As regular readers will know, I’ve had a long debate[1] with the Productivity Commission on the sources of the supposed ‘productivity surge’ of the 1990s, which, I’ve suggested was primarily the result of increased work intensity and unmeasured increases in working hours at a time of high job insecurity. I was looking back at some of these discussions when Google turned up a Hansard transcript of hearings of the Senate Standing Committee on Economics in 2012. It turns out that the Commission now agrees with me, and has done so for some time. To quote the Commission’s expert witness, Dr Jenny Gordon[2]

There was a very big debate with the former branch head, Dean Parham, who did a lot of work on productivity. He looked at the effect of the reforms and ICT, which is one of the points that Professor Quiggin made, in trying to explain the productivity boom of the 1990s in terms of what actually happened. Professor Quiggin’s main point is that work intensity is important, which is quite hard to measure but, in fact, is a major source of productivity growth. If people work smarter and work harder while they are at work, that will improve productivity. So it is cutting the fat of organisations, I suppose you could call it. The other point is that people are working longer hours. But the way the productivity measurement is done takes account of the hours of work. That is actually data collected through ABS surveys of individuals reporting the hours that they work. So we could measures hours properly. It is hard to measure work intensity. It does appear and it is a source of productivity growth … So we were in full agreement with that. So the debate was settled back in the mid-2000s.

It’s good that we are in agreement this far. I would add though that productivity growth achieved by working harder does not, in general, improve economic welfare. As for “working smarter”, if this is a reference to technological progress, it’s fine. In my experience, however, it’s usually management-speak for “do the same job with less resources, and work out for yourself how to do it”.

More importantly, the key implication of my analysis is that, to achieve sustainable improvements in living standards, we ought to be focusing on getting the macro issues right rather than lining up for another round of microeconomic reform. Increases in work intensity don’t last, as experience since the 1990s has shown. Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology (only a small proportion of which are generated domestically) and through macroeconomic and labour market policies that avoid wasting human potential through unemployment and other forms of social exclusion.

fn1. In the same hearing I cite here, PC Chairman Gary Banks described it as a ‘rich’ and ‘ongoing’ dialogue. I’ve certainly learned a lot from it, and I hope the same for the Commission and any onlookers patient enough to follow it.
fn2. Not particularly germane, but interesting to this post is that Dr Gordon is married to Brian Schmidt, winner of the 2011 Nobel Prize for Physics

Reports that the NSW Liberal government is planning to buy back the Cross-City tunnel, following the bankruptcy of the second set of private owners mark an important step in the failure of the private infrastructure program launched in the 1980s with the Sydney Harbour Tunnel[1].

The interesting failure here is not the bankruptcy of the operators but the recognition that the whole idea of imposing tolls on a road designed to divert traffic from the city is nonsense. The most sensible plan, after buying the tunnel is to remove the toll and free road space in the CBD for a variety of initiatives including light rail and cycleways.

Unfortunately, the lessons have not been learned. The new WestConnex project in Sydney is to be a largely private tollway. The proposed East-West link in Melbourne is also a toll road but “is being procured as an Availability Public Private Partnership (PPP), with the State initially retaining tolling and traffic risk.” Whether or not these projects are economically and socially justified, there is no doubt that the use of toll funding will greatly reduce the benefits, leaving more traffic on congested, but untolled, roads.

fn1. A sham deal, which was eventually reconstructed as a publicly owned tunnel with a private operating contract.

The Abbott government is faced with its first big economic policy decision, a bit sooner than I expected. Going into the election Abbott promised to reverse the Rudd government’s tightening of FBT rules for motor vehicles, at a cost of $1.2 billion over the forward estimates period of 4 years. This was to be funded in part by scrapping $500 million of assistance to the domestic car industry.

Since the great majority of cars in Australia are imported, and since much of the benefit of FBT rorts is dissipated through the inefficiency of the required structuring of salary packages, the reversal of the FBT decision yields only a minimal benefit to the domestic industry. It’s unsurprising therefore, that Holden has announced that, unless the government restores Labor’s assistance policy by Christmas, the company will close down. The general assumption is that the resulting contraction of the supply chain would force Toyota out of domestic production as well, so that the entire industry would shut down.

All of this would be comprehensible if the government was pursuing a consistent free-market line. But no one has tried to pretend that the FBT treatment of cars is anything other than a rort. LNP advertising during the election was all about the damage removing the rort would do to jobs in the salary packaging industry and to employers who depended on the rort to reduce their wage bills. Those employers notably include charities and NGOs which could be aided more efficiently with grants – of course, the LNP is going to cut those grants.

Assuming the government is unwilling to see the car industry close down within its first year of office, the sensible thing would be a double backflip, restoring Labor’s policy. That seems highly unlikely. I’ll also be surprised if the government holds its nerve and lets Holden close. So, I suspect we are going to see a half-baked partial solution which will increase the structural budget deficit relative to any consistent policy, and still only defer the end by a few years.

But, even if we don’t make cars any more, we will, at least, have a salary packaging industry that is the envy of the world.