Truly, it was the greatest century

DeLong on the Greatest Completed Century So Far: 

Briefly: very very roughly, approximately, and inadequately, on average what twenty workers were needed to do in 1870 with their eyes, fingers, thighs, brains, mouths, and ears, 1 worker was able to do in 2010.

It is also true that what one worker could do in 1870 required 20 in -6000. But that 20-fold amplification was an 8000-year creep rather than a 140-year sprint: a proportional growth rate of 0.04%/year rather than 2.1%/year. And from -6000 to 1870 the overwhelming bulk of the potential benefits for humans from that twentyfold upward creep of technological knowledge had been eaten up by growing resource scarcity: the land and other natural resources available to support 1 person in -6000 had to support 400 by 1870.

By contrast, the twentyfold post-1870 technological-progress wave had to deal not with a 200- but only a 6-fold multiplication of human numbers, leaving lots to be devoted to bringing about much higher average productivity.

Productivity increases really really matter. 

If there is one single nugget of insight that I want readers of my book Slouching Towards Utopia to permanently engrave on their brains, this is it: around 1870 the rate of technological progress and thus of potential wealth creation went into much higher gear. After 1870, humanity's deployed technological capabilities and thus potential prosperity doubled every thirty-five years—and with it came economic creative destruction that reduced old economic structures to rubble and built new ones, and did it again, and again, and again, every single generation. Before 1870? From 1770-1870 humanity's globally-deployed technological prowess had a doubling time of about 150 years—not 35. From 1500-1770 it had a doubling time of 500 years. And before 1500, we are looking at a doubling time of 2000 years. The difference between our world, in which technological progress creatively destroys and revolutionizes the economy every 35 years, and the world of Agrarian-Age antiquity in which the same proportional changes in technology and economy, and thus in polity and society, take not 35 but 2000 years is, I think, a master force shaping human history.

I want to hammer home the obvious to those who don't have exponential growth magnitudes in their immediate intellectual panoply: a twentyfold amplification of human technological prowess in 140 years is a REALLY BIG F---ING DEAL. To get an equivalent proportional jump in the other direction, you have to go back from 1870 to the Bronze Age— to the year -2000 or so. We are, proportionately, as separate in technology from the railroad's Golden Spike and the first transoceanic cables as those were from the earliest chariots and the sculptor of the dancing girl of Mohenjo-Daro:

Who would you have picked to run the Productivity Commission?

The National Business Review ($) has a roundup of reactions to Ganesh Nana's appointment as head of the Productivity Commission. It includes some minor comment from me, and you can probably guess what I think about it.

But it also includes this somewhat intriguing bit from Sam Warburton:

Former Treasury Economist Sam Warburton said he could not name an economist in the public realm that would be suitable for the commissioner role at the moment - a comment that spoke to the credibility of the profession, which he said had not been high for the past few years.

Imagine that you're the recruiter tasked by Grant Robertson with finding the right candidate. You want a Commissioner who is a credible economist, who is respected by the profession, who has some profile beyond other economists, who is able to communicate to a broader audience, and who has public sector nous. 

It's a somewhat difficult Venn diagram to construct, and especially if you layer on the obvious political constraint that you can't select someone who's relatively 'dry' on economic issues. 

But it's still hardly an empty set, even if we restrict ourselves to people currently in the country. 

I would have hoped that Arthur Grimes and John McDermott would have been on that list. I don't know whether Arthur would have left Vic for it, or John would have left Motu, but you'd think a recruiter would have called them up to check. Norm Gemmell would have been a great pick, but I'm not sure whether Robertson would have seen him as too dry? 

There are Motu-affiliated folks who've done interesting work in the productivity space. Dave Maré and Richard Fabling in particular. But they haven't done as much public-facing work, so would likely be ruled out on those grounds. 

Tim Maloney at AUT should also have been on any reasonable short-list. He's not just done interesting work on labour markets, he's also served as Chief Economist at the Ministry for Social Development. Rhema Vaithianathan at AUT could also reasonably have made the list, though perhaps a bit further down only because her work is further from core productivity issues. 

Who do you think should have been ahead on the list? Leave out anyone who'd be ruled out as being too dry. Imagine yourself as an honest recruiter for Robertson for the position, knowing full well that folks like my excellent colleague Bryce Wilkinson would never be considered. 

Who would you have called? 

Update: A few additions to the shortlist, via Twitter, and others that have come to mind:

• Gail Pacheco (via Tony Burton; I'd not considered those currently in at the Commission)
• Bill Rosenberg (via Mike Reddell; I'd not considered on same basis as Gail)
• Alan Bollard (via Fran O'Sullivan)
• Tim Hazeldine
• Bob Buckle 

Far from the frontier

Richard Harris spent a bit of time going through firm-level panel data on NZ firms, looking at the productivity frontier here and the distance to the global frontier.

Here's the upshot:

The most important conclusion from this study is that while there is some evidence of a failure of productivity-enhancing technologies to diffuse from firms operating at the national productivity frontier, the major problem is failure of productivity-enhancing technologies to diffuse from firms operating at the global productivity frontier. New Zealand’s major problem is that frontier firms are underperforming because of their characteristics (e.g. small and lacking international connections) while productivity is overall adversely affected by a lack of competition, which generally creates barriers to exiting and insufficient reallocation of market shares from lower- to higher-productivity firms. In terms of the policy response needed in New Zealand, Andrews et al. (2015, p. 93) note that ‘innovations at the global frontier do not immediately or inevitably diffuse to all firms ... frontier innovations often need to be adapted to national circumstances’. However, to increase the likelihood of diffusion from the global frontier, there is a need for a sufficient level of global connections via trade, FDI, participation in global value chains and the international mobility of skilled labour. New Zealand does not do well on any of these factors. In addition to improving the trajectory of firms at the national frontier (towards the global frontier), there is also the need to ensure greater resource reallocation towards more productive firms. As Andrews et al. (op. cit., p. 97) argue: 

If small firms are (on average) old, this might reflect barriers to post-entry growth and weak market selection mechanisms ... A key message is that creative destruction and up-or-out dynamics are central: entry matters but what happens next is crucial – all else equal, young firms should grow rapidly or exit (i.e. “up-or-out”) but not linger and become small-old firms. 

With respect to New Zealand, there does appear to be clear evidence that here are higher exit barriers (except for frontier firms where the wrong firms, with higher productivity, were exiting 2001–16) due in part to a lack of competition associated with an over emphasis on producing for small domestic markets.

One particularly depressing bit: the data from his study ended in 2016. Over the fifteen years covered, "only mining saw a substantive upward trend in the frontier." 

Which part of mining? 

"In mining, being located in the rest of the lower North Island provides a nearly 11% greater probability (cet. par.) of belonging to the frontier in this sector (reflecting the gas and oil sector that is predominantly located in the Taranaki region." 

Tarankai's oil and gas industry was speeding ahead of the rest of the sector, and ahead of every other sector. 

Of course, that kind of behaviour cannot long be tolerated around here. 

Looking-glass productivity

Over at the NBR (ungated), I get annoyed at the persistent Wellington tendency to get productivity backwards. Government's role isn't to run studies figuring out which firms are productive, which ones aren't, and to then try to arrange for the one to teach the other. Government's role should be figuring out and removing the barriers to entry and the barriers to competition that keep business away from the productivity frontier. 

A (lengthy) snippet:

Some folks take the wrong lesson from intermediate microeconomics – or never took the course in the first place. I worry that too many of them staff Wellington’s bureaus.
Every decent second-year university paper in microeconomics teaches students there are two equivalent ways of getting to efficient outcomes but one of them is much easier to implement.

Imagine an omniscient and benevolent central planner existed who knew our abilities, the productive capabilities of every firm in the market and exactly what each of us values. That benevolent planner could ensure efficient outcomes where no one could be made better off without making someone else worse off in the process. It is hard to do things that way because the knowledge the planner would need to make those decisions is impossible for the planner to obtain.

Fortunately, the welfare theorems in every intermediate microeconomics course show us that, if competitive markets are working well, we get there automatically. Prices coordinate individuals’ plans, so we wind up at the same kind of solution that the benevolent planner would have chosen. There is no need for a bureaucracy to figure out which firms are the most efficient at teaching the others how to work better as the discipline of markets takes care of it.

All of that left me rather irritated during the Productivity Commission’s “Productivity Hub” seminar last week on productivity in construction.

Housing New Zealand and BRANZ had commissioned work to review the literature on the productivity of housing construction before scoping future work on estimating the productivity of New Zealand’s housing construction sector.

It’s a big topic that matters. There have been conflicting studies on whether construction productivity has been stagnant or improving, and whether there is a long tail of low-productivity firms in the sector. Housing New Zealand is set to embark on a substantial bit of house building and will want to build the most houses possible on its budget.

Economic modelling

The work proposed using New Zealand’s administrative data to find the construction industry’s productivity frontier. Firms producing the greatest output value for their combined sets of inputs define the frontier in this kind of stochastic frontier analysis work; firms using the same amount of inputs to produce less overall value are inside the frontier and are considered less productive.

The seminar focused on important technical issues like the merits of Cobb-Douglas as compared to translog functional forms and the merits of stochastic frontier analysis over conventional linear regression techniques in figuring out which firms are most productive.

But I was getting itchier and itchier over the course of the seminar – as were a few others. It was not the researcher’s fault at all – she proposed taking the right approach to the question as defined. The problem rather was the framing of the question and its policy consequence.

Trabant efficiency

Imagine going back in time to 1982. You’ve been hired by the East German government to examine the productivity of the country’s automobile construction sector. You’ve been asked to use the latest statistical techniques to figure out which of Trabant’s suppliers are working efficiently and which are not. The government wishes to do this so it can send experts into the efficient plants to figure out what they are doing, so they can help the less efficient suppliers to get up to speed.

Stochastic frontier analysis was not really available then but that was hardly the main problem. Even if they got every one of the Trabant plants, and their suppliers and their suppliers’ suppliers running as efficiently as the most efficient East German plant, they would have mis-specified the problem. They would still have a Trabant at the end of the production line, and the value of a Trabant was less than the value of all of the bits of plastic and metal and rubber and labour that went into producing those things – and it certainly ran less well than the Volkswagens produced across the border in West Germany.

Instead of commissioning a study that might figure out which plants are efficient, tearing down the Berlin Wall and allowing free trade would let markets figure it out. Efficient plants might survive; inefficient ones would put their machines and workers to better use elsewhere.

New Zealand reached a similar conclusion about its local automotive industry during the reforms of the 1980s and 1990s. Economist Steve Landsburg talks about the Iowa car crop. Growing corn, selling it to Japan, and getting cars back, is a more efficient way of building cars than a lot of ways America has tried. New Zealand’s paddocks, forests and office towers provide our car crop more efficiently than did the Petone plant.

The construction productivity work specified the problem back to front but was hardly the first to do so. An academic study might point out which firms seem more productive than other firms but it can be easy to get those things wrong – especially when New Zealand’s construction firms have operated within a system designed to stymie construction productivity.

Regulations nest

Zoning has never allowed building to any reasonable scale, so the industry developed for smaller scale developments and bespoke projects. A broken land use planning system has given us a construction industry that may be relatively efficient within that system but it is not the one needed for the scale of the task at hand.

A nest of regulations and perverse incentives in council consenting makes it difficult to use far less costly but higher-quality construction materials from trustworthy places like Vancouver or Seattle or Tokyo. Costs here are consequently much higher; productivity is the ratio of the value of the outputs to the value of the inputs. Building houses costs (very roughly) twice as much here as it does in Texas, leaving land costs aside.

And competition from foreign suppliers is hampered not only by the Overseas Investment Act but also by the morass of local regulation that local firms have learned to navigate but foreign firms have not.

Seeing the productivity problem as one of finding the most efficient firms and cajoling the others to behave more like those Stakhanovites  (Soviet Union workers who took pride in their ability to produce more than was required, by working harder and more efficiently)gets the problem back to front. It is trying to work the welfare theorem from intermediate microeconomics the wrong way around.

I think the NBR's editors added the definition of Stakhanovite. I didn't know that was no longer a term I could assume commonly known. Alas. 

Afternoon roundup

This afternoon's worthies on closing out the accumulated browser tabs:

• Russell Brown on cannabis reform, including links through to reasonable critiques of the Berenson work that's been floating around.


• Some excellent data work by Mike Reddell looking at the time path of employee compensation in NZ. Labour worries a lot about what they see as a declining labour share of income. Here are the key graphs.
  
  First up, employee compensation as fraction of GDP, adjusted for production taxes and subsidies. It's up on where it was in the 90s, but has been flat for the past decade.  
  
  
  
  Next up, wages as fraction of nominal GDP per hour worked:
  
  
  Reddell's summary:

  There is a fair bit of short-term noise, but the trend is pretty clear. On this data, wages have been rising faster than the overall earnings capacity of the economy. That was so in the 00s, and has been so – albeit to a lesser extent – in recent years too. For anyone inclined to want to debunk the analytical unadjusted series, note that this chart is not wildly inconsistent with the labour share chart I showed earlier: the labour share of total income has increased since the early 00s, with the biggest change occurring in the pre-recession 00s themselves.

  The underlying problem remains low productivity growth.


• Labour markets remain tight.


• These wonderful maniacs coded folklore from 1,000 pre-industrial societies to look for common traits that could be used in testing social science conjectures. Pastoral oral traditions have more motifs of anger and retaliation; foraging societies have more leisure-related motifs; political centralisation correlates with more use of trade and money words and with respect-related motifs. And old folklore predicts current views about things like toleration of socially deviant behaviour. Read! 


• Nudges are far less beneficial when we consider the psychological costs imposed on the nudgees. 


• Peer effects matter. Or, an argument against school zoning rules that concentrate disadvantage.


• Requiring a job search period before benefit uptake can be rather beneficial. It increases earnings and reemployment, without worsening health or crime outcomes.  


• Informal governance matters in disaster planning. I'm reminded of last year's Christchurch Earthquakes Symposium, where Hurunui District Council's Hamish Dobbie explained [my take on part of his talk] how their Council worked to enable civil society organisations rather than supplant them after the Kaikoura earthquakes. 


• And finally, Nate Silver:

  How my brain interprets every Brexit explainer: https://t.co/7smQVKMP76

  — Nate Silver (@NateSilver538) January 15, 2019

Public Service Productivity

The Productivity Commission is to be looking at state-sector productivity in a coming inquiry. 

Here's Patrick Nolan on it:

Measuring the productivity of public services is complex. The question is whether evidence of a lagging productivity performance tells us something about public services or more about the measures being used. In particular, the Statistics New Zealand data for the education sector do not account for changes in quality, yet the quality of products and services varies over time.

Adjusting estimates of public sector productivity for quality changes is a challenging task. To illustrate, the Productivity Commission has just published work on quality adjusted productivity measures for New Zealand schools using sector-level data. This work shows the benefits and risks of different approaches and highlights differing results emerging from different quality measures. The differences point to the need to better understand what measures reflect the performance of New Zealand schools.

There is still much more to do to better understand the productivity of New Zealand’s public services. And it is important not to simply point to poor performance, but to develop practical insights into how measures can help improve services. No single approach will work in all cases and no single organisation will have all the answers.

While understanding public sector productivity may be challenging this does not mean giving up. Nations cannot ignore the need to measure and improve the productivity of their public services. As David Cameron once noted, improving public services are “not about theory or ideology – they are about people’s lives.”

Public sector productivity is a big problem for a few reasons.

One of those reasons is that a reasonable chunk of what the public sector does destroys value, and making the government more effective and efficient towards those outcomes is itself destructive. Imagine a world in which the government were tremendously efficient at identifying and prosecuting people who:

• Smoked a joint;
• Provided assistance to a terminally ill person in constant pain to help end their suffering;
• Gave somebody a ride in their car, not for free but for cash, and without a P-endorsement on their license;
• Blasphemed;
• Watched an R-13 TV show with their 12 year old on DVD (illegal) rather than on broadcast (legal);
• Rode a bicycle without a helmet;
• Was homosexual before the government finally got around to deciding that it shouldn't be prosecuting people for being homosexual.

Efficiency in the pursuit of public bads is bad. Government produces many public bads. The same government that funded Alan Turing, killed him. The first part of that was a public good; the evil of the second part outweighs the first. Views on the desirability of efficient government depend on views on that government's benevolence. And there's much to be said for government stopping doing evil things before doing good things better. 

But leaving all that aside, you need to put some value on the outputs. There's plenty of stuff you can do to get closer towards one sense of cost-efficiency. Outsourcing, competitive tendering, and a lot of the outcome-based contracting under the Social Investment Approach will all give us a much clearer picture of the cost per unit of outcome. And the Social Investment Approach also gives a sense of the value to the government of those outcomes in terms of reduced long-term fiscal liability - which is a darned sight better than what we have had before. But it still doesn't really say how much people really value the outcomes.

Patrick's link does go to some exceptionally interesting work on productivity in education; I'll follow up on that in a later post.

It'll be interesting to see where Prod Comm takes the inquiry. I'm an optimist about getting better cost-per-outcome efficiency. I'm a pessimist that we'll ever get the right mix of outcomes. But I'm optimistic that we will eventually at least be able to stop the purchasing of bad outcomes. 

Assorted links

The Friday closing of the browser tabs brings us a few gems:

• Noah Smith is absolutely correct. The academic mill is partially to blame for declining trust in science. Why? Lots of people who aren't really up to producing great, or even just good work, face strong incentives to publish anything. For similar reasons, I worry about accounting being subject to the same research and publication requirements as other disciplines in New Zealand.


• Danyl Mclauchlan's take on Key is excellent. I disagree with him a bit at the end though. New Zealand's system on emissions trading lets New Zealand automatically get serious about carbon emissions when the rest of the world does too: prices here will lift when international acceptance of dodgy credits ends, which is when everybody else is getting serious, which is when we should be too. 


• Kiwis with American friends have always had friends ship stuff over that's not here available. Great to see some entrepreneurs making this available to everybody. 


• Thomas Schelling died last week. Here is Schelling's explanation of organised crime. See also Ortmann and Cowen.


• The new process for settling Kaikoura EQNZ insurance claims is far better than the one that applied in Christchurch. EQC had told the government before the Christchurch quakes that its job should only be to cut cheques, not to run assessments. EQC had to take on a bigger job than that in Christchurch; it didn't go well. Those with insurance claims in Christchurch will be able to deal instead with their private insurer. Hooray! Meanwhile, Lew Stoddart provides a bit of commentary on Brownlee's push-back against criticism from folks dissatisfied with other parts of the government's response.


• Arthur Grimes and Richard Fabling find that Ultra-Fast Broadband on its own did nothing to improve firm productivity, but that firms that jointly invested in UFB and organisational ICT-based changes did do well. The average effect on productivity's being insignificantly different from zero will not be encouraging for those expecting more than that. 
• Market indicators to watch to tell how Trump's doing: foreign policy edition.


• Diet soda also increases obesity: consumers of diet sodas eat more afterwards. View these results, as all results in this area, with due scepticism. 


• The evidence strongly suggests that the world entered a bizarro-timestream somewhere around June of this year. 


• Brendan O'Neill's celebration of Christmas excesses.


• This headline makes no sense. "Euthanasia debate: 'Those in pain shouldn't have to die like a dog because of ego and conceit of others'. But vets euthanise dogs that are in pain. People don't get that option. I blame Trump for the "like a dog" thing.


• New Zealand's drug laws disproportionately affect Māori 

So endeth the lunchtime closing of the browser tabs. My but they accumulate. 

Simpsons' paradoxes and GDP per hour worked

Bernard Hickey's been on a bit of a tear about GDP per hour worked and employment rates.

So NZ created 179k jobs in the last 2 yrs, but unemployment actually rose 1k to 128k. Jobs soaked up by net migration & more >65 yrs working

— Bernard Hickey (@bernardchickey) November 2, 2016

NZ actually worse since 2012. Flat real gdp per hour worked. We're just pumping more low wage workers in the economy and working more hours. pic.twitter.com/9uKE0UV1vR

— Bernard Hickey (@bernardchickey) November 2, 2016

There's another potentially relevant chart.

And, one more:

I wonder what GDP per hour worked would look like if we could isolate out demographic changes. 

At the same time as the recent flatlining in GDP per hour worked, we've had substantial numbers of beneficiaries moving out of benefit and into work. The first of my charts has number of people on benefit over the period. The proportion of working-age people on benefits was 12.1% in 2011. It is now 9.8%. Average productivity among those moving off of benefits will likely be rather lower than average productivity among other workers. But while that would worsen average productivity or GDP per hour worked, it won't worsen anyone else's productivity unless they're making other workers less productive just by being there. 

The second of my charts has employment rates sorted by age cohort. Recall that the employment rate is the number of employed people divided by the population in that cohort - it isn't the inverse of the unemployment rate. You can have rising employment rates and rising unemployment rates if people are being drawn into the labour force who were previously not seeking work. 

I've dropped out prime age workers, which have been much flatter, so you can see the compositional changes in the tails. The youngest workers are least productive. They hugely dropped out of the labour market with the changes to the youth minimum wage, but that decline's since reversed a bit. There's been a long trend growth in hours worked among older workers, but typical wage patterns over the lifecycle have wages flattening out from the early 50s or thereabouts. Big increases in employment rates among cohorts with lower than average productivity, or at points in the life cycle where wage profiles (and presumably productivity) flatten out, will both flatten or worsen GDP per hour worked. 

And, obviously, net migration's increased over the last few years. New workers getting settled in New Zealand might take a bit to find their feet as well, while still being better off than they were before.

The classic Simpson's Paradox shows how you can have a declining average measure for a group despite improving average measures for each cohort within the group if changes in the proportions of the overall group coming from the different cohorts change. 

So suppose that you have a classroom with 5 Canadians and 10 Kiwis. The Canadians all get 70% on their tests this year and the Kiwis all get 90%. Average is 83%. Next year, there are 10 Canadians and 5 Kiwis. The Canadians all get 75% and the Kiwis all get 95%. The group average drops to 82%. Every cohort has improved by five points, but the average performance looks bad. 

And so I wonder what the GDP per hour worked figures would look like isolating for these compositional changes.

Note too the strength of the employment rate. Only four years in the series back to '86 had higher employment rates: 2005-2008. 

O-Ring models and NZ productivity

The long low-productivity tail of firms isn't just a New Zealand problem. Here's Alex Tabarrok on a new OECD report. The key image is this one: the gap between frontier firms and everyone else is becoming huge.

 

Tyler Cowen wonders whether this might be due to O-Ring production models. Where the highest valued stuff requires having zero screw-ups at any point down the line, the returns to having no screw-ups start increasing hugely.

As Alex points out in this helpful explainer, the top firms pay the most across all tasks, even the low value tasks, because they can't afford to have anything go wrong.


I suspect that this is, in part, behind New Zealand's fairly flat inequality stats. We don't really have many of the frontier firms, so we don't get frontier firm salaries, so we don't have the run-up in top salaries - and it's not really to the country's longer run benefit either.

Here's Cowen:

Yesterday Alex outlined the facts, which I take to be not in dispute. Firms at the frontier have seen significant productivity gains, the others not so much. Alex calls this a “lack of innovation diffusion” and considers whether IP law might be one cause.

My framing is somewhat different. The result reminds me of the international trade literature on why so few firms export. The notions of increasing returns to scale, and fixed costs to trade abroad, provide the beginnings of an answer. In such a setting, let’s say the world has become more globalized, more IRS, and more based on learning curves, much of those trends being attributable to information technology. In that case we would expect a growing bifurcation of firm productivity outcomes, just as we find a strong bifurcation of export outcomes, with a relatively small percentage of firms doing most of the international trade, or innovating, as the case may be. The “only a small percentage of firms export” and the “only a small percentage of firms are on the productivity frontier” may sometimes even be the same way of describing the same basic fact.

The on the ground reality I observe is that the large, famous, exporting firms put together fantastic O-Ring teams of talent in a way the smaller, medium-size enterprises do not. That is the relevant diffusion barrier, but of course there may be limits on that diffusion as well. Eliminating barriers across firms is a good idea but not enough either.

It's worth thinking through the implications for New Zealand.

"I couldn't be arsed"

Perhaps satisficing under conditions of low competition can take some of the blame for New Zealand's low productivity rates.

Donal Curtin at EconomicsNZ wonders about productivity in our service sector:

If business innovation is important for growth, then we need to be alert to the need for continuous innovation, and we need to be as diligent at it as other places if we want to match their living standards.

But the Productivity Commission came across this rather suggestive piece of evidence that says New Zealand businesspeople's heads aren't in the right innovation space at all. They ran a survey which among other useful things asked businesses that hadn't invested recently in ICT, why not.

What would you think the lead answer was? Cost? Complexity?

Not a bit of it.

The top answer was, "I couldn't be arsed", which is my rough translation of the complacent result shown below.

"It would be cause for concern", the Commission said (pp177-8), "if this response reflects a large number of firms with no aspirations to expand or that face little competitive pressure". Indeed, and with knobs on when it comes to that point about "little competitive pressure", though as the Commission says, in what's either judicious analysis or one of the longer kicks for touch you've ever seen, "The response is, however, challenging to interpret. It could also cover cases where respondents are simply unaware of the possibilities of using ICT to improve their business. Equally, it could cover businesses that invested significantly in ICT more than two years ago or where there are small benefits from investing in ICT. Without further information it is hard to read more into this result".

My feeling is that the Commission was onto something important, and I think it could have been very productive if the government had chosen, as the Commission's next line of enquiry, some deeper analysis of what's going on here.

Roger Proctor at MBIE last year presented evidence on New Zealand's long tail of relatively low-productivity firms (see Aaron Schiff and me). For some of these, "couldn't be arsed" would be a perfectly fine reason: small owner-operator firms run by folks moving into retirement. Rather than looking at expansion and selling it off, some of them would be looking at slowly winding things down while pottering away at it. In other sectors, it might point instead to relatively low competition.

One graph in Proctor's presentation suggested that low IT adoption might not be the reason for lower productivity:

That isn't to discount the power of "couldn't be arsed" in small and relatively uncompetitive markets. I'm sure every academic in the country can point to dozens of local examples of it within their own institutions. Why is it so hard for international students to navigate through the University websites to figure out what they need to do to enrol? Why aren't any universities offering international students protection against adverse currency moves in order to attract more students where it's easier for the large institutions to buy the hedge than it is for individual students? Why can't a University offer parking as innovative as that provided in the city of Palmerston North (a beautiful service-industry productivity move where NZ's leading the world)? Why do Universities make it so ridiculously difficult on the admin side to handle grants? 

Is there a better answer than a "Couldn't be arsed" somewhere in the system?

Fixed costs in small countries, again

The Productivity Commission explains New Zealand's high prices:

The overall messages from this analysis are:

• Modelling the determinants of non-tradables prices using the extended FG model works fairly well in general, and especially for a group of OECD-Eurostat countries. 

• This supports the hypotheses that: 

• Non-tradables prices are higher in association with higher values of capital and unskilled labour endowments, and trade deficits; 

• Non-tradables prices are lower in association with higher values of skilled labour, and population;  

• Tradable prices also tend to be higher where non-tradables prices are higher both because this raises the (non-tradable) input costs for tradables, and because high tradables prices are impacted by „trade impediments‟ and indirect taxes. 

• The model suggests NZ‟s relatively small population and high tradables prices tend to raise its non-tradables prices relative to other countries. NZ‟s lower than average capital endowments should serve to counter-act these high prices, but modestly. (NZ has the 28th highest ranked capital endowment, and 25th highest capital/labour ratio, out of 43 countries). 

• For labour endowments, taking a ratio of skilled labour (differences) to population (differences), NZ is ranked 29th out of the 43 OECD-Eurostat countries in this ratio, so that its relatively low skilled labour per capita also serves to raise its service prices.

• NZ's relatively high price of non-tradables is estimated to add around 40% to the domestic consumer price of tradables, compared to border or factory gate prices. This is also around the OECD-Eurostat average cost share. 

• However, after accounting for this 'cost share of non-tradables' contribution, NZ's tradables prices remain fairly high by international standards. A "good candidate" to explain this are the transaction costs associated with NZ‟s distance from markets. Though we have not examined direct evidence on this here, numerous other studies have suggested the importance of such factors; see, for example, McCann (2003, 2009). 

• Based on "adjusted" tradables prices that removes the "cost share of non-tradables" element, NZ's tradables prices are around 6th highest in the 43 country OECD-Eurostat sample – behind such countries as Iceland, Norway and Japan (see Figure 6). These are also countries relatively distant from many of their key markets. (For Japan at least, other protectionist measures may also be relevant). However, Australia is ranked 19th out of 43 countries in its adjusted tradables price, suggesting that to the extent that there are "disadvantages of distance", Australia manages partially to avoid or overcome these.

• As Figure 6 shows, NZ is like a number of other small countries with a high adjusted tradables prices (e.g. Cyprus, Malta, Denmark, Finland, Israel, in addition to the "small and distant" economies of Iceland and Norway). This suggests that size or other characteristics of domestic markets/populations may be important in ways not already accounted for by the FG model's variables.

Labour has been exercised lately by the high costs of an increasing population: new migrants come in and bid up the price of housing where housing supply cannot expand to meet increased demand. They might worry instead about the longer-term costs of being small if they block migration. We can't do much about distance. But we can get bigger.

Other points worth thinking about:

• Our relatively high cost of alcohol and tobacco is particularly noted by the Commission; this does run contrary to the usual story we're told about alcohol being too cheap in New Zealand.
• I wonder whether results would be affected much by taking PriceSpy import prices instead of domestic landed prices for some consumer goods. How much does PriceSpy, and related services, constrain domestic prices?
• Gemmell's prior work showed footwear and clothing to be expensive here. I note that footwear still here attracts a 10% tariff. We could fix part of our stupid-high-prices problem by getting rid of the tariff that helps make one of those price categories more expensive than it needs to be. Sir Roger tried back in 2010; National vetoed the change.

If you're Wellington-based, Norm Gemmell's talk on all of this starts in Lecture Theatre 3, Rutherford House, Victoria University, in about 2 minutes.

Update: See also Donal and Matt.

The Social Costs of Abstinence

Suppose that the correlation between one's sex life and earnings were actually causal, and worked from sex to income rather than the other way round. What correlation? This one:

Having an active sex life may make you happier, healthier and wealthier.
A new study reveals that people who had sex four or more times a week earned more money than their counterparts who weren't as lucky.
"People need to love and be loved (sexually and non-sexually) by others. In the absence of these elements, many people become susceptible to loneliness, social anxiety, and depression that could affect their working life," study author Nick Drydakis, an economics lecturer at Angila Ruskin University in Cambridge, England, said to CBSNews.com by email.
The discussion paper was published in July by the Institute for the Study of Labor,an economic research institution, in Germany.
Drydakis said he was interested in the topic because of previous studies linking sexual activity with extroversion traits (including being sociable, outgoing and energetic) and good health. In addition, good health has been linked to higher wages. A 2009 Brazilian study also showed a connection between higher wages and a more active sex life.

We can imagine some causal mechanisms that could run from sex to income. Happier people could be more productive at work. Or the cardiovascular benefits could yield better health and then consequently greater productivity. The authors do use a two-stage estimation procedure to try to isolate causality: they try to instrument for sexual activity, so it's at least more plausibly causal than much of what goes on in the public health literature.

If we follow the standard line in public health of assuming correlations are causal and in the "right" direction, and of ascribing as social all things private, we have to then worry about the social costs of abstinence. Those having too little sex earn less and so must be less productive. Those productivity costs reduce output and reduce tax revenue. And if it's working through a health channel, they also impose costs on the public health system.

The policy consequences are left as an exercise for the reader. But note that if you're recommending subsidies, you might need to offset the STD costs on the public health system via complementary regulations around health testing and public disclosure of who has what. This may seem like a violation of privacy, but can we really make rational decisions without perfect information?

[The should-be-obvious caveat: entire post subsumed within a "reductio" tag.]

Alcohol wage puzzles: Churchill-Stalin edition

There's a longstanding alcohol wage puzzle: drinkers earn more than non-drinkers even after correcting for a bunch of stuff. Chris Auld found that moderate drinkers earn 10% more than non-drinkers and that heavy drinkers earn 12% more than non-drinkers; plenty of other studies have found similar effects.

One not-unreasonable explanation is that drinking together builds trust among co-workers, making them jointly more productive (and higher paid) despite the occasional productivity-reducing hangover.*

Radio New Zealand provides a nice bit of anecdotal evidence.

Josef Stalin and Winston Churchill had an all-night drinking session in Moscow that lasted until 3am during World War II.

Relations between the Russian and British leaders were stiff until Churchill arranged a late-night banquet in August 1942 with Stalin, according to files held by Britain's National Archives.

The event was recorded by Foreign Office permanent under-secretary Sir Alexander Cadogan.

The mood was "merry as a marriage-bell," he added, though Churchill was complaining of a "slight headache" when Cadogan came to find him at 1am.

The two men did not engage in much military talk during the meeting, which went on until 3am.

The evening was dubbed a success by Cadogan, as the two men got on.

"Certainly Winston was impressed, and I think the feeling was reciprocated," he wrote in a letter.

"We broke up soon after 3(am), giving me just time to get back to the hotel, pack, and leave for the aerodrome at 4.15(am)."

The BBC reports the letter was among almost 600 government files dating from World War II and the early years of the Cold War, released by the National Archives.

Do all-nighters really end at 3am?

I wonder whether the anti-alcohol activists of 1942 would have bemoaned the wartime losses caused by Churchill's slight hangover the next day while ignoring that getting on well with the Soviets was rather more important.

* Note that Google Insights for Search provides reasonable evidence that hangovers are concentrated on the weekend. I mean, look at this and tell me that the folks who take average weekly hangovers as a measure of productivity losses aren't just a bit mischievous.