Andrew Leigh

"A NEW PRODUCTIVITY PUSH"

SPEECH TO THE AUSTRALIAN ECONOMIC FORUM
SYDNEY

28 JANUARY 2016

Princeton economist Paul Krugman once put it neatly: ‘Productivity isn’t everything, but in the long run it is almost everything.’

As an economist, I love hearing real-world examples of how firms are raising productivity. A couple of years ago, I visited a manufacturing firm that makes mining machines. So baroque had the production line become that when they revamped the layout, the firm found that it was able to get the same work done on a line just one-thirteenth the length. The result was a one-third improvement in productivity for the company.

Visiting Fortescue’s operation in the Pilbara, I heard about its company-wide competition called ‘Have a Crack’, with the prize being $50,000 for the best productivity-boosting suggestion. The winning idea increased the efficiency of the machines that load iron ore onto bulk carriers, saving the company tens of millions of dollars each year. Not a bad return on investment.

This kind of innovation is what companies like the ones represented here today do so well. Coming up with the creative improvements which let workers do more with fewer resources. Honing in on the little productivity gains which make a big difference to profits and growth. As you well know, this is work that never ends. Companies like yours are always looking for fresh ways to stay ahead of the curve as technology and the global economy evolves.

Smart governments need to do the same.

Economists talk about the ‘rule of 72’. If you want to know how long it takes to double living standards, just divide 72 by the growth rate.

This means that a 2 percent growth rate doubles living standards every 36 years, or about once a generation. But a 4 percent growth rate doubles living standards every 18 years, or twice a generation.

Without productivity growth, living standards stagnate. If we want a society where people are better off than their parents, where we can be more generous to the vulnerable, and where we have better public infrastructure, we need faster productivity growth.

Over the past few years, our productivity performance hasn’t been bad. We’ve seen labour productivity grow at 2.4 percent since the GFC, which is close to the average in the past forty years (2.3 percent). But the big question for Australia is: what happens next?

If you’re a glass-half-full person, you’d point to some positive signs:

• The Australian dollar at US 70 cents
• The lowest global interest rates in 5000 years
• Oil at US$30 a barrel
• A stronger sense of political bipartisanship than we’ve seen for quite some time

But the glass-half-empty types would raise other concerns:

• Disposable income per person down 2 percent since 2013
• A huge sharemarket shock this year, and an earnings outlook on the Australian sharemarket that’s now lower than UK, US and Japan.
• ASX dividend payout ratios rising above 60 percent, which is well above many other countries
• Geopolitical concerns everywhere from the South China Sea to the Middle East.
• Significantly higher inequality than a generation ago.
• The highest carbon emissions per person in the advanced world
• Too little innovation – just 6 percent of ASX300 firms say that Australia is a ‘highly innovative’ nation.
• A budget not due to return to surplus until after 2020.

When I was on the House of Representatives Economics Committee, Glenn Stevens would report to us every six months.

Invariably, the politicians on the committee couldn’t constrain ourselves to just asking him about monetary policy.

One day, clearly frustrated that we kept asking him about productivity, Governor Stevens told us: ‘The Productivity Commission has a long list of things to do. My answer to what we can do about productivity is: go get the list and do them.’

It fell to Gary Banks, then chair of the Productivity Commission, to admit that in fact they did not have such a list (though in one of his final speeches, he did set one out).

This matters because over 85 per cent of all per capita income growth in the past generation can be attributed to workers becoming more productive.

To achieve this, I propose a new productivity push, focused on five main areas.

1. Better teachers. Over the past decade, test scores of Australian children have fallen backwards in reading, maths and science. We need to do more to ensure that schools can attract and retain great teachers. Labor’s announcement today that we will fully fund the Gonski reforms provides an essential platform to make this happen.
2. Global trade deals that reduce barriers to trade right across our trading partners. A shift from multilateral to bilateral trade deals may be one reason why world trade has been slowing in recent years. If we can’t strike multilateral deals, we should at least allow the Productivity Commission to scrutinise bilateral ones.
3. Infrastructure spending based on benefit-cost analysis, not pork-barrelling. Last year, Bill Shorten announced that Labor is exploring the notion of providing Infrastructure Australia with more power and greater independence. As the country with the third-lowest population density in the world, Australia will always have more projects than dollars, and it’s vital that we spend wisely.
4. A tax system that is simpler, more efficient, and more equitable. The central job of our tax system is to raise money for the public good with as little impact as possible on economic activity. Whether it’s company tax or individual tax, we should be careful of attempts to use the tax system to subsidise other activity. We should also encourage the states and territories – who have both the most efficient and the most inefficient taxes – to pursue reform.
5. A market-based approach to tackling climate change. As Australia’s competition reforms of the 1990s showed, getting prices right can drive positive change. Many of your companies already use carbon prices in your long-term modelling. In fact, you may even model non-market policies as a ‘shadow price’ – probably a high one. Malcolm Turnbull put it crisply in 2010: ‘Climate change is real, it is affecting us now, and yet, right now we have every resources available to us to deal with climate change, except for one, and that is leadership. We cannot cost-effectively achieve a substantial cut in emissions without putting a price on carbon.’

Like it or not, technological advance and inequality are inextricably bound together. We need innovation as a driver of productivity. But new technologies have a tendency to widen the gap.

Put another way, many of us are drawn to innovation because we love creativity. But as Schumpeter’s memorable phrase ‘creative destruction’ reminds us, creativity tends to come with destruction.

That’s why policy needs to focus on inclusive growth – combining productivity with equality. Smart government policy shouldn’t be focused on reducing the wages of low-paid workers, but on raising output per person. By boosting the quality and quantity of education, investing in science, improving public infrastructure, and engaging with the world, we can raise people’s productivity. By maintaining a means-tested social safety net, we can ensure that the most vulnerable are looked after. This approach favours a race to the top, not a race to the bottom.