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Managing the news cycle

Peter Martin draws attention to the Australian Treasury press release listing the adjusted figures for the government surplus in 2006-07:

Preliminary estimates indicate that the Australian Government general government sector recorded an underlying cash surplus of $17.3 billion for 2006-07, which is $3.7 billion higher than expected at the time of the 2007-08 Budget.

A commenter on Peter’s site asks the obvious question:

Is it a good thing that treasury gets it’s numbers so consistently wrong? Who is responsible for the mistake – in this case an error of 27%. If it had gone 27% the other way who would have copped it?

27% is indeed a very large adjustment, and it’s rather difficult to imagine this sort of revision being made in the other direction. It is possible that the adjustment is just as much a surprise to Mr Costello as it (nominally) is to the media, but I suspect that it was always known – or at least believed – in the Treasury that the figures included in the 2007-08 Budget were too low. They will have, at best, decided to err on the side of caution (in case their internal numbers were wrong or there was a sudden crisis that worked against it) and, at worst, knowingly understated the true figures in order to guarantee the political capital boost they’d get later in the election cycle (i.e. now) when the upwardly revised figures were released.

I’ll leave it up to the audience to come to their own conclusions on which is the more likely explanation.

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The exponential rise of bureaucracy

Bureaucracy has been getting worse for years. Bigger, more complex, more self-referential, self-justifying, self-absorbed. More impenetrable. The language of bureaucracy has been changing as some sort of linguistic mirror of the organisation itself. It has happened in the public service at all three levels and in the private sector. It has happened in every industry. Why? My current thoughts, in three slightly overlapping points:

Point 1) The distribution of demand across skills and abilities has been changing. As we’ve moved away from agriculture, through manufacturing and towards services and office work, the need for administrative, bureaucratic tasks has increased.

Point 2) The distribution of task-related ability across the population has not changed, or at least has not changed much. There might be more people going to university, but there are limits to how much education can enhance a person’s innate ability.

Point 3) (a) A high-ability person will get more done than a low-ability person, irrespective of their coworkers.

Point 3) (b) The productivity of a person is influenced by the ability of their co-workers, so that high-ability coworkers will raise your productivity and low-ability coworkers will lower your productivity.

Point 3) (c) There is an optimal size to a team. Even if everyone is of equal ability, per-person productivity will (initially) rise with the size of the team, peak, and then start to fall.

Points 1 and 2 mean that the need for bureaucratic work is increasing, but the number of people needed to do that work is increasing faster because the ability of the marginal (new) bureaucrat is less than the average ability of the existing bureaucratic workforce. Point 3 means that the gap between these two growth rates increases as the demand for bureaucratic work increases. As an illustration, I imagine the demand for bureaucratic tasks increasing linearly, but the size of the bureaucracy (and the inner complexity of it) needed to provide this service increasing exponentially.

How do we fight this? I see three ways:

a) Try harder to shift the distribution of ability over the population. The Aust/UK governments are aware of this, but have unfortunately settled for simply lowering the bar for getting into university. A generous commentator might acknowledge that they had the best intentions at heart, but the end result is one set of numbers going up, the value of those numbers going down and the problem remaining the same. Seriously working to address the problem via this tack — if it can be done from this angle at all — could only be done over a timeframe of 20+ years.

b) Work to slow (or, ideally, reverse) the increasing demand for bureaucratic work in the first place. Cut red tape. Stop trying to watch, record, register and regulate everything. Remove overlap.

c) Decrease bureaucratic team sizes. Make them specialise. Specifically link bureaucratic teams to the end-consumers that they are nominally serving.

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Libertarianism, inequality and cultural homogeneity

Andrew Norton doesn’t think much of this article by Christine Wallace in the Griffith Review, in which she argues that the Coalition under Howard has instigated libertarian policies by stealth. He calls it “a dozen or so pages of ignorance and silliness,” citing this paragraph from page 8 in particular:

The libertarian logic is that, since personal freedom and the existence of free markets are inextricably entwined, and since – as Bork puts it – “vigorous” economies are vulnerable to being “enfeebled” by particular cultural practices, then the champions of personal freedom have a licence to police cultural practices – in the interests of freedom and economic vigour. Thus libertarians can reason that difference (for example, multiculturalism, homosexuality) must be eliminated so that the economy can function better – reasoning that is absurd, to say the least.

A commenter on Andrew’s blog also highlighted this bit on the previous page:

The central difference between the Howard Government and the Hawke/Keating Governments is that the Labor governments saw a crucial role for the public sector … especially in relation to issues of economic inequality; about which libertarians are unconcerned.

First a confession: I’ve not read more than two or three pages of Christine’s article. Still, if the blogosphere isn’t a place for partially informed comment, I don’t know what is. In the interests of fairness, though, I will disagree (slightly) once with Andrew and once with Christine …

In the paragraph that drew Andrew’s ire, Christine argues that the libertarian pursuit of free markets justifies cultural homogeneity. Andrew’s implicit criticism certainly seems to make sense: why should free markets and cultural heterogeneity be mutually exclusive? But it is worth noting that Christine may – at least to some extent – have an unpleasant point. For a market to operate efficiently requires trust between its participants. A market can certainly operate without trust if institutions are sufficiently advanced and corruption-free, but the enforcement costs they impose are a classic form of market failure, along with moral hazard and adverse selection. Even with good institutions, market efficiency is optimised by increasing trust. However, as Andrew Leigh has observed for Australia [here and here] and Robert Putnam has found for the USA [here], ethno-linguistic diversity breeds mistrust. In so far as they proxy for culture, Chrstine’s point at least partially stands.

Now back to Christine. She reckons that libertarians are unconcerned about inequality. It’s obviously a generalisation, but even in general, it’s misleading. While I’m sure that libertarians are not concerned about inequality per se, I’m equally sure that they are concerned with unwarranted inequality. Classic theory of the firm suggests that in perfectly competitive markets, a person’s wage will equal the value of their marginal product. Presuming (safely enough) that different occupations have different marginal products (so an engineer will contribute more to a firm’s profits than a cleaner), if people at the top of the pile are being paid more than their marginal product and people at the bottom are being paid less than theirs, a libertarian would oppose the excess inequality that resulted.

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The man whose name is anathema

Peter Martin, currently the economics editor of The Canberra Times, has got a nice little piece on labour productivity in Australia over here.

It’s fascinating for two reasons. The first is that growth in labour productivity in Australia has stalled – it may even be as low as 0% for the current financial year – and this slow-down coincides neatly with the Coalition’s Work Choices program. I’m not convinced that one necessarily caused the other. At the very least, I would have expected some sort of lag between Work Choices coming into effect and any change in productivity growth. Nevertheless, it looks ugly for the Howard government and they’re clearly doing their darndest to avoid drawing attention to it.

The second fascinating thing is that, even though this raises the question of whether Keating’s enterprise bargaining system was better in terms of promoting productivity growth, nobody – on either side of Australian politics – will dare mention this possibility. For the coalition, this makes perfect sense. They don’t want to acknowledge anything about the previous Labor government that was “better” than under them. For the Labor party, though, it’s far sadder. They’re clearly working under the assumption that invoking the name of Keating will tar them with the 1991 recession. It’s sad, because they’re just as clearly throwing away the best piece of evidence they have for Labor’s economic-management credentials.

In case anyone is interested, here is a graph from ABS data that Peter included in his piece, showing clearly that the quarterly change in labour productivity has turned negative for the last two quarters:

Quarterly change in Australian labour productivity

Recognising the probable noise in quarterly data, Peter also includes this graph of a four-year rolling average courtesy of Saul Eslake at ANZ:

Four-year rolling average of changes in Australian and American labour productivity

Paul Keating, speaking to the ABC’s Eleanor Hall in the week leading up to the recent budget, justified enterprise bargaining over individual contracts thus:

On this floor at the ABC here, there must be 150 people. If you went out there and said to them, look we’re going to make an agreement for the next three years or four with the ABC and we want 3 per cent productivity a year out of it, or 2 per cent productivity, together you could all do something.

But if they just take Eleanor Hall by herself and say, you will give us an increase in productivity, how can you, individually? How can you? What are you going to do, talk louder? Talk more? Be at work earlier?

For reference, the latest Australian federal budget can be found here. The section relevant to Peter Martin’s commentary is Budget Paper 1, statement 4.

Update – 14 May 2007 – In response to Andrew Norton:

Andrew is absolutely right that a firm is concerned principally with profit, but there are always two ways to get more of the stuff. You can do the same at a lower cost (as he speaks of), or you can do more, with the value of the extra done being more than the extra cost it requires.

Assuming that the amount of labour employed remains the same in both cases, the first possibility does not increase worker productivity; it only shifts a greater proportion of the output away from labour and into firm profits. The second possibility increases worker productivity, with an ambiguous effect on the labour/capital shares of output.