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Productivity and the economic priesthood

The latest from the Inroads listserv selected and edited by Bob Chodos

In a speech in Winnipeg on February 4, Bank of Canada Governor Mark Carney warned that Canada’s economy was being held back by the country’s “abysmal” level of productivity. The listserv took note and wondered why Canada’s performance is so poor – and what productivity means anyway.

From: Gareth Morley | February 6

The other day, Mark Carney pointed out how abysmal Canada’s productivity performance is compared with that of the United States. He estimated that the difference is going to cost the average Canadian $30,000 over the next decade.

I’m curious if anyone has a good idea why the difference is so stark. Twenty years ago it could have been attributed to differences in public policy – with Canada more statist – but public policy has converged.

Is it cultural? Are Canadian businesses still just more reluctant to innovate? Why would that be?

Gareth Morley is a litigator with the British Columbia Ministry of Attorney General. All opinions expressed are his alone, and do not reflect the views of the Ministry of Attorney General.

 

From: Ian Malcolm | February 7

I wonder if the difference is real. Paul Krugman and Dean Baker have argued that the alleged productivity difference between Europe and the United States is a fiction created by mismeasurement. It might be the same in the case of Canada.

Ian Malcolm is Senior Publishing Editor (humanities) with the European office of Princeton University Press in Woodstock, England.

 

From: Harvey Schachter | February 7

I did an article for Canadian Banker a few years ago and came away suspicious of the issue because the measurement is so poor. That doesn’t wipe away the whole issue – we know that more R&D is done in the States because of the nature of the relationship between our two economies – but certainly the figures used to measure are wobbly.

Here are some excerpts:

Everybody may have an opinion, but according to Tim O’Neill, executive vice president and chief economist of the Bank of Montreal, the reality is that “we don’t know. It’s humbling for economists. We’ve spent 25 years trying to find out and there is no single answer.”

At first, for example, the problem was blamed on the spike in energy prices in the 1970s. But when prices dropped in the 1980s, productivity remained virtually unchanged. In addition, economists have studied a litany of other possible factors, but none seem to explain the productivity decline. “It may be the aberration in growth was not the decline but the growth in the 1950s and 1960s,” O’Neill muses. “If you look back 100 years, the 1950s and 1960s stand out as a period of unprecedented growth.”

Measuring productivity can be as complicated as explaining it. When you move away from the simple widget-making factory to organizations and industries providing a variety of goods and services, comparisons must be based on monetary value of the output in order to combine coal, cars, education and bank loans. But monetary value can confuse the matter at the same time as it makes measurement possible.

If one automobile factory produces 10 Honda Civics an hour and another 10 Cadillacs an hour, is the Cadillac factory twice as productive because the cars sell for more? If one of those factories hikes its price by 10 per cent, does productivity suddenly grow by 10 per cent? According to logic, no; according to the monetary-based productivity calculations on which the debate is based, yes.

When some federal civil servants in the federal finance department were sent home for the day during rotating strikes this spring, they were paid their normal salary even though they didn’t work. The actual productivity was zero but since productivity calculations are based on salaries, Statistics Canada would consider them to have been as productive that day as any other.

If a bank teller appears for work one day but no clients happen to show up at the wicket, is that person not productive since no output resulted or fully productive because the salary was paid? If a loan officer approves a loan to one customer for a Honda Civic and to another for a Cadillac, is he or she twice as productive when approving the Cadillac loan?

Jim Frank, vice-president of the Conference Board of Canada, points to a physician: “Let’s say he treats 30 patients one day and 45 the next day. Is he 50 per cent more productive the second day? Maybe on the day he handled 45 he only did runny noses and the first day he was handling people with heart attacks. Productivity is a simple concept – but not a simple concept to measure.”

And the hardest place to measure it, he stresses, is in service industries. Indeed, traditionally, financial services weren’t even measured for productivity since financial intermediation wasn’t considered a valuable service, notes John Baldwin, a Statistics Canada economist.

Internally in banking, the ratio of non-interest expenses to revenue, long known as the efficiency ratio, is now increasingly being dubbed the productivity ratio and used for such comparisons. But Peter Watkins, the executive vice-president and chief information officer of CIBC, has qualms about that tendency since the quality of services being provided doesn’t get captured in that ratio. “You can be using very efficient, old technological services but functionality is not great and so productivity is less than if you invested in a new system. The ratio is a good proxy for efficiency but not for productivity,” he says.

Harvey Schachter is a freelance journalist living in Battersea, Ontario.

 

From: Garth Stevenson | February 7

As Harvey’s example suggests, measuring productivity in much of the service sector is very problematic. I would hate to think that my colleague who lectures to 500 students in a first-year class is five times as productive as I am because I teach upper-year courses with smaller enrolments. And if I publish more than he does, how do you weigh one kind of output against the other? The fact that many universities are now attempting to make calculations of this kind doesn’t mean that it makes any sense.

On the other hand, it does make sense to measure productivity in specific industries, such as railroading, farming or manufacturing. In Harvey’s example of the factories that produce Honda Civics and Cadillacs, I would say that the Cadillac factory is obviously more productive, because it produces a higher-quality product for which people are willing to pay more. If you disagree with me on that point you are making the mistake of economic planners in the Stalinist and Maoist regimes, who measured only quantity and not quality. The statistics looked good on paper but the products were useless, like the “steel” produced in backyard blast furnaces during Mao’s Great Leap Forward.

As for comparing different countries, this is problematic too because their economies contain different proportions of the different sectors, and productivity in the nonmarket sector or even in services such as banking can probably never be as high, if you can measure it at all, as in the goods-producing sectors.

Garth Stevenson is Professor of Political Science at Brock University in St. Catharines, Ontario.

 

From: Reg Whitaker | February 7

I am not an economist and am a bit doubtful about entering into a debate about an esoteric concept like productivity measurement. I say esoteric because economics has some of the elements of a semisecret cult in which only a select few are initiated into the inner mysteries. These same few are empowered to define certain terms for the benefit of the uninitiated. This is potentially a powerful tool for social control, or what is called in our era shaping public policy.

However, when cults fail demonstrably (i.e., when priestly incantations do not bring on the promised rains, the crops wither, and locusts ravage the land) the priesthood loses some of its magical aura. This does happen periodically, when lean years succeed fat years, and each time it does, priestly authority falters, at least momentarily, only to be reasserted when it becomes clear that the unwashed and uninitiated haven’t got a clue themselves about how to get things better again and thus eventually return their trust to the temporarily defrocked shamans. The latter adroitly divert attention from their lousy track record by yanking out yet new esoteric terms for which they claim great power, but which are too complex for simpler minds to grasp.

Recently, as we are all aware, the cult of free, unregulated “liberal” markets promised indefinite prosperity, unending economic growth and bonuses of Croesus for the geniuses playing the market. Only economically incompetent governments stood in the way of this expansive vista.

But then a funny thing happened on the way to the end of history. It looked suspiciously like a Great Crash. Back to the spin cycle for the priesthood. First, “stimulus” replaced the market. That might seem contradictory to all the previous incantations about deregulation, privatization, liberalization and downsizing government, not to speak of the evils of deficit financing and the dreaded Debt Wall. But hey, no problem for resilient shamans.

Their next step is to introduce a couple of new terms to awe the masses. First is the Structural Deficit, which is very, very Bad and can only be wrestled into submission by doing the exact opposite of everything being done under the Stimulus to turn the Great Recession around (i.e., if government was unaccountably required to right the imbalance caused by economic liberalism, dealing with the Structural Deficit requires strangling government and hollowing out its capacity to influence markets).

The Canadian priesthood has a second useful concept: Productivity. This is a real winner because it defies any attempt to penetrate to its essential definitional core, and can therefore sustain any number of attacks against it by slight shifts of emphasis and terminology. It is also mightily useful for achieving policy goals that the priesthood has always held dear: liberalizing labour markets (breaking unions); targeting R&D incentives to the private sector (more corporate welfare entitlements); and freeing markets to reward success (bigger, fatter bonuses for execs). All this can be justified as meeting the demands of Global Competition, a natural phenomenon like the weather which cannot be contested by mere mortals, and certainly not by politicians.

There are of course niggling questions raised by sceptics and doubters, some of which have been raised on this list. I might add another: does productivity measured by output per worker not increase every time a worker is laid off by automation? A secondary question: does the economy benefit from replacing a worker who buys the products of the economy with a machine that does not?

Questions like these will have little effect on the impact that the Productivity mantra will have on public policy. That’s not the way the system works.

Political scientist Reg Whitaker lives in Victoria, B.C., and is a member of the Inroads editorial board.

 

From: Harvey Schachter | February 7

I think economists and businesspeople have essentially come to the conclusion that productivity is not a word they can brandish effectively any more, if they ever did. Previously it went over many people’s heads. Now it is seen as a codeword for cutbacks and retrenchment. So I have heard they want to move away from that term, while retaining the competitiveness concept at the core.

The word still works, however, when they are talking to themselves and to government, within the cult as Reg would say, although some economists have a different take, as Reg knows.

 

From: Alastair Sweeny | February 7

I’d say the Canada-U.S. gap has had a lot to do with the value of the Canadian dollar. The low dollar limited our ability to buy foreign technology and modernize. Then when the high dollar hit, our factories, particularly in industries like forestry, found they had a lower-quality product – little value-added – that nobody particularly wanted.

I don’t buy Carney’s argument. How can he predict where the U.S. dollar is going to track over the decade, and estimate global demand for our raw materials and manufactured products?

Alastair Sweeny is Vice-President, Development, of Northern Blue Publishing in Ottawa.

 

From: Garth Stevenson | February 8

I enjoyed Reg Whitaker’s comments on the role of economists in our society. Thorstein Veblen, John Maynard Keynes, Harold Innis or John Kenneth Galbraith would doubtless have agreed, and could hardly have said it better.

At the same time, I disagree with Reg in his dismissal of the concept of a structural deficit. Unfortunately, the structural deficit is neither a myth nor a joke. It may be defined as the result of a situation where tax revenues persistently fall short of expenditures, regardless of the economic cycle. In some less developed countries this may be because the state simply lacks the administrative capacity to collect taxes efficiently. However, that is obviously not the case in Canada or the United States.

In the present-day United States, and perhaps to a limited but growing extent in Canada, the problem simply results from the reluctance of people to pay enough taxes to cover the cost of the public expenditures that they demand or take for granted. This problem has deep cultural roots in the U.S.A., as the recent antics of the Tea Party movement remind us, but it has been exacerbated in recent decades by the failure of politicians to inform voters honestly about the facts of life. (Obama, judging by his state of the union address in January, is no exception.)

Americans complain endlessly about their taxes, but theirs is the only industrialized country without a value-added tax or a national sales tax of any kind. It is also the only country that allows the absurd practice of deducting interest payments on mortgages from taxable income, an idea that the Wilson administration accepted so as to get the original income tax legislation through the Senate, where heavily mortgaged farmers in the thinly populated western states were overrepresented. This not only costs the federal goveernment billions in lost revenue; it encourages wasteful overinvestment in housing and contributed significantly to the recent crisis of the banking system.

Add to this situation an aging population, a costly social security program, and the world’s costliest, and most powerful, military forces, and you have a situation that cannot be indefinitely sustained. Old-school conservatives in the first half of the 20th century really believed in small government, including a low-cost military establishment. Their successors today take social security and medicare for the elderly for granted, and they demand an aggressive foreign policy and almost unlimited spending on “national security.” At the same time, they clamour for lower taxes. To put it bluntly, this is childish and irresponsible, but what politician dares to say so?

Contrary to what people like Rick Salutin tell us, it is not “right-wing” to worry about the structural deficit. Having a deficit is ultimately regressive, because it imposes on the whole society a long-term burden of interest payments, most of which go to wealthy investors. The rich would far rather lend money to the state than be taxed enough to actually support it.

 

From: Patrick Balena | February 8

Judging from what I see from a couple of entries on Berkeley economist Brad Delong’s blog, the spike in U.S. productivity seems to be related to recession job losses – i.e., they may be boosting labour output by shedding lower-productivity firms and workers, rather than by making major new investments in better plant and technique.

Patrick Balena lives in Vancouver.

 

From: Reg Whitaker | February 8

Garth is right about the deficit, and I actually have no quarrel with the argument that deficit financing cannot be sustained indefinitely. Indeed, I think that this argument applies especially to smaller economies like Canada which are left very vulnerable to the bond rating agencies and to the forces of global capital when running large deficits. The United States is a different matter: when you are the thousand-pound gorilla on the block you can get away with bad behaviour for a long time, especially when the debt is largely owed to the Chinese, thus setting up a form of mutually assured destruction preventing either superpower from pulling the plug on the other. In these circumstances, Paul Krugman has a valid Keynesian point that you don’t need to worry overmuch about the deficit.

Canada is a different story. The elimination of the deficit by the Chrétien-Martin government in the 1990s was one of its signal achievements in what was overall a rather good economic record, and was particularly noteworthy for not being couched in neoliberal rhetoric about downsizing and marginalizing the state, but instead was presented as recreating the means for the state to act again where appropriate. It also provided Canada with breathing space on the international stage for slightly greater independence of action vis-à-vis the U.S.A.

This is where I part company with many of the economic priesthood now preaching ruin over the “structural deficit”: they are quite deliberately deploying this as a scare tactic to put neoliberal restructuring back on the table just as the disastrous impact of neoliberal economics is still being absorbed by a battered working and middle class. Since tax increases, especially for the rich and the corporations, are anathema to this kind of thinking, slash-and-burn attacks on the public sector and social programs are the only route left to bring down the deficit. We can already get a glimpse of where this will lead in the U.K., where a thoroughly spooked Gordon Brown is trying to keep out in front of the Tories with his own scorched-earth campaign (universities are apparently set for mass layoffs and the closure of entire campuses). All this while the U.K. is still mired in one of the worst economic messes of any European country, and stimulus funds are still being expended. What kind of plan advises stepping on the accelerator and brake at the same time? Toyota economics?

Surely a sensible program for the opposition here in Canada is to target the looming structural deficit with a plan to restore the 7 per cent GST and to raise taxes on the superrich, but not until the economy is back in shape – two, perhaps three years down the road. Sensible, but not likely. Instead, we can look forward to sudden, wrenching, destructive lurches in opposing directions, all under the wise direction of the economic gurus who have been so helpful for so long.

 

From: Alastair Sweeny | February 8

In the long run, the bigger the deficit, the higher the taxes that must eventually be paid. Big deficits mean more tax money goes to bondholders and consuming functionaries instead of productive workers and companies.

 

From: Reg Whitaker | February 15

In light of the discussion on this list of the “productivity gap” between Canada and the United States, and the many questions surrounding this measurement, I was rather struck by this that crossed my desk today in the TD Waterhouse investment newsletter, looking at prospects for the U.S. economy:

Despite the positives that we’ve highlighted regarding the trend, we believe that U.S. unemployment will remain high relative to the recent past. Why? Corporations have seen that they can produce similar amounts of goods and services with fewer workers. This can be seen in the large productivity gains (up 6.2% Y/Y in Q4/09) that U.S. corporations have made during this recession. While nonfarm payrolls should begin to show net job adds in the coming quarters, and see the unemployment rate slowly trend lower, we believe that some of the 8.4 million jobs lost will be structural and not return for some time. These structural job losses would therefore likely impede economic growth in the future.

I repeat a question I asked earlier: if productivity rises when workers are laid off and replaced by technology, does this not reduce effective demand and thus “impede economic growth”? Are productivity gains then really such an unalloyed good thing as the economic priesthood would have us believe? Of course, TD is headed by CEO Ed Clark who has just been identified by the PMO as on its enemies list, who once met with (yikes!) Michael Ignatieff, so perhaps this is just Liberal propaganda …

 

From: Gareth Morley | February 15

TD Waterhouse is reverting to pre-18th-century economics. In the long run, increases in productivity will not lead to lower employment. Rather, unemployment is caused cyclically by inadequate aggregate demand (which is usually in the control of the central bank) and labour market rigidity. Otherwise, we would all have starved as a result of the industrial revolution. What is true is that when labour force participation decreases, it is often those with lower productivity who leave. When aggregate demand heats up again and labour market participation increases, then those marginal workers return. That means that, all other things being equal, average productivity will be lower in booms than in busts. But that’s not because higher productivity is causing unemployment – it’s because unemployment is causing higher productivity.

 

From: Reg Whitaker | February 15

Gareth makes good points, and I hardly want to appear as some Luddite denouncing technological advances. There is obviously a difference between the short term and the longer term; I doubt that TD Waterhouse is reverting to pre-18th-century economics when they assess the short-term effect of the productivity gains. My only point – I grant I was being just a little mischievous – was to question the simplistic way in which productivity is advanced as a one-size-fits-all prescription for public policy in the face of a major recession and major unemployment, in the short term at least. In any event, if there is longer-term structural unemployment, that will surely have an impact on future economic growth, not to speak of demands on government for assistance.

 

From: Alastair Sweeny | February 15

Gareth is right that higher productivity does not cause unemployment – it usually makes goods cheaper. But I am not sure that unemployment causes productivity, unless it happens by the healthy deflation of bubbles.

The introduction of radical new technologies and the spread of Web business and intranets are still having the most profound effect on productivity. The biggest boom is in small manufacturing, where parts and products can be designed, prototyped, made and delivered anywhere in the world.

We lag behind the United States because we do not invest enough in new technology and Web business as much as they do and cannot compete as effectively. A higher Canadian dollar will help, as it will make machines and innovative technology cheaper.

So called “lost jobs” are usually jobs in declining industries or jobs in sectors propped up when governments rescue incompetent managers, as in the case of GM and Chrysler. They are of course replaced by “found jobs” somewhere else.

This is the new normal.

 

From: Gareth Morley | February 16

The question is what we should do in response to improvements in productivity. If the central banks allow demand to expand, then improved productivity will be good. If they don’t, it won’t. Right now, it is the European Central Bank that is the worst offender, although Canada certainly had its own experience of crazed ideologues in the central bank in the early 1990s.

Also, I wasn’t really saying unemployment genuinely causes higher productivity (although that may sometimes be true). It’s just that if productivity is measured in terms of output per hour worked, and lower-productivity workers are driven out of the workforce, the average goes up.

 

Selected and edited from the Inroads listserv by Bob Chodos

 

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Bob Chodos
Bob Chodos is managing editor of Inroads.




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