Friday, April 29, 2016

Productivity stagnation proves there is a cost to regulation

This morning I read an article in the New York Times asking why productivity growth in America is so weak. It laments the fact that, for American workers, productivity per hour worked has not increased at all since 2011. In New Zealand we have similarly dismal figures.

The Times writer goes on to propose three scenarios to explain this anaemic productivity growth. Firstly, he speculates that we have reached a plateau of technological innovation. He doesn't explain why - as with global warming, we just seem to have reached an inexplicable 'pause'. Secondly, he says it could be a measurement error, but he admits economists can't give any reasons why this might be so. Finally, he says that businesses could be investing for the future but there is a lag between that investment and productivity gains. This scenario sounds plausible but he promptly dismisses this too, for the very obvious reason that business investment in equipment is historically low.

The writer's dismissal of the third option hints at the truth but, as is typical of mainstream media coverage of economic issues today, he is prepared to consider every explanation but the obvious one. We have to question either the Times journalist's intelligence or his motives in putting up three strawman scenarios that he so promptly knocks down, without examining the more likely scenario.

Productivity is a factor not just of labour but, much more importantly, of capital - because it is capital that provides the leverage for labour productivity. When you think about this, it is very obvious. The human body is not much different to what it was in our distant ancestors' days but our productivity is almost infinitely higher. This is because we have become much, much better at making and using tools - and tools are capital. If businesses aren't investing in plant and equipment, then productivity cannot grow.

So why aren't businesses investing in equipment? What has changed so much about their environment that means they feel unable to invest in new plant and equipment? The answer is regulation. In the United States and New Zealand (and every other Western nation) new legislation and regulations have piled more and more compliance costs on businesses. Legislation like the new (and completely unnecessary - but that is for another post) Health and Safety at Work Act introduced by the New Zealand Government this year means businesses must spend more and more of their resources on things other than producing better products and services more efficiently. Increasing government compliance costs mean businesses must cut other production and operating costs just to stand still, with the result that there are no net productivity gains. And why would a business owner risk additional capital for no gain?

The productivity numbers are stark evidence there is a cost to regulation and it is only by reducing regulation and compliance costs that we will grow our productive capacity and improve our lives.

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