This chapter addresses one of the most difficult issues in Macroeconomics, how to increase useful economic growth. While fiscal and monetary policies can derail growth if handled badly, new ideas applied to real businesses are the main source of increased economic growth.
Australia’s Productivity Commission is one of Australia’s most golden public sector organisations. As official information on the work of the Commissions says: ‘The Productivity Commission is the Australian Government's independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians.’
This graph shows the increase from 1990 - a time of severe recession - to 2013. The vital fact is the sharp rise in national productivity from the depths of recession until the end of the 1990s and gradual decrease since then. The apparent increase in the past 5 years is welcome but productivity increase in the past few years so far are still around half the rate achieved at the peak.
The recently retired Chairman, Gary Banks, kindly provided speeches he has presented to give me a better feel than I had for the organisation and its work. Dr Banks started a talk in 2007 with the following definition: ‘The Productivity Commission was created as the Australian Government’s principal advisory body on microeconomic policy and regulation. Its role, expressed most simply, is to help governments make better policies in the long-term interests of the Australian community. As its name implies, the Commission’s focus is on ways of achieving a more productive and efficient economy — the key to higher living standards’.
[Reference: Gary Banks, ‘Public inquiries in policy formulation: Australia’s Productivity Commission', Address to the International Workshop: Australia’s Public Inquiry Experience and Economic System Reform in China, China-Australia Governance Program, Beijing, 3 September 2007. ]
A key feature is use of experts, and when it is a review by the Productivity Commission the main work is done by experts employed by the Commission. Gary Banks again: ‘Taskforces of experts can reduce the risk of governments making ill-informed decisions. They may also provide for public consultation and gather information about how current and potential future policies affect different groups.
‘Australia’s experience with such processes has been mixed. Some have provided reports of high quality, which have led to major policy changes. (Examples include the ‘Campbell Inquiry’ into financial market regulation in the 1980s and the ‘Hilmer Inquiry’ into competition policy in the 1990s.) Such reviews have been characterised by eminent and expert leadership, well-resourced and ‘neutral’ secretariats, and adequate time frames.’
Other characteristic of the work of the Commission is independence and public consultation. ‘Independent’ public inquiries, by definition, need to be structured such that those involved can undertake their own analysis, reach their own conclusions about the best way forward, and not have a vested interest in the advice provided to government. They should also provide ample opportunity for public input to the formulation of policy recommendations. This combination of independence and public consultation has major advantages. It can lead to better inputs to policy making, because there is an opportunity for various points of view to be heard and considered, not just those who have the most influence within government.’
[Reference: ‘Independence’ was addressed specifically by Dr Banks in 2011, in a paper presented at the AIAL 2011 National Administrative Law Conference in Canberra.]
‘The Commission’s independence is formalised in its statute, the Productivity Commission Act 1998 (Cth), but key features of this legislation have their origin in the Tariff Board Act 1922 (Cth). The Tariff Board had a quasi-judicial role in relation to its advice to government. Tariffs involve both winners and losers and impartiality in making judgments based on transparent ‘evidence’ was rightly seen as essential.
‘The same rationale for independence was adopted by Sir John Crawford in his report to Gough Whitlam in 1973 on the replacement of the Tariff Board by an Industries Assistance Commission (IAC) (Crawford, 1973). The IAC was assigned a similar role, though with a wider responsibility, in the conflicted area of industry assistance. Its purpose, like that of the Tariff Board, was to provide evidence-based impartial advice. However, a crucial difference, introduced in its statute, was that it was required to take an ‘economy-wide perspective’, ie it must promote the interests of the community as a whole over those of any particular industry or group.
‘Over the years, the Commission has evolved considerably and its work now covers much more extensive policy territory than tariffs and other industry assistance. However, the formal statutory independence that had its origins in the Tariff Board has held it in good stead. Indeed it has facilitated the extensions of its public policy role.’
In a later presentation, on the occasion of the launch of a Productivity Commission in Queensland, Dr Banks provided some thoughtful issues. This has followed the birth of similar institutions in other states of Australia and in some overseas countries.
[Reference: ‘The Productivity Challenge and 'the PCs'.]
Early on, Dr Banks provided some necessary warnings.
‘I wish I could begin by saying that governments’ increased interest in Productivity Commissions has coincided with an increase in productivity-enhancing policies and reforms. Rather, the past decade has, if anything, witnessed more policies that detract from productivity growth than enhance it.’ and
‘Monetary and fiscal policy have an important, indeed at times crucial, role to play with respect to economic activity and employment in the short to medium term. But they have little direct impact on growth rates over the longer term. As the ‘3Ps’ identity makes clear, economic growth is determined by the rates of growth in population, participation and productivity. And on a per capita basis, the growth in incomes depends (terms of trade aside) almost entirely on the latter two.’
Past examples of policies for productivity increases
Despite recent disappointment, particularly in the decades of the 2000s and 2010s, Australia in the past 60 years has benefitted from a number of important policies to increase Australian productivity. These included:
Freeing ability to mine resources, started in 1960/61 by a government facing an unexpected recession.
Cutting tariffs, started by Whitlam government as an anti-inflation policy, continued by Hawke, Howard governments.
Floating the Australian dollar in 1983, already discussed in chapter xx of this book.
Financial Deregulation, perhaps as elsewhere overcooked but providing a substantial positive effect on national productivity.
Partially deregulating industrial relations, started under Hawke government, continued by Howard government.
Establishing a GST, with some offsetting cuts to income taxes, tried by Hewson government, implemented by Howard.
The substantial pro-competition reforms to public utilities (commercialisation, corporatisation, privatisation).
Not all of these policies produced only benefits. Cutting tariffs cost manufacturing sector jobs and capability. Large scale mining upsets people of a deeply ‘green’ personality. Floating the dollar has allowed what some people regard as ‘too many imports’, further eroding manufacturing sector jobs and capability. Deregulating industrial relations upsets unions and cheers business owners, and is the most ‘political’ of policy changes. The GST/income tax switch is meant to encourage saving and discourage consumption, but national saving has not followed this pattern. (A broader GST with higher rate, say 15 %, might help cure this issue.)
My impression is that these changes have made Australia a more dynamic and globally interested nation. Again there are results that some people do not like. Many more women are working and seem to enjoy it. However, some two income households struggle in various ways, some of which create neglect of children. Some women complain about being paid less than men but a fine female economist says there are good reasons for this. [Reference: Judith Sloan]
Also, growing numbers of women in the workforce mean less full time jobs for men. And loss of jobs is no longer just losses of blue collar jobs. There is now an excess of lawyers, accountants and other white collar jobs that are being replaced by of jobs for people offshore or technical innovations. Imagine the effect of the university sector when ten or twelve American universities, and perhaps one or two in the UK, go global. What rapid development of Artificial Intelligence means for jobs of humans is a black cloud over thoughtful people.
For a mix of factors, including excessively easy monetary policy, Australian house prices are far too high for young and lower income workers to buy into an overheated market unless helped generously by relatives.
Whether Australia is a more inequitable country is hard to decide. Careful analysis shows that generous welfare payments mean that the poorest people, those with the bottom 10 % of income levels, keep pace with percentage growth of people with the top 10 % of income. Many middle income people however, find their income growth slower than those at the top.
I suspect that most Australians believe that senior financiers are paid far too much and the recent Royal Commission has had the effect of putting a crimp in this issue. But all the large banks are busy cutting jobs and workers that make up a significant share of their total workforce.
A most important general issue involves development of a viable defence industry. During the second world war, Australia’s manufacturing industry was rapidly shifted to a war footing. Ships and aeroplanes were rapidly built and performed well. Scientific discoveries were applied to improving the nation’s defence. Even so, it took the might of the US navy and the bravery of Australian soldiers to block the downward thrust of the Japanese attackers.
Nowdays, fighter planes, ships and submarines are made very slowly by companies domiciled overseas. Australia believes it will learn from these activities, and no doubt that will occur. But the expertise immediately available in the 1940s will be lacking for at least the next 30 odd years. In any war we shall be totally dependent on the American forces and who knows how willing the US administration will be to come to our aid.
Perhaps we should be focussing on some virus, like the viruses used to kill rabbits, to attack people from overseas, and make sure Aussies, or welcome visitors, are inoculated so it does no harm.
The need for further progress.
Despite the efforts already discussed, the Australian economy has fallen behind other nations in its quest for increased productivity. This is important because increased productivity is the route to greater national wealth and individual financial wellbeing. In 2014 I was involved with a group called The Industry Group, lead by Richard Morgan, in an attempt to explain the ways Australia was falling short in the drive for increased productivity and suggestions for remediation.
[Reference: Richard Morgan, Peter Jonson, Mark Rayner and Colin Tease, Growing the Trade Exposed Industries, Self published, 2014.]
Governments, Regulators, Industry and Unions have often failed to recognise, understand or give consideration to the less obvious and often long term consequences of their
decisions and actions, and their impact on Australia’s competitive position.
Recent examples of adverse consequences are the progressive closure of Australia’s oil refineries around the coast, rather than their progressive replacement with one or two world-scale facilities, and the closure of alumina refining, aluminium smelting and aluminium rolling capacity. Reductions in cement and steel manufacture, and closure of a number of food processing operations are other examples.
Nowdays oil is refined offshore, well to the North of Australia. Not only would it be for an enemy to cut off supplies, a war, or even a strike, could cripple Australian and normal life in Australia in a most unhelpful way.
Decisions against major renewal in more productive equipment are made when the cost impediments are compounded by low rates of tax-deductable depreciation and the absence of accelerated write-off to match overseas competitors.
The trade exposed industries are now operating in a global economy. Markets no longer have a national or regional emphasis but have a global perspective. Specialisation provides gains in productivity but it is the size of markets which enables these gains to create wealth with opportunities to generate jobs, economies of scale, resources for research and innovation and an increase to the national tax base.
The study by the Industry Group provides a host of impediments to growth of the Trade Exposed Industries, in particular Manufacturing and Minerals and Food Processing. Readers of this book may request a copy of our full study by writing to the author at firstname.lastname@example.org.
The following list of ‘Significent Industry Impediments’ and what can be done about them shows the options available to any government prepared to fight for productivity improvement.
Reduce cost of coastal shipping compared to foreign flag vessels used for imports, by reform of the current cabotage system that protects high cost coastal shipping.
Restore domestic production of petroleum and other oil-based products. Solar or wind products will not keep ships, trains, road trucks or even domestic cars running for many years, but even then reliable baseload energy will be needed.
Regulate impacts on power and energy costs by insisting on a seriously inexpensive base load high efficiency supercritical coal-fired generation capacity. If private enterprise will not do this job, arrange government set-up and eventual sale to the private sector.
Reform company tax so that depreciation write-off for new manufacturing equipment match rates in overseas companies. When fiscal situation allows, reduce company tax rate to current USA levels.
Increase labor flexibility and opportunities for productivity improvement in the workplace. Management must be involved and an appropriate culture embedded.
Increase government grants of money spent on R&D and improve taxation treatment for results of R&D spending.
Create opportunity to tax capital inflow to reduce exchange rate to eliminate excessively high exchange rate, thus improving competitiveness of exports and reduce competitiveness of imports.
Give priority to mergers that create stronger groups that can hold their own in international markets. Take care to carefully consider likely effect of foreign takeovers which are likely to hinder development of international trade.
Create a culture that minimises red tape and bureaucratic obstacles to industrial progress and is kinder than at present to entrepreneurial efforts.
How to greatly improve Australia’s defence is a very important issue on its own. Please put some serious brainpower to work on this question. Mr Prime minister.
How would Australia need to change?
What will Australia look like if opportunity to create jobs is limited by powerful international businesses with productivity we cannot match?
The first point is to stress that Australia can match even the largest international enterprises. As one way to achieve this, a national wealth fund could be created to invest in some of the world’s greatest corporate entities and find a way to fit some appropriate divisions in Australia into their operations.
To the extent that this fails to keep a large proportion of Australians working, we can increase numbers working in defence, health, educational and welfare services funded by government. Of course, mere keeping pace with people's needs will require these increases in all liklihood, provided national productivity is sufficient to allow this. Printing money, or borrowing from overseas, are dangerous ways to pay for jobs in all these sectors.
Mervyn King on Productivity
Lord Mervyn King is a former governor of the Bank of England, now a member of the house of Lords and an author. His book, called The End of Alchemy. Money, Banking and the Future of the Global Economy, is important and radical in its conclusions. I have written about the general material, but here I report his views on promoting productivity. There are three general suggestions.
The first concerns productivity, 'barely noticable' since the global crisis of 2007-08. Capital growth has been much contracted and growth has been supported by hiring more people. Efforts to boost productivity will require a restoration of increased capital. and there are many opportunities to increase productivity.
Boosting productivity in the product market by reducing monopolies and increasing competition. In the tax system by reducing distortions between saving and spending. Also by eliminating complex deductions and reducing rates of income tax. Simplifying regulation (which King claims support for the 'Chicago plan' in banking would greatly simplify) and improving public infrastructure. I would add tax cuts to promote innovation.
Lord King's second item is the promotion of trade. 'Throughout the post-war period, the expansion of trade has been one of the most successful routes to faster productivity growth, allowing countries to specialise and exchange new ideas about new products and processes'. The so-called Doha Round (which started in 2001) failed to produce another round of reductions in tariffs and other trade barriers. 'The best way forward now would be for the advanced economies to push further liberalisation in trade of services - the dominant part of our economies and a growing proportion of total trade - not only to benefit from increased trade and its effect on productivity but also to demonstrate to the emerging markets that they cannot block all progress in this area. (King, p361).
The third proposal is the restoration of floating exchange rates. 'The experiment with fixing exchange rates has not been successful and it is important that exchange rates are free to play their stabilising role in order to correct the current disequilibrium'. (King, p361). In my view the best candidate for this is the EU. Exchange rates of Germany and other 'Northern' members would be higher and those of deeply recessed 'Southern' members would be far lower. Of course, this would be seen as a deeply retrogode (Sp check) move by the elites of the EU, and would also require possibly large debt write offs for 'southern' members before the float, as happened to Germany during the great economic difficulties of the 1930s.
Both China and Germany would have important matters to sort out, even if a return to flexible exchange rates was to be complicated. But free floating of currencies would have great benefits for productivity and the point needs to be persued by global leaders.
Lord King finishes his book with some warning points. one of the most thought provoking is the follows: 'There is nothing predetermined about the inevitable triumph of capitalism'. (King, p 365). But here I shall finish, after applauding Lord King's summary.
'Four concepts have run through this book in order to explain the nature of financial alchemy ... 'disequilibrium, radical uncertainty, the prisoner's dilemma and trust. It is hard to think about money and banking. It is hard to think about money and banking , and their role in the economy, except in those terms'.
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