Opinion: How National's productivity talk-fest skirts around key issues
5th May 09, 11:24am
By Infometrics economist Matthew Nolan In a recent report the OECD praised the government's aim to "increase productivity" in the New Zealand economy. Ever since National came into power, the catch phrase productivity has been thrown around with reckless abandon "“ treated as both our saviour in the current crisis and the destitute child that was abandoned by the previous Labour government. However, all this talk of productivity is a bit 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 greater production, the strict focus on productivity alone will lead to bad policy. Productivity is a surprisingly vague term given its importance in economics. The essence of productivity is as follows: when an industry or an economy is more "productive", it can make more output with the same amount of input. This definition indicates that productivity isn't a goal in itself. The goal of policy should be to support domestic economic activity (efficiency), while ensuring that the other issues that society values (equality, fairness, justice, etc) are taken into account. The purpose of an elected government is to balance the often competing goals on the basis of what it appears society wants. An extreme example of how the single-minded focus on productivity is dangerous: As a caring social planner, who believes that society only cares about productivity, I walk into each firm across the country and ask who the least productive employee is. Then I shoot them. From there our nation's productivity increases. I think we would all agree that such a situation is probably not in the social interest, but it would be supported by a single-mined focus on productivity. The example does not have to be this extreme for the trade-off to make sense. If we are focused on productivity we can achieve this goal by lowering employment, or forcing individuals to save at a higher level than they really wish to. These aren't satisfactory policy prescriptions, but they can be logically supported by blind support of productivity targets. When the current government is discussing increasing national productivity there are three ways this could occur through policy:
- 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.
- They have found a way to make additional output appear out of thin air.
- They believe society is willing to accept less active legal and social policies in order to increase economic output.