Full Marks for Honesty

"Now I got shrinks that will not rest with their endless Rorschach tests
I keep telling them that I think they're out to get me
They ask me if I feel remorse and I answer, "Why of course!
There's so much more I could've done if they'da let me!"¹

The Rorschach test is when psychologists get you to look at some random inkblot, describe what you see and then they analyze your response to supposedly gain some insight into your personality based on what you 'project' onto a meaningless image.

More and more, I'm getting the sense that the current Rorschach test in Canadian politics is Canada's lagging productivity growth over the last few years (I wrote about this topic here as well). What I mean is that people will take whatever it is that they want implemented as policy and then proclaim that we have to do this because it will boost productivity which is the ultimate driver of our standard of living. Productivity is ideal for this purpose because nobody really has any idea which policies might work to increase productivity and there's pretty much no way to really measure the impact of any given policy on productivity.

Rarely is the 'do what I want because it will increase productivity even though I have no evidence that it actually will' argument advanced more honestly than in today's Globe and Mail by Neil Reynolds (subscription only, you can probably find it on google news). Writes Reynolds,

"In its Falling Behind report earlier this year, the Canadian Senate's standing committee on banking, trade and commerce gave Mr. Goodale a credible package of productivity reforms: Reduction of the corporate tax rate, reduction of income tax rates for middle- and upper-class wage earners, elimination of restrictions on foreign investment, aggressive pursuit of international trade agreements and elimination of internal barriers to trade. Although no one really knows how to get supercharged productivity gains, all these reforms meet the most important test: First, do no harm."

(emphasis added)

Presumably joining the invasion of Iraq wouldn't have done any harm to productivity either, but, so far at least, nobody is suggesting we should have done that to boost productivity.

The truth is, productivity is pretty mysterious. One thing we know is that the most direct route to increasing productivity is to fire people, and force your remaining workers to get the job done with fewer resources. People get stressed, families come under pressure, the government is forced to help those laid off but productivity goes up. Again, Reynolds,

"In a report on U.S. productivity gains in manufacturing that was published this year, U.S. economists Martin Neil Baily and Stephen Z. Lawrence conclude -- ironically -- that the phenomenal U.S. productivity gains are themselves responsible for massive job losses in the manufacturing industry.
(snip)
Mr. Baily and Mr. Lawrence, however, say that superproductivity accounted for 90 per cent of the American manufacturing jobs lost in the past five years."

There's nothing ironic about this. Productivity is a measure of output per worker and when you fire workers this tends to go up. On the flip side, when companies are making record profits and enjoying a boom in demand for their products such as oil, timber and mortgages (to name just 3) they tend to hire more people and productivity growth goes down - which seems like a pretty good description for what has happened in Canada in the last few years. Ironically (for real this time), if this analysis is right, then cutting corporate taxes could do harm to productivity since the increased retained earnings could just be used to hire more workers (and did I mention that unemployment in Canada is already at a 30-year low and the central bank is worried about inflation?).

Anyway, my main point here is that, if you hear anybody advocating that we should implement policy X because it will boost productivity, be very skeptical.


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Note: Reynolds (of course) does not provide a link to the Baily & Lawrence study he quotes, nor does he even give the title, but I think he is referring to this study, "What Happened to the Great US Job Machine: The Role of Trade and Electronic Offshoring."

It's pretty technical, but underscores the complexity of the issues involved and the need to be careful drawing conclusions as shown by this quote (pulled out of context, but still making my point, I think),

"Productivity, trade flows and domestic demand are interrelated in complex ways. Their movements may reflect independent causes or inter-actions among them. For example, rapid US productivity growth could lead to relatively lower US prices, more US exports, fewer imports and more domestic use. However, rapid US productivity growth could also lead to higher US incomes and more demand for both domestic products and imports. Similarly, rapid increases in imports could stimulate domestic productivity growth, and increases in domestic demand could lead to more imports and fewer exports.

In addition it is dangerous to imply that increased imports and larger trade deficits necessarily come at the expense of domestic employment. The clearest way to see this is to imagine the economy is at full employment - as it was in 2000. If this is the case, it is not possible for domestic supply to meet the increased demand. The ability to trade allows the national spending to exceed national income so the increase in national spending leads to a larger trade deficit, but there is no job loss due to imports. Yet a mechanical decomposition might lead to the claim of jobs lost due to imports.

In sum, these estimates can be helpful in providing a perspective on the relative importance of domestic demand and trade in manufacturing employment. But it is
important to be cautious in drawing causal implications from the results."

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¹ From the hilarious 'Curse of Millhaven' by Nick Cave and the Bad Seeds.