Tuesday, August 30, 2011

How to Double Productivity

Macroeconomists focus on things like increasing education, tax breaks for trendy investments, even space aliens and hurricanes (more jobs!), but the best way to increase productivity is to deregulate. A lot of this overbearing regulation is from union-related work rules. In this Ed Prescott video he mentions this case study of how the Minnesota mining productivity soared after being exposed to new competition from international markets. Output fell about 50% from 1979-82. This study is from James Schmitz an the Minneapolis Fed:

In response to the crisis, these iron-ore industries dramatically changed how they produced iron-ore, in the process doubling their labor productivity and pushing foreign competition out of the Great Lakes.

...I begin my analysis of productivity in Section 3 by describing the work rules that prevailed before the crisis. These placed restrictions on the tasks individuals could perform at mines, particularly repair work. First, machine operators were not permitted to perform even the simplest repair work on their machines. Second, repair staff had restrictions on their work. In particular, there were a very large number of repair job classifications, close to thirty. A person with a given classification was permitted to complete repair jobs assigned to this classification but not others. In response to the crisis, work rules were changed to allow machine operators to conduct simple repairs and which reduced the number of repair job classes... a growth accounting exercise would show this growth (from changes in work rules) was “accounted” for by increases in total factor productivity, and in the capital-labor and materials-labor ratios.

Over the next five years, productivity doubled.

The increase in regulations is difficult to quantify, but consider that just last week the proposed TransCanada pipeline, known as Keystone XL, has had dozens of public meetings, hundreds of thousands of comments, and extensive consultations with the EPA, DOT, USDA, DOI, DOE as well as several other federal and state agencies. A recent abortion kerfuffle occurred when Virginia's Department of Health proposed regulations for abortion clinics that are consistent with the construction of new hospitals, and all the sudden liberals realized how insanely onerous these regulations are. The bottom line is that regulations are very costly, and they are growing, as Obama is pushing for more EPA regulations based on fanciful savings to health care costs.

Unfortunately, for Keynesians there's no interest in the effects of regulations on aggregate demand.


james said...

2 things:
1: what do you say when others retort "we tried 8 yrs of no regulation under bush and look what happened".
2: Sure regulation may seem bad, but compared to who else, Europe? China? South America? Canada?

Eric Falkenstein said...

1) regulations grew under Bush too. People think they deliver benefits without costs, which is why we have too many.

2) I don't know much about other countries, but I figure we could cut ours in half without cost. I know a CFO of a large corporation and he tells me they aren't considering California purely because of regulations. Meanwhile, they prevent development for obscure fish and rodents that no one cares about.

Anonymous said...

At the big corporation where I work I think we could substantially increase productivity if we changed our risk management bias and focus-on-safety from "extremely conservative" to "balanced." We get sued no matter how careful we are, so I'm pretty sure being even more careful does not have a good ROI.

Dave Pinsen said...


Re 1), that's certainly true (e.g., Sarbanes-Oxley). But what about claims that some of the deregulation at the tail end of the Clinton administration (e.g, The Commodity Futures Modernization Act) contributed to the financial crisis?

I think there's also the general perception on the left today that regulations are rules designed to protect health, safety, consumer rights, etc., so "regulation" = "good". They ignore that regulations historically have had other functions as well (to limit competition, for example).

Anonymous said...

Abdominal exercise like crunches, hip lift, leg raises etc strengthens the muscles in the abdominal region. A regular workout is necessary in toning up the abs. However, these exercises will not ensure the visibility of the abs.

Dipper said...

err ... high-levels of health and safety increase the barriers to entry of an industry, and so makes it more profitable for firms in that industry. So its in the owners' interests to have these regulations unless foreign companies without the regs can compete.

And some industries are seriously dangerous. Building sites, chemical industry, mining, to name but a few.

J said...

Exactly, Dipper. Regulation has the side effect of limiting competition, therefore it reduces productivity.

There is also the problem of deciding what is seriously dangerous and what a totally imaginary potential danger.

J said...
This comment has been removed by the author.
LJM said...

"Unfortunately, for Keynesians there's no interest in the effects of regulations on aggregate demand."

Seriously? Your take-away from a worthwhile demonstration of some inefficiencies of regulation is that an entire subset of macroeconomics is flawed? Mate, I enjoy reading your blog, but the silliness of conflating low AD/total Ricadian equivalence with specific government failures hurts the validity of your other observations.

Sam said...

LJM - I couldn't agree more.

Eric Falkenstein said...

LJM: I'm unaware of any Keynesian macro model that accounted for, say, the new Dodd-Frank regulations, the new EPA regulations, new diversity requirements. Were they all immaterial, or these just 'good' ones like regulations to increase lending to historically underserved communities? I have never seen a Keynesian macro model that has tried to measure regulations and put them into a forward looking model.

Macro focus on C,I,and G consistently ignores the regulatory environment that is so important, assuming productivity and the Solow residual have an independent law of motion. The Keynesians are the main fans of this approach.

LjMeehan said...

Eric, you know full well that no modern macro model -RBC, New Keynesian, DSGE, MSG3, IS-LM, Monetarist, IMF, BOJ or otherwise - has any role for regulation aside from the most brutalistic of 'frictions'.

Poking holes in modern macro theory isn't hard, and the worth of doing so is backed up by your original post. Mis-regulation is an issue, unquestionably. To imply that monetarist dynamics account for this when Keynsian structures don't is strawman-ing, and beneath you.

Eric Falkenstein said...

The macro I prefer abjures macro aggregate models, as when Gary Becker, Michele Boldrin, Casey Mulligan do. They often talk about the unintended effects of policy, and so it never boils down to a multiplier debate, rather, is the present value of the costs less than the present value of the benefits. Thus, the 'supply sider' RBC and DSGE models I find irrelevant, but most 'small government' advocates don't rely on these models for the arguments. Big government types, however, do use standard Keynesian macro models that were discredited in the 1970's (why almost all the Keynesian macro modelers are >50).