Over on kiwiblog this week, Farrar retails a Salient interview with Roger Douglas that raises some serious questions. But they’re questions about Douglas’s mental faculties. And Farrar’s understanding of economics.
During the interview, Douglas is reported to have said (and it is an “unedited” transcription, so it is quite possible that Salient have made mistakes in the transcribing):
“Oh look, im not worried about Helen Clark or Michael Cullen, we are not going to agree anyway. How can I agree with them anyway! They are tearing the country apart! They have reduced our labour productivity to a third of what it was, multifaceted productivity is down to one seven of where it was. …
“So the consequence of that, apart from the years of 1992 – 2000 our productivity has been relative to other countries abysmal. We had higher productivity than Australia in 1992 – 2000 largely due to the changes Ruth and I made. During those years we were catching up.”
DPF then chips in (as is his wont) with:
“And productivity growth is the long term key to closing the gap with Australia.”
What’s wrong with this? Lots.
First, the statements are about “productivity”. Now productivity has been growning since 1979, so Douglas clearly doesn’t mean “productivity”, even though that’s what he says, but “productivity growth.” An important distinction that someone who pretends to economic expertise ought to know about.
But the main problem is that productivity growth across the economy hasn’t taken anything like the hit that Douglas outlines. There is no series of statistics showing the rate of productivity growth falling by anything like 66% after 1999.
Here’s what the Treasury says:
“The moving averages in Figure 2 indicate that trend labour productivity growth, on an economy-wide basis, has been in the 1% to 2% per annum range since the early 2000s. The 10-year moving average rose from 0.8% in 1999 to 1.5% in 2003 and fell back slightly to 1.4% in 2007, while the 5-year moving average rose from 0.4% in 1996 to 1.9% in 2004, fell to 1.1% in 2006 and rose slightly to 1.2% in 2007.”
Janssen, J., & McLoughlin, S. (2008). “New Zealand’s Productivity Performance” (New Zealand Treasury Productivity Paper 08/02, April 2008). Wellington: New Zealand Treasury. (p. 8)
Here’s a graph from the Secretary of the Treasury’s recent speech on productivity. See if you can spot the “higher productivity than Australia in 1992 – 2000 largely due to the changes Ruth and I made.”
As the Secretary says, “New Zealand’s under-performance problem became entrenched during the disco era.”
True, there was some, minimal improvement above the trend in the late 1980s/early 1990s, but as Brian Easton’s analysis shows, this largely resulted from the sacking of tens of thousands of forestry, railway, etc, workers. Also, as an economy slows, less productive workers are taken on (with diminishing marginal returns due to limited capital stock, etc).
Comparing productivity performance during the big slow-down that Douglas and Richardson’s policies brought about with performance in the tight economic labour market of recent years is fraudulent.
In fact, if you look at Fig. 3 in the paper cited above, you will see that labour productivity growth peaked c. 1984, after a sharp and continuous climb from its lowest point in 1979. It then declines for most of the period that Douglas ruled as Minister of Finance. The graph also shows clearly that labour productivity growth has averaged about the same since 2000 as it did in the 1990s.
Also, there’s no such thing as the “multifaceted productivity” that Douglas talks about. Try googling the term. Again, he’s clearly mis-speaking. He means multi-factor productivity a.k.a. total factor productivity.
Douglas seems to be using data from table 1 in the very paper cited above. Trouble is, this is taken from a section that looks at productivity growth in the “narrow” measured sector of the economy only. That shows multi-factor productivity growth twice as high in the period since 2000 compared to 1985-1990. It also notes that the latest cycle is incomplete, and so on. Highly stylised statistics that don’t refer to the whole economy, cited without the necessary qualifications.
Looks like a deliberate attempt to mislead. Confounded by ignorance.
Interestingly, the section on the narrow measured sector also shows NZ and Australian labour productivity growth as being very close over the whole period (Fig 8), which makes a mockery of Farrar’s point. This is not a surprise, as previous studies (including by The Treasury) show that much of the difference between NZ and Australia’s productivity performance results from differences in scale and industry. Think mining in Western Australia.