the Prime Minister's department Dr Mike Keating in seeking to lift the tone of the economic debate.

"We are spending too much effort debating how and how quickly we should bring the Commonwealth budget back into balance," Dr Ric Simes said in a speech to the Australian Business Economists this week.

"We need to elevate the economic debate from the level of catchcries about debt and deficits, or about productivity or even about the use of cost-benefit analyses. We need some deeper analyses being brought to the surface."

Simes, now a director of Deloitte Access Economics, formerly of Treasury and economic adviser to Paul Keating as prime minister, wants to see a more sensible discussion about productivity.

Productivity is obviously important and policy should indeed be focused on lifting it.

"But we do need to be careful about what this may mean in a particular circumstance," he said. One problem is that productivity is being used as a catchcry for a myriad of causes, often unjustifiably.

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Simes agreed with Mike Keating's trenchant observation that "business associations, some leading employers and their camp followers in the media are insisting that future reforms must focus on alleged labour market rigidities and reductions in taxation, as if these were the most important influences on productivity".

And while "there is scope for improved labour relations to make a modest contribution to improved productivity . . . the main responsibility for improvements in that regard lie with employers themselves," Keating has written.

"The best thing that employers and their trade associations could do is to stop passing the buck to everyone else for their own failings, and get on with making their workplaces more productive using the existing freedoms that they undoubtedly have," Keating concludes.

Simes adds that this is exactly what most businesses try to do. For his evidence, keep reading.

Simes' second problem with how "productivity" is being used in the debate concerns its measurement. "Productivity is simply a less than perfect measure of economic wellbeing, and having the public debate focus so much on what the Bureau of Statistics reports as productivity can be unhelpful."

Indeed, Professor John Quiggin, of the University of Queensland, had called productivity an "unhelpful concept", mainly because of problems with the way the contributions of labour and capital were measured in its calculation.

Simes agreed with Quiggin we'd be better off using a term that was closely related to productivity, "technological progress" – that is, the introduction of technological innovations such as new products and improved production technologies.

Rhetoric – the choice of terms – did matter, Simes said, and had we been using the term technological progress instead of productivity, the debate wouldn't have been so open to distortion by vested interests.

"Tax, or industrial relations, or fiscal policy, can and should be refined, but they are not at the heart of why measured productivity weakened after 2000," he said.

But the measurement problem went further. "I think we have a fundamental problem in that our measures of gross domestic product or productivity are becoming less reliable proxies for economic welfare."

If instead of looking at productivity statistics we stand back and look at the way societies and businesses are changing, we find some profound changes under way, particularly the digital revolution.

We see consumers forcing retailers and media companies to transform. His own research had found that, without telework, only 14 per cent of new mums said they would return to work with their old employer, but 61 per cent said they would if telework was available.

His research had found how companies' information technology policies on staff use of social media at work and BYOD – bring your own device – were of growing importance in attracting young and talented employees.

He'd found that businesses able to create a "collaborative" working culture – including through use of digital technologies – succeeded in growing faster than otherwise.

What has this to do with productivity? First, most of the change we were seeing was being driven by individuals, whether they be consumers, workers, students or patients. To a trained economist, this should suggest that economic welfare had probably risen – and risen a lot.

It was hard not to conclude that individuals making deliberate decisions to do something new were adding to their own welfare, and to society's.

But, second, if this isn't showing up in our measures of welfare – such as GDP or productivity – then maybe there was something wrong with those measures. It seemed to Simes that "productivity, as measured, misses many, if not most, of the gains to consumer and social welfare that digital technology is delivering".

It didn't capture the benefits from improved convenience when we no longer had to queue for ages to renew a licence or at our bank branch. Nor the convenience of being able to search for a needed service in a fraction of the time it took before the internet.

It didn't capture the benefits of much greater choice. The Amazon books site, for instance, took costs out of the supply chain (thus reducing prices to consumers) but also provided much greater choice of books in a convenient manner.

Studies by Erik Brynjolfsson and others at the Massachusetts Institute of Technology had estimated that the easy access to a greater choice of books generated seven to 10 times the consumer welfare that the more efficient supply chain generated (the only bit that would make it into measured productivity).

He wasn't saying we should include the benefits of convenience and choice in our measurement of GDP – that wouldn't work.

No. "What I am arguing is that we need to be careful to base policy decisions on a deeper understanding of our objectives and not be driven by simplistic rhetoric," he said.

Ross Gittins is the economics editor.

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