Published in the Financial Pos (www.nationalpost.com), August 22, 2007, p. FP-17

 

Hollow Goddess of Productivity
by
Pierre Lemieux

The political hype about productivity reminds me of a remark by economist Steven Landsburg in his interesting book, The Armchair Economist: "We live in an age of 'policy wonks' who judge programs by their effect on productivity, or output, or work effort. Wonkian analysis uses the jargon of economics while ignoring its content. Economists view the wonks' fixation on output as a bizarre and unhealthy obsession. Wonks want Americans to die rich; economists want Americans to die happy." This also applies to Canadians. Our own politicians seem to think that productivity is a goddess, and that productivity incantations will bring happiness (and votes) to their wards. Even the Canadian Institutes of Health Research sings the corporate song by reproducing on its Web site an undated Globe and Mail ode to productivity -- which, coincidentally, asks for more government subsidies to research. Although more serious, a report just published by TD Economics under the signature of Don Drummond feeds the cult. There are reasons to value productivity, defined as market production per hour worked. This labour productivity is one dimension of economic efficiency and one cause of prosperity. But other factors are at play. Economic efficiency also depends on the productivity of capital, and on whether the allocation of resources is done on the basis of free-market prices, including the relative prices of labour and capital. Other factors in prosperity include the number of workers and hours worked. More importantly, prosperity ultimately depends on what people prefer to do with their time, which includes leisure. The economic concepts of efficiency and prosperity are entirely based on individual preferences. An efficient and prosperous economy is an economy where individuals can make their own choices in work, consumption, and leisure. Similarly, economic growth has a normative value only if it responds to individual preferences between present consumption and investment (or future consumption). A number of reasons can help to explain the productivity gap that has recently developed between Canada and the United States. One is lower investment in Canada, which can, in turn, be explained by other factors such as the higher dynamism of the American economy. Or perhaps Canadians simply have a higher rate of time preference -- that is, prefer to consume more today than tomorrow. But one thing is sure: Pious sermons to businesses for not investing enough and not being good girls are meaningless. The problem with the productivity hype is brought to full light when other hypes enter the competition. Since the Canadian economy has relatively more small firms than the U.S. economy, we might expect smaller investment levels and lower labour productivity here. The TD Economics report makes this point, but immediately adds, "Let us be absolutely clear that small firms are an important part of the Canadian economy." Simultaneously chasing two fashionable goddesses, productivity and smallness, is an impossible mission. It is true that many public policies interfere with labour productivity: high taxes on capital, subsidies to businesses, lower competition due to obstacles to foreign investment in banking, telecommunications and the "cultural" sectors and, last but not least, regulations and trade union privileges. Indeed, writes TD Economics, it can be argued that the tax advantages of small businesses in Canada constrain productivity. Economist Peter Spiro has even suggested that the productivity gap could be partly the result of the growth of the Canadian underground economy (generated by public policies), which is less productive than the legal economy. I find it puzzling, though, that the legal privileges granted to trade unions (compulsory financing, monopoly of representation, power to impose collective agreements, power to slow down or close operations) and their consequences on flexibility and efficiency in the workplace are seldom mentioned in productivity diagnostics and complaints. The hype about productivity, and the sermons to bad businessmen who don't invest enough of their big profits, are mainly excuses for calling in Big Brother: Please intervene more in order to correct the failures of your previous interventions.