Productivity vs. jobs: another economic fallacy

Gerard Jackson
BrookesNews.Com
Monday 24 September 2007

This article was first published in The New Australian in September 1998. It was retrieved from the TNA’s archives in response to Mike Steketee’s thoroughly dishonest attack on the Laffer curve (How the Laffer curve really works), thus once again revealing his stunning ignorance of economics. Why Murdoch publishes Steketee’s drivel is a complete mystery.

Without a doubt, Mike Steketee, The Australian’s national affairs editor, is one of the worst economic commentators it has been my misfortune to read. And that is saying a lot given the dreadful state of the Australian media. Like all enemies of the market, Steketee cannot bring himself to accept certain fundamental economic laws, one of which is that overpricing goods or services will create a surplus. Hence, when unions and their political allies raise the price of labour above its market clearing level persistent widespread unemployment will emerge. But this is just too much for Steketee to grasp. What! Hold unions responsible for their actions? Not on your life! Instead he trots out interventionist economists like Gregory and Argy to muddy the economic waters while justifying more government spending. Anything but the truth.

His latest piece of economic illiteracy (The Australian 5 August 1998) tries to link unemployment to rising productivity. He refers to the fact that since the mid-’70s unemployment after each recession settles at a higher level, as if there is some law of nature that dictates this phenomenon. That it has not happened in the US is totally ignored, as expected.

I will give a brief explanation for this situation. The Austrian school of economics explains that credit expansion creates a boom that misdirects production causing malinvestments. When the boom busts, malinvestments appear as idle capital and labour. If the government allows the malinvestments to be liquidated and labour costs (including oncosts) to adjust to the new conditions, the economy will recover and full employment will be restored. However, and they stress this, if labour-cost adjustments are paralysed unemployment will become the norm. This is why our unemployment is about 100 per cent greater than America’s.

Naturally, none of this is acknowledged by Gregory or Argy. They prefer to emphasise that though our per capita GDP growth exceeded the average for the OECD, driven by increased productivity according to Argy, our unemployment still remains stubbornly high. Steketee is clearly inferring, as did Gregory at a recent conference, that productivity increases contributed to unemployment. This is the old technology-destroys-jobs fallacy in new garb. If it were true, then America’s unemployment would be much higher than Australia’s. Why? Because US productivity in manufacturing is nearly twice as high as in Australia and certainly exceeds the European level. And only someone totally ignorant of the American economy could claim that productivity in Australian services leads the America.

But these discussions about relative productivities are totally misleading. Gregory and Argy know full well that our average productivity level would fall if full employment was restored because more workers would be employed in marginal operations. [This is precisely what happened]. These would obviously pull the average down. What this amounts to is that the only labour productivity figures that count must come from areas where labour markets are at least comparatively free. Raising productivity by raising the level of unemployment is nothing to boast about.

Steketee repeats Gregory’s claim that the low-skilled have suffered large falls in real wages rates without any significant effect on unemployment¹. This is just bad economics. Whether such falls have occurred is not relevant. (By the way, wage rates should also include oncosts). In any case, why are the low-paid the problem? I believe that a very good economist would argue convincingly that they might be a symptom. Above market rates elsewhere would actually have the effect of swelling the ranks of the low-paid.

This is something that Gregory and his media fan club ignore. No market economist should ever argue for en bloc wage cuts as a solution to unemployment. This approach is another Keynesian myth. What they should argue for are adjustments to those, and only those, labour costs that are causing the unemployment. Allowing these adjustments to take place would release withheld capacity and raise aggregate income.

His article finished with a call for a Labour government to raise taxes to fund labour market programs and community jobs. This, he states, would raise the demand for labour². It is a complete economic absurdity to suggest that such policies could raise the demand for labour, whether by demand one means rising real wages for all or just employment at any wage rate. Two things need to be made clear: Labour market programs are not only a costly failure they are also a miserable attempt to escape the real reason for the level of unemployment. As for funding jobs out of taxes, this does not increase demand but only transfers income from one group to another. The only thing that would raise real demand is increased investment.

Note: Before anyone sends me e-mail criticising my attack on Steketee, they should pause and ask themselves why he refuses to debate his economic opinions. No prizes for guessing the right answer. If journalists were genuinely held accountable for their writings, i.e., made to defend them, the kind of economic nonsense and ideological bigotry that seems to be Steketee's hallmark would soon dry up.

It should be the rule of every newspaper and magazine, etc., that journalist should never write anything they are not prepared to defend. It is a rule that The New Australian rigidly stands by.