Productivity is dead

Just got to the AFR at the end of the day, and what do we find: Falling productivity numbers cloud economic recovery. The headline front-page story too.

The weakest productivity numbers in at least 25 years have unsettled the outlook for an economic recovery, a pick-up in wage growth and a string of budget surpluses predicted by the Morrison government and the Reserve Bank of Australia.

Former Productivity Commission chairman Gary Banks said that while he was cautious about the poor productivity reading, it “caps off what has been consistently weak productivity performance” in Australia and the serious need for structural reform to lift economic output.

“Trying to stimulate demand through monetary and fiscal measures won’t cut it, I’m afraid, and these pose risks of their own,” Mr Banks said. “The causes of [economic weakness] require regulatory and other reforms to enhance the supply side of the economy.”

Public sector spending is notoriously non-value-adding. You can have all the fake GDP growth you like, building train lines in Melbourne and streetcars in Sydney, and who know what everywhere else, but if they do not repay their production costs in higher levels of output, they are taking your economy backwards. And like with the trains and the trams, since neither is even carrying a single passenger as yet, there is absolutely nothing on the ground taking place that creates any value whatsoever. All for very classical reasons, but you’d have to read Mill and not Mankiw to see the point.

Liked this bit too, also for very classical reasons:

While the figures are likely to reflect strong jobs growth at a time of weakened economic activity, including a drop in farm production because of the drought, many economists blame structural problems, such as a distinct lack of business investment, especially outside the resources sector.

My favourite line from Mill, the most radicalising phrase I ever read, was “demand for commodities is not demand for labour”. To translate: there is no connection between the level of demand and employment. With real wages there is a major connection, but with employment none at all.

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