Bleg: What is the paradox?
Hey I have a question to ask. I have been in Melbourne drinking all week at this point (I wrote this prior to the trip) and when I get back I’d like to know what NZ’s “productivity paradox” is. I was not at the conference sadly, but I saw the text of this speech from Gabs Makhlouf (Treasury Secretary). Here the paradox was stated as:
But that brings us to the so-called paradox: in view of those settings, what are the explanations for New Zealand’s persistently low productivity growth compared with many other OECD countries?
So although we have pro-growth policy settings and “New Zealand does particularly well on OECD quality of life measures such as health, civic engagement, education, safety, environment and life satisfaction”, measured productivity is lagging the rest of the developed world. Is that the paradox?
And is our interest in asking whether this difference is due to policy actually being poor (we are wrong about economics) or due to NZ being different to other countries (being a million miles from nowhere and having low population density has not meshed well with improvements in technology).
That is my interpretation – but I find the use of “paradox” fascinating, as it makes the issue sound like it is incredibly complicated at a fundamental level.
However, let us say that it is a paradox if we make a series of assumptions about NZ being just like the rest of the world, in which case our arguments look logically inconsistent. We solve the paradox by weakening those assumptions – so essentially the symposium is not so much about the paradox, but about whether the “more realistic” assumption satisfy the facts. In essence, rather than it being a focus on the paradox we are simply asking how NZ is unique – a narrower set of questions.
Or is this a misinterpretation of the true question. Is it actually impossible to really look at “counterfactual New Zealand’s” and appropriately split what is going on in New Zealand into fundamental causes. Is the very concept of trying to understand how NZ is unique a hefty, maybe unsolvable, paradox. In other words is it a situation where, even with “realistic” assumptions we end up with multiple compelling, and contridactory, results that satisfy the data. In that case, the weight of the term paradox does seem appropriate.
Or, am I just being weirdly pedantic, and should accept that all sets of data offer “paradoxes we are trying to unpack”?
Not weirdly, just unhelpfully pedantic. There is a real issue here which affects real people’s real wellbeing and you’re flaffling about the careless use of a particular word. Disappointingly short of your usual standards
“Not weirdly, just unhelpfully pedantic. There is a real issue here
which affects real people’s real wellbeing and you’re flaffling about
the careless use of a particular word. Disappointingly short of your
usual standards”
Interesting. I agree completely that these are real issues, of real importance to peoples wellbeing – undeniably. I also appreciate your passion for the issue, we need more of that! But this view actually leads me to the complete opposite conclusion around the importance of thinking about the term. It is pedantic to think about whether the key term used to communicate policy to the public around productivity is appropriate – and how it will be taken … but given the issue is about communication this is important!
I asked this as a question as I wanted to be a bit careful making my key point – as a result, I will just make this here. The term paradox is going to be horribly misleading for the public, I can tell you right now that a number of people view this as a “paradox” because they see the reforms of the 1980/90s a mistake.
Now, there are two ways to think about the issue in terms of framing. When someone hears “paradox” they think that the problem is essentially unsolvable (or that it defies the common sense of the group analysing it) – they think that the underlying model being used by economists must be wrong.
What the symposium seemed to be doing was loosening assumptions in the model in order to improve fit – a sensible thing to do. From what I’ve read there was some danged excellent work there that I in turn intend to blog on. While I think this is great, is this really the point the public will get from it when they here that economists are discussing this “paradox”?
I’d note something else here – the point Blair makes above about the change in policy iis the way many people, including economists, see this issue. But to really think it through we need theory, and we need counterfactuals. Undermining this by calling the issue a paradox (which is how it may be taken) is something I am VERY concerned about because I care about the issue a lot – hence why I see my pedantic discussion as more appropriate than you do 😉
I think there is an paradox, because NZ took a massive step towards the economics profession’s ideal of an economic system in the mid 1980s, i.e. much less distorted. Everybody expected productivity to converge with the rest of the OECD and it didn’t happen.
The answer has to do with the fact that the largest distortions that are left are anti-saving, and economic theory predicts this shouldn’t matter because we can just borrow someone else’s capital. But it does.
Indeed, I can see where you are coming from. The thing is we don’t have a “counterfactual” New Zealand to compare ourselves to – so the goal here seems to be to figure out the ways NZ is unique and figure out what is going on!
I suspect blaming macropolicies, rather than natural issues of endowment, may not be appropriate. But it is a question that needs to be asking, and it is good to see Treasury and the Productivity Commision asking it!
I see the issue as very very similar to the high real exchange rate issue the RBNZ is talking about – I think a lot of the research between the two groups could be shared fruitfully!
When I was a kid, I was taught that our distance and lack of population meant we were poor, but having lived and worked in Japan, the US, UK and Australia, I now have the opposite view, i.e. that our geographic setup is very lucky. Being isolated from, and selling high-end food to an emerging middle class seems highly fortuitous. We have soil, sun and water, a terrific labour force, little violent internal conflict or corruption and a fairly dynamic society. Shipping is cheap, and there are plenty of wealthier, more productive countries with <10m populations, even just starting with the letter S! So I started to look to macro and micro explanations.
In a micro sense, I think the answer is in retrograde planning policies. Having half or more or Auckland zoned as 500m2 minimum single dwelling blocks is f'ing insane. Read Ed Glaeser people.
In a macro sense, I think there is a burning shortage of equity capital (I think this is less internationally mobile than debt) and it stems from the lack of any kind of serious pre-funded pension system. This is a major differrence to any other OECD country I am familar with and I think it is a massive distortion.
I think your insight is pretty accurate and useful Blair – it just leads me in a slightly different direction. Instead it merely makes me think that international GDP comparisons are suspect – and are a poor way of actually describing the inherent “wealth” or “consumption value” associated with living in a certain country!
I also think you are correct in saying that, if we are subsidising savings less than other countries, we will end up with less capital and lower GDP. This all makes sense – but when our goal is a broad version of welfare, maximising GDP doesn’t really make sense to me. I think sometimes we all get a bit lost when hunting around with this. This is why I’m always banging on that we need to “find the failure” before we talk about the solution.
This is one of the reasons I get pretty annoyed with talk about productivity – it is a whole other step backwards from thinking about policy in terms of answering failures. Productivity differences are at most symptomatic of something – and may well not mean anything. Research why is important – but trying to “solve” it in of itself is a mistake:
http://www.tvhe.co.nz/2013/01/24/limited-knowledge-provides-the-limits-to-government/
GDP, productivity, inequality, prices – these things aren’t levers we pull, they are loose indicators of the essential welfare and happiness of society. We are interested in the later, and we should always be trying to come back to that 🙂
I fully agree with you, Matt. People see a paradox because they’re not observing the counterfactual. In fact the best research is quite clear about why productivity is low and is in accord with economic theory.
Much of the time I think people just use productivity as a proxy to complain about whatever they think are the ‘real problems’ in society. It’s unhelpful and Treasury shouldn’t be pandering to it.
Paradox seems a bad word, but it is a bit puzzling. I still chalk it up to agglomeration and distance, but I don’t have high confidence in the point estimate.
I agree with you here. There is certainly plenty of room for work.
My priors are the same, but they are easily shifted as work is released!
I fully agree with you, Matt. People see a paradox because they’re not observing the counterfactual. In fact the best research is quite clear about why productivity is low and is in accord with economic theory.
Much of the time I think people just use productivity as a proxy to complain about whatever they think are the ‘real problems’ in society. It’s unhelpful and Treasury shouldn’t be pandering to it.
The whole, productivity line makes me a bit nervous. It leads itself to pushing for export oriented, large, firms with social support. It makes the idea of NZ Inc seem more appealing. It starts to seduce people into the idea that if we just support the right businesses NZ will be the next Singapore … but without all the bad things that come with it. This is one of the issue with cross-country comparisons … as we all know!
From what I’ve read from the symposium there was plenty of good stuff, talk about competition, institutional environment, openness – and how these things help out. But in talking about a “productivity paradox” I genuinely fear that the public will view these things (which are extensions of the reforms) as unimportant, and more general state support for exporters as important – and to be absolutely honest, so of the suggestions that appear to have come out of the conference were also pushing in that direction. There are plenty of ways to lift GDP and savings that will in turn reduce welfare – without a clear idea of welfare in our minds, I get concerned about policy conclusions …
I’m glad you have a clear idea of the welfare function to draw policy conclusions from 😉
😛 – clear is too strong a term I guess …
Also you know what I mean – we should be transparent about the implied welfare function … how’d I fall into that trap!
Of course I know what you meant, but that’s not going to stop me teasing you about what you said!
I’ll be honest, I appreciate it – slack writing is one of my worst habits! And why is the first reply I wrote the last one on this list 😛