Latest Productivity Commission report – relies on and exploits our ignorance – to undermine our well-being

I had a sense of déjà vu this week when I read the latest release from Australia’s Productivity Commission – Advancing Prosperity – which was released on March 17, 2023 and is a five-yearly exercise conducted by the Commission on behalf of the Australian government. Frankly, if the government was looking to cut spending while advancing material well-being in the community, they could simply tell the Commission to cease doing this work and instruct the staff involved to get real jobs and do something that matters. We just get a regurgitation of GIGO, that well-practiced art of pretending to have something authoritative to say while one is grabbing money out of the till at a rate of knots to advance self-interest! The problem is that the ordinary citizen is ill-equipped to understand any of the technical hoopla that attempts to shroud these types of Report in ‘credibility’, and so is at a disadvantage when trying to determine whether they should support it through the ballot box. Neoliberalism relies on and exploits our ignorance.

Background

As background reading you might like to consult:

1. A continuum of infinitely lived agents normalized to one – GIGO Part 3 (February 6, 2012).

2. OECD – GIGO Part 2 (July 27, 2010).

3. GIGO … (October 7, 2009).

The – Productivity Commission – is a neo-liberal, pro-market agency in Australia that examines big microeconomic issues.

Its origins come from the old Tariff Board, which was founded by the federal government in 1921 as part of the strategy to develop a manufacturing industry behind a tariff wall, using the – infant industry – justification.

In 1974, as the use of tariffs to protect industry were becoming maligned (by the free traders who basically wanted open slather), the government changed the name to the Industries Assistance Commission, which then became the Industry Commission in 1990 and was folded into the Productivity Commission in 1998, along iwth two research bureaus – the Bureau of Industry Economics (BIE) and the Economic Planning Advisory Commission (EPAC).

So, starting out as a body that administered the trade protection policy of the Federal government in the C20t, it has morphed into its current guise, which is to give advice to government on how to deregulate, privatise, outsource and other trash the conditions of workers.

It evolution reflects the way in which the economics profession has evolved over the time span involved.

The sense of déjà vu that I experienced is because I haven’t really thought about the tools and techniques it uses for some time, whereas, when I was a graduate student and a young academic, developing modelling and statistical skills, I was forced to deal with these issues on an almost daily basis.

Indeed, I did my Masters’ degree at Monash University, which at the time was one of the leaders in the field of – Computable General Equilibrium (CGE) – modelling and so I was confronted with it on a daily basis while I studied and taught (as a tutor) in that Department.

CGE models exemplify GIGO.

1. Start with a stack of equations that pretend to be representing the real world.

2. So, the assumed human behaviour bears no resemblance to any human behaviour observed.

3. Further, because complexity predicates against mathematical solutions, the models have to assume just one human (who behaves not like any human) which is called the ‘representative agent’.

4. Same for firms, too much detail is bad, so assume a ‘representative firm’ that behaves like no firm we really observe.

5. Impose a whole lot of numerical parameters on the behaviour of the agents which just reflect the conclusion that you want to reach anyway – so, you believe that real wage increases reduce employment and increase unemployment, so there will be a large negative coefficient (number) assigned to the real wage term in the demand for labour equation.

Simple – GIGO.

6. Change some variable – like a policy parameter – and then trace through the impacts through the input-output industrial structure of the model.

But remember, the trace is totally dependent on the numbers imposed which ‘model’ the responses of different parts of the economy. They just reflect the dominant neoclassical view, so you get out what you put in.

GIGO.

7. Some CGE models are ‘static’ which means they cannot tell us anything about adjustment processes as a result of the shock introduced. They just suddenly take us from one market-clearing equilibrium to the next with no intelligence provided as to how we get there or how long it might take.

Which means all the interesting aspects of policy design are silent.

I recall a quote from Post Keynesian economist Paul Davidson [in the book by Bell and Kristol The Crisis in Economic Theory, Basic Books, 1981, p.157] which describes how mainstream economics uses methods and approaches that renders it unable to embrace real world problems.

It is very applicable to CGE models:

There are certain purely imaginary intellectual problems for which general equilibrium models are well designed to provide precise answers (if anything really could). But this is much the same as saying that if one insists on analyzing a problem which has no real world equivalent or solution, it may be appropriate to use a model which has no real-world application. By the same token, if a model is designed specifically to deal with real-world situations it may not be able to handle purely imaginary problems.

Post Keynesian models are designed specifically to deal with real-world problems. Hence they may not be very useful in resolving imaginary problems that are often raised by general equilibrium theorists. Post Keynesians cannot specify in advance the optimal allocation of resources over time into the uncertain, unpredictable future; nor are they able to determine how many angels can dance on the head of a pin. On the other hand, models designed to provide answers to questions of the angel-pinhead variety, or imaginary problems involving specifying in advance the optional-allocation path over time, will be unsuitable for resolving practical, real-world economic problems.

I should also emphasise that I am not against simplified (abstract) modelling. Clearly, it is essential if you want to gain some traction on a real-world problem that is complex.

But when the abstraction level makes it impossible to gain any understanding of how the real world operates and/or the results are totally dependent on the assumptions that you start with, so that final output tells us nothing meaningful and just validatesof the original ideological position, then I consider the exercise to be pointless from a scientific or academic perspective.

You may as well just say you want workers to have lower real wages because you want capital to get higher profits rather than go through all the equation diversion that tries to justify that desire in a smokescreen of technique that barely anyone can understand or contest.

Latest Productivity Commission Report

Reading the latest 5-year review from the Commission brought all that back to me – unfortunately.

It demonstrates that my profession has made very little intellectual progress in the face of the massive empirical dissonance that has become obvious to most people over the last 15 years or so.

Most people don’t know why the economics profession is failing to deal with the real world and why their predictions are always so wrong, they just know something is very wrong.

But, I know why because I know what these techniques are and how they work and why these exercises are GIGO.

The latest Productivity Commission report – Advancing Prosperity – released March 17, 2023 is a nine-volume effort, which leaves me frustrated as to why such bright people and many of them, are occupied producing such nonsense instead of being employed to advance humanity.

Of course, that is not the way they see it.

They are so locked in Groupthink that they actually think they are doing good work.

The final report is so full of ideology (free market, market clearing, etc) and neoclassical economic folly that a ‘burning the books’ strategy would be the best way for government to deal with it.

The Commission has a track record in pressuring the federal government to privatise, outsource, pare back government services, marketise anything moves and then some, and advancing the notion that if there is not profit to be earned in an activity then the activity is not worth thinking about.

Major policy initiatives over the last decades reflect the bias towards this sort of thinking to the point that we now have major areas of what should be ‘public space’ being managed and profit-gouged by private entrepreneurs.

Think about vocational education and training which has been forced into the private-for-profit, competitive market – where hosts of parasitic corporations and fly-by-nighters extract millions from government and produce hardly any effective outcomes.

There have been many notable private training provider collapses in recent years where the operator has been paid massive amounts by government to provide training but then becomes insolvent, leaving stranded students everywhere, and a safe nest egg of public money squirrelled away and untouchable by any liquidation process.

Think about the scandal of aged care where the federal government sold off or outsourced this crucial care function to fly-by-nighters.

There was a reason that there were very high death rates in the privately-run federal aged care homes during the early period of Covid while those under state government ownership and control had very low death rates.

Think about the job services sectors – which emerged out of the privatised Commonwealth Employment Service.

In making that shift, the government created a new industry – the unemployment industry – and pays millions to profit-seekers who alledgely are tasked with preparing the unemployed they case manage for work.

There have been constant scandals, rorting, fraud in this sector – and then constant cries of ‘skill shortages’ from business when there is mass unemployment – which raises the question what the millions being paid out doing?

We know what – lining the pockets of these private providers who do as little as possible to extract the largesse of the government.

All of these scandals and dysfunctions are the result of the sort of work the Productivity Commission does and uses to pressure the government.

We learn that there are “five key reform pillars” if Australia is to advance prosperity, one of which is:

Building an adaptable workforce to supply the skilled workers for Australia’s future economy, through education reform, skilled migration and modern, fit-for-purpose labour market regulations.

Cut through the jargon and you arrive at the conclusion that this means:

1. Cutting job security provisions – making it easier to sack workers.

2. Dumbing down education standards.

3. Bringing in low-cost labour to pressure local workers into accepting low wage rises and real wage cuts.

4. Cutting non-standard hours penalty rates and overtime payments.

5. Forcing more expenses onto workers.

All standard Productivity Commission suggestions.

When the employers started their campaign which has achieved some success to date to get rid of penalty rates at weekends they promised, based on Productivity Commission research, that there would be a boom in employment in the services sector, in particular the hospitality areas.

Some years into that experiment what have we seen – higher profits, lower wage outcomes, real wage cuts and no discernable increase in employment.

It was a policy designed to add another dimension to the ongoing strategy to redistribute income from workers’ wages to profits.

And in that context, it has worked a treat.

It is just that the rationale for the changes were always lies.

Another of those “pillars” is:

Lifting productivity in the non-market sector to deliver high quality services at the lowest cost, by changing incentives and culture.

Which means forcing workers to work harder, longer for less pay and security.

More of the same.

The problem for the nation is that when the government ratifies this sort of ideological nonsense by designing policy that reflects it, the outcomes actually undermine the stated objective.

The profit-sector uses the government as its pawn and through funding rules, lobbying and all the rest of it, the state becomes an agent for capital.

So the politicians tell the nation that these shifts will achieve A or B, which sounds good for all, when in fact, the actual motivation is to improve profits by undermining the capacity of workers to defend their interests.

The question then is why would workers go along with any of that when they realise – often after the fact and when the damage is entrenched – that they have been dudded.

As I note in my quarterly national accounts updates, the wage share has been falling dramatically over the decades when all this neoliberal nonsense has been dominant.

There is no longer any credibility in these sorts of ‘reform’ exercises.

In other words, the very group that is needed to advance new ways of doing things to improve output per unit of input becomes alienated from the process because they cannot trust the underlying motivations.

The Commission is big on rhetoric about education – yet our public education system has been degraded by austerity cuts and so-called ‘efficiency dividends’, while increasing volumes of government money goes to advancing new sporting fields in private schools that serve the very rich and few.

To see how nonsensical all this you might consult the technical chapter – 5-year Productivity Inquiry: Whole-of-economy modelling – which provides the detail of the assumptions and the structure of the CGE model.

This is where the déjà vu really hits.

1. Capital is mobile and flexible – which means machines etc can move without cost between uses. I would love to see that.

2. Investment in capital stock is arithmetically determined by the size of the capital stock – one goes up the other goes up. There is no place for uncertainty and flights of fancy, which psychologists will tell you really drives the investment cycle in the real world.

3. Foreign investment is “not affected by domestic variables or policies” – try understanding that if you are Russia at present!

4. “Government spending is assumed to have no effect on the model’s productivity parameters” – yet education is claimed to be a clear productivity-augmenting activity.

In 2022, 65 per cent of students were enrolled in government schools (Source).

Go figure.

5. “Government tax rates are exogenous, except for household income tax rates that endogenously adjust to balance the government budget” – so there are no fiscal surpluses or deficits. The currency-issuer has no net spending effect on the economy.

6. “Wage rates are determined through market clearing of individual group labour supply decisions (via a utility maximisation process) and industry labour demand decisions (via a cost minimisation process). Any type of labour supplied can be used across any industry (that is, labour is perfectly mobile)” – so no unemployment (there is always market clearing) and excess labour supply can move anywhere, anytime to new sectors, firms, regions.

Believe that and I will sell you the Sydney Harbour Bridge! E-mail me for a good price.

7. “The primary model simulations assume that there is no unemployment, and that labour markets fully clear” – as above.

They do some simulations based on wages being set above the ‘clearing floor’ – that is, they consider real wages and employment move inversely – the typically neoclassical approach, which, however, fails to accord with reality.

Conclusion

The problem is twofold:

1. These reports are a massive waste of the resources that go into creating them.

2. They have a disproportionate influence on government policy which have led to growing policy disasters that beset our country – and reflect similar policy failures right around the globe.

The other problem is that the ordinary citizen is ill-equipped to understand any of this and so is at a disadvantage when trying to determine whether they should support it through the ballot box.

Neoliberalism relies on and exploits our ignorance.

That is why it has prevailed.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.