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Our national obsession with a lack of productivity

And how we’re misusing Statistics Canada data to track it


 

Artiga Photo / Corbis

Hardly a week goes by when the pages of our nation’s newspapers aren’t graced with someone worried about our productivity gap. Econowatch has been a bit of an exception, noting that there are some issues with the ways in which we measure productivity which imply we probably shouldn’t worry about it as much as we do.

I believe there’s a factor in the productivity story to which we don’t pay anywhere nearly enough attention: the misuse of Statistics Canada’s Input/Output model to keep telling us that costs are benefits and that productivity doesn’t really matter. A wonderful example of this was provided last week by the Canadian Energy Pipelines Association (CEPA). Lest you think I am beating up on the fossil fuel industry, let me assure you that the obsession with low productivity does not stop at fossil fuels; the green jobs crew more than pull their weight.

The CEPA study is the perfect example of what’s wrong with using I/O models to measure the benefits of infrastructure, either existing or proposed. Ideally, pipelines would be cheap to build, would use little energy, and thus would allow resources to reach their markets at minimal cost, maximizing the value realized from extraction of our scarce resources. By enhancing the value of resources, efficient transportation would enhance the implied productivity of labour in the resource sector. The method used in the CEPA study would value a pipeline system which was costless to operate at something approaching zero, and leave us all wishing for more expensive pipelines so that they’d have more economic impact.  If you can’t see how that’s backwards, you’re just not giving it enough thought.

The CEPA study looks at the annual operating revenues of pipelines, and treats those as a shock to the economy – money which would not otherwise be spent. Of course, nothing could be further from the truth. Operating revenue of pipelines is revenue not earned by resource production or refining, depending on the dynamics of the particular energy market, or money not saved by consumers at the pump. This is not money which is magically added to the economy. Rather, it’s part of the value of resources lost to the costs of transporting them to market.  The higher the transportation costs, the lower are taxes, royalties, net revenues to producers, margins of refiners or the higher are consumer costs. These lower margins would either mean less employment or lower wages or both in the upstream sector, while higher costs would lower welfare for consumers, all as a result of the lower productivity that we’re told is a source of great benefit to the economy.  It’s as close to zero sum as you can get.

I wrote a few years ago about the economic case for an oil bucket brigade, but I never thought anyone would take it seriously. Of course, it’s a ridiculous option because it would have absurdly high operating costs and would negate any value in the resources being transported via inflated transportation costs. However, if you used the method CEPA uses, a shift from pipelines to bucket brigades would produce a boom of epic proportions. The logical conclusion of their study is that, if the current transportation network is a large benefit to the economy, then a more expensive transportation network would be an even larger benefit.

Perhaps, with this in mind, we should consider shutting down the existing pipeline network and replacing that low-cost, high-efficiency transportation with oil transport by rail or truck? At the very least, we should clearly abandon new pipelines in favour of transportation options which will generate higher total revenues. Somehow I doubt that’s the point that CEPA was trying to make.

The more disturbing upshot of the use of I/O models in this way is what these methods would tell you about a true shock to the economy delivered from the oil transportation system. An oil spill, in the spirit of broken windows, would show up in an I/O model as a veritable economic boom. A billion dollar clean-up bill would ripple through the economy and employ people in the same way as any other expenditure, but in no way would it be a net benefit to society. Sure, people would be employed in the clean-up, and businesses would see demand for their services increased, but these costs would be paid for by insurance companies, pipeline company shareholders, and other members of our society. This is money that would otherwise be spent on other things, which would now have to be deployed restoring a landscape to something resembling its previous state, and not adding any net value. Not to mention, of course, that the environmental costs of the spill would not be tabulated in any way by the I/O model. I am sure that CEPA would not endorse the idea that oil spills are good for their economy, but that’s what their method would tell you – higher costs mean higher benefits.

Input/output models lull us into a false sense that costs are actually benefits, so we’re fine no matter what. They allow business and government leaders to believe that a project executed inefficiently is better for the economy than one executed efficiently. The next time you’re faced with these numbers, take them to their logical conclusion. If they tell you that a pipeline would be worth more to our economy if it cost more to operate or if you built it twice rather than once, ignore the numbers. If the method would count an oil spill as a benefit, it’s not worth the paper it’s printed on.

These models have their uses (see Stephen Tapp‘s comments here and here), but with every study I see using the I/O model to validate lower productivity, I become more and more convinced that setting all macro multipliers to zero by fiat would be a welfare-improving policy. That way, people would have to justify projects on their merits with respect to the welfare of Canadians, and that would be a refreshing change.


 

Our national obsession with a lack of productivity

  1. Ahhhh, but haven’t some economists argued that exports are costs, hence something to avoid or reduce? This argument seems to pop up whenever a discussion ensues surrounding *changing* trade numbers (deficits or surpluses).

    • They are. Exports are what you give to someone else in exchange in something called “trade”

      • So, all things held constant, is increasing the value of exports good or bad? This seems to be the CAPP /AB strategy – maximize volume for exports.

        • Suppose that, at recess, you used to be able to trade your apple for 1 pudding cup. Now, another student who really likes apples starts a bidding war for yours, and you can trade it for two pudding cups. You’re better off with having something of higher value to trade, all else equal.

          Same applies to getting money for oil. If, all else equal, we get higher value for our oil, we’re better off. We’re still giving up oil to be able to buy other things…just getting more other things.

          • If, all else equal, we get higher value for our oil, we’re better off.

            Didn’t say “higher value”, said higher volume, holding price constant. You must have spent much of your spare recess time playing marbles.

            When it comes to “oil” , total exports = volume x price. These are not independent.

            In your example, you trade two apples, for two pudding cups, etc.. Eventually, following this trend, you get fat and unhealthy from not having a balanced diet.

          • Read your own comments: “So, all things held constant, is increasing the value of exports good or bad?”

          • Followed by the clarification in the same paragraph: “This seems to be the CAPP /AB strategy – maximize volume for exports.”

            Context.

            Anyway, thanks for playing.

          • I can’t be responsible for your confounding of value and volume.

  2. Wouldn’t your arguments apply equally well to using the GDP as a measure of performance?

    As you say, a well operating pipeline adds very little to the GDP in and of itself, whereas the associated emergency clean-up around a spill area — especially if that spill happens to be in isolated ecologically sensitive territory and thus not one that is likely to have negative effects on the surrounding economy (like Deep Water Horizon did to Louisiana coast industries) will cause a boost to the GDP through extra hiring and employment.

    • It’s more an issue of looking at the economic impact of the expenditures without looking at where that money would otherwise have been spent. So, yes, Deep Water Horizon would have caused a spike in local employment related to the clean-up, but also declines in other industries locally. Even if it were to be a positive GDP shock, it’s not a welfare gain since the economic activity is being spend to get you back to somewhere close to what you had before the spill – you’d be far better off without the spill and with those same resources devoted to other things.

      • Yes, that’s understood, and why I gave the specifics I did. Deep Water’s GDP increase was likely eclipsed by the local industry damage.

        However, a pipeline spill in a remote, ecologically sensitive area, would not have the economic negative effects.. thus be considered a positive addition to the GDP, yes?

        Which brings me back to the original question — isn’t GDP an equally flawed measure to use if we’re suggesting that increases to GDP equate to benefits to society?

        • By these models or in reality? In reality, the resources used to clean up the spill would come from somewhere, so would not be spent on something else, and so the net impact on GDP would be approximately zero, plus or minus trade impacts. And yes, GDP is a flawed measure of welfare because it doesn’t measure welfare – it measures economic activity.

    • GDP by itself is not a good indicator of how you are doing. It just means people are spending more. Politicians who use GDP by itself as to propel we are doing good are using it for deceiving the people, they lie to look good.

      For example, say you pay 5% more for stuff but get less stuff. If you pay more and get less, this is _REAL inflation. But because less goods and services were rendered, it also means less jobs and less goods and services were actually delivered. You can easily have GDP go up just from inflation yet no real good results from wages or employment.

      Reality is government is constantly BSing the people, as to get us to get less and pay more taxes. Make us feel good on the ride down as they cook some stats to BS us all.

      • GDP figures are generally quoted in real terms for exactly this reason – to omit inflationary expansions. You should, perhaps, be more concerned with what is omitted from GDP – the value of what is produced, the valued of non-production economic activity and leisure, as well as the value of the environment for a few examples.

  3. Sorry to be slightly off topic a tad…time for a story.
    I’m not sure if i like where you’re going with this, at least in some aspects. As a real wold example, that i’m personally familiar with: there once was a flourishing logging economy throughout the length of the BC coast. It employed many local families using traditional techniques such as hand logging and A frames [ from the beach and fore shore] We now know that a good deal of harm once done to the environment at the time [ and over the preceding century] but at nothing like the scale once modern clear cut technological innovation eventually got its act together.
    This change didn’t magically appear, the bc govt changed the rules, locking small companies[ some were little more then what were called gypo operations, barely keeping afloat or solvent from job to job] by taking away cutting rights and transferring them to larger operators who eventually marginalized and drove the small guys out of business. Just times a changin’ or something else? The result – a barren and pretty near empty coast north of Campbell River on the mainland side.

    Those small guys employed far more men in the woods then the new corps ever did.[ locally anyway] They supported local communities and encouraged families to settle the coast; whereas today the coast is largely deserted but for the folks who will never leave and have always understood that you need a community behind you to live in a wild and remote place – that is if you want to stay half sane. The model wasn’t perfect nor entirely efficient. Valuable tree species were left to rot in the woods because they had no market value at the time, and salmon habitat was damaged when they dragged timber through the streams.[ all of which got much worse as the big multi- nationals moved in and increasingly just abandoned communities and saw no value in keeping families on site.
    I suppose the bottom line would be that someone would have eventually have set up shop in Chile or central America and drove them out of business anyway eventually. My point, if i have one, is that efficiency in pure economic terms aint every thing, nor is it always desirable in social terms. It was a wonderful period of history for anyone who’s inclined to study it, and efficiency arguments and govt bean counters plus the greed of vested interests helped make it so well before its time. There are other ways of measuring cost Mr Leach.

    • So, on with the bucket brigades and the cutting of trees by hand.

      • That was really deep. Actually a bit pathetic coming from you really.
        I had tried to convey that changes in productivity and technology are no doubt inevitable and even necessary on a case by case basis[ what’s workable on the coast may not be in Northern Alberta] But they come at a cost not measured by economics alone.[ it is pefectly possible to still hand logging or use variants of A frame logging using modern technology and science. Perhaps not with the same man power, but the point still stands]Instead we get hugely expensive heli -logging, no doubt with the appropriate tax right offs.
        In the case of the BC policy change the sad reality probably has as much to do with unwillingness to support the cost of infrastructure and operational costs for remote communities as much or more then simple corporate greed. But it amounts to the same thing. It became both easier and politically expedient to throw the little guys under the bus. And i’m not speaking just of ancient history here. I meet people most summers on the coast where i sail who recall the change – and not old folks either.
        But thanks for reminding me why i never wanted to pursue a soulless occupation like economics.

        • It’s not soul-less – it’s looking at the whole picture. Yes, it’s great to say that we should protect jobs here, there, or wherever, but you also need to talk about how that’s going to happen and who is going to pay the bill. If your story is creation of more “employment” through lower productivity, remember that you also have lower total product at the end of the day with which to pay wages. There are two ways to change that – first, you could isolate the domestic market and force consumers to pay for inefficiently produced products, which doesn’t help everyone, it simply provides a very inefficient way to transfer money from one part of society to another. You could also directly subsidize the sector, which is another way of doing the same thing. If there are issues you want to deal with, deal with them directly…don’t try to hide the redistribution behind a large-scale manipulation of the means of production.

          • In this particular case i was talking about a social good as much as employment. IOWs familes and communities living on the coast and good that follows from that. These harvesting methods were efficient in their day, although they were undoubtedly numbered; but the govt tweeked things by pulling their access to timber[ A rationalization made no doubt on the grounds it was inefficient use of the resource]The net effect was to kill communities that had been doing their best to adapt. The result – a coast with far less individuals making or living productive lives now then even 50 years ago, much less a century earlier. And obviously the end of a way of life, some of which probably deserved to go; but please lets not pretend this happens like some cool mathmatical model. It was political, venal in some respects and messy in terms or individuals lives and livelihoods lost. I don’t buy the subsidy argument either as current operations are also subsidized.
            I guess what i’m getting at is this general tendency[even with economists] toward the one size fits all model.
            It’s no accident i fear the only economists of any stature i’ve been able to read have pretty much been Keynes and Galbraith. Not just because the were liberals, but because they had time to acquire appreciation for the arts, philosophy and such like distractions to todays more specialized economic disciplines. OTOH it was a great pity B. Russel never took up economics a little more seriously.
            In any case, there’s a reason economists don’t often seem to make great political leaders, our present PM being a case in point.

          • You sound like you need a pudding cup. Got a favourite flavour?

          • Another guy lacking imagination then i gather.

          • You gather, rather, un Danly, I imagine.

          • Cryptic doesn’t suit you either.

          • Could a small outfit get logs to market for the same price per mbf than the big guys? Could they get to market product in quantity in a timely way for a mill to operate?

            As well, it was provincial policy for years to have an annual allowable cut, and licensees hss to cut a certain amount no matter market conditions. The goal was to force a certain employment consistency onto a cyclical industry. The real result was twofold. It pissed off the american producers who saw a flood of cheap lumber coming from canada when the market was soft. And it favored large firms who had the resources to survive the ups and downs. The small outfits you describe could never survive a downturn when they had to supply at or below cost.

            Don’t blame the market for anything to do with the bc forest industry. It has been a long time since the market drove that industry. Maybe the fond memories are from a time that it did.

  4. Part of why we cant compete, too much dead wight on Canadian taxpayers to support, fleabagger economics that is just hot air…

    Reality is that on average, our standard of living has long since peeked and its down hill here on in. Big government with idiocracy and tax greed, we are economic slaves of corrupt government state.

    More government, less for the people.

    We love fraud economics….reality is we are a morally, ethically and financially bankrupt nation.

    • Did you not go to CONFESSION last week?
      Another “sky is falling in” proponent.
      We gotta build more doghouses to increase the GDP.
      The Pessimists Party. duuuhhh!

  5. Once LEACH starts to quote the Pembina Institute, the most biased vitriolic group in Canada next to Maud Barlow, then its a “time out” for fairness and honesty.
    Its ironic that many of these very ” think tanks” are almost fully supported by public money plus subsidized by charitable donations, yet they trash most of Canada’s resources. They omit the well founded fact that one in 5 jobs depends on exports. Canada has more of these slanted left wing intellectually bent institutes than many third world countries. None of them are self supporting. All depend on handouts including huge dollars from USA extremist groups who pay handsomely for influence and laugh at democratic values.
    Ask them who pays millions to keep their offices and travel going?
    They never disclose their benefactors.

    • Exports aren’t just natural resources

      The rightwing Fraser Institute has charitable status.

    • Well, aren’t you charming. If you read the article, you will notice that it doesn’t quote Pembina who, I assure you, are far less vitriolic and biased than you appear to be.

  6. More excuse-o-nomics from the geek squad at Maclean’s. Record low productivity doesn’t matter. The massive trade deficit doesn’t matter. The hollowing out of the middle class doesn’t matter. The loss of 500,000 manufacturing jobs doesn’t matter. Why? Because the free-market tooth fairy waves its little wand and everything magically works out for the best…

    • Read the article again. If you continue to see the point as, “lack of productivity doesn’t matter,” read it again. Repeat until comprehension achieved.

      • “Remember, it’s two beef patties, then the special sauce, then the lettuce and cheese…” *

        * from the Enbridge Professor of Status Quo

        • “two all-beef patties, special sauce, lettuce, cheese.” If you’re going to quote the song, at least get it right.

      • Almost forget: Dutch Disease doesn’t matter. I’m sure I could come up with a couple more to add to the list…

        Here’s one from Paul Krugman for the Econowatch geek squad:

        “There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.”

        • Well, we seem to have done a great job of convincing you that it’s worth finding time in your schedule to read our work so carefully. We appreciate it.

          • If it wasn’t for commenters on Macleans, for example, I suspect you’d still be saying Energy East was a boondoggle. Until you came to realize how pipeline tolls actually work, and had to provide a clarification in a subsequent blog.

          • Actually, that clarification had nothing whatsoever to do with pipeline tolls, nor with comments from Macleans, but you can take credit if you like. Clearly, if I didn’t value comments, I wouldn’t read them. My question was why people both reading stuff they don’t think is worth their time.

          • It’s because others read them – like members of the media, politicians, policy makers.

            Why do you tweet? Same reason, i suspect.

          • Fair enough.

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