Mercurial Productivity

Here is some of what Terry Corcoran wrote in today’s Financial Post about Bank of Canada Governor Mark “Carney’s suggestion that Canadian business has so far ‘disappointed’ because it has failed to revive Canada’s lagging productivity”:

Central bankers appear to know many things, and have big fancy computer systems and economic models to tell them what’s happening in an economy [but] it would’t (sic) be enough to tell a widget maker that now’s the time to invest in more wiget (sic) making capacity. Corporate managers make investment and other decisions on the basis of market conditions and a hundred and one other factors exclusive to their business and their markets and their companies.

. . .

BMO Capital Markets economist Douglas Porter put it well in a note to clients. “The reality of course is that capital spending decisions are made by individual businesses based on the conditions and incentives they face, and their perceived prospects. Against the backdrop of the deepest global downturn in 50 years, the forecast of a prolonged period of deleveraging by U.S. consumers (and next governments almost everywhere), and the crushing weight of the resurgent Canadian dollar on exporters, is it really shocking that business is somewhat cautious in its capital spending plans?”

I think that this interpretation of what drives investment and productivity is basically correct. Also, as I asked a month ago, why would we expect corporate Canada to invest in building substantial new plant and equipment when some 30% of existing capacity is idle?

Corcoran’s view that investment and productivity are subject to many industry-specific factors and cannot be predicted by economic models leads to an interesting question. Why should we have any confidence that yet another “free trade” deal, or yet more corporate tax cuts, will boost productivity?

Of course, tax policy could affect some investment decisions at the margin. However, if it is impossible for policymakers to predict if or when corporations will invest, surely the appropriate approach would be to provide tax incentives that apply only when they actually do so: an investment tax credit, accelerated depreciation, etc.

Across-the-board corporate tax cuts wastefully give companies money even during extended periods when other market factors will dissuade them from investing anyway.

7 comments

  • “Why should we have any confidence that yet another “free trade” deal, or yet more corporate tax cuts, will boost productivity?”

    Because the policy is pre-baked into the heuristic (hardcore) model and sometimes even the (protective belt) formal policy model.

    What is more interesting is they both essentially acknowledge that CIT cuts and Free Trade have not been the magic productivity bullets they were supposed to be. Strikes me that the structure of the economy is key here. If investment moves from manufacturing to lower productivity sectors then the new investment will generate lower levels of productivity growth.

    Stagnant productivity means that the question of redistribution is not far off as there is not an increasing pie to be, albeit unequally, shared out. Maybe we are going to have to have an adult conversation about wealth redistribution.

  • lol, gees didn’t we just have this grand debate like a couple weeks ago- and it turned into almost a record comments count!

    I do like the fact that Carney is at least a bit economically pragmatic- at least on the investment causality front.

    As Erin mentions, the one tried and true method of influence on business investment, is targeted investment into the realm of many avenues that can boost productivity. Without specific strings being attached, the puppet will do whatever it likes- which in many cases is to just sit idle. So across the board cuts, especially in these times of investor angst and timidness is to me a waste of tax payer money to pad the profit margins of companies. Yes, we will all agree that lower CIT will do a bit, but quite an inefficient avenue.

  • If private investment lags, then we should ramp up public investment

  • Iggy brought forward one of the liberal’s new party planks on the rebuilding of the good-ship red.

    A freeze on the planned tory CIT cuts. They will peg the cut at 18% rather than the targeted cut of 15%, which, as stated would save the government 5-6 billion annually. The tories have come out swinging making grandiose predections that the sky will fall and investment will dry up(?), resulting in masssive job loss (?).

    (hold on a second, didn’t we just go through all this- wasn’t the mantra of the neo-cons over the last 30 years of getting government out of everything including lowering CIT and didn’t following all that distopia finally burst and throw us all into an unregulated meltdown of historic proportion.)

  • That would seem to be the policy advice emanating from both New Keynesian and Post Keynesian economists. With capacity under-utilization and insufficient private investment there is neither an argument about inflation or crowding out to be made.

    Yet the discourse on fiscal consolidation is not really a mystery. Thirty years of the Sky is falling, the Sky is falling from the usual suspects has a way of becoming common (read median voter) sense. Now they want an adult conversation after having given succour to Victorian nonsense about fiscal chastity and “less is more.” My sense is the horse is out of the barn and it will take a generation before we can have an adult conversation.

    Thus is a generational element to this to. The boomers made off like bandits. Their parents received steady real increases in step with productivity, near full employment characterized the labour markets and when they left the house they got to take advantage of the universal programs that were created (and here I include unions) and that they would create and then, as they have been steadily moving through their best earning years and into retirement, they have supported the dismantling of the public supports they took such excellent advantage of. That public health care is something they can still get out of bed to support is more than a little telling. There are of course class dynamics at play here that I will not elaborate on.

    What seems evident is the boomers are not going to go for increased public investment because in their median brain the basic equalities are: increased public investment = increased taxes = lower standard of living in retirement.

    I could go on but I sense my words are turning “amer” and in the process acerbic.

  • es I do agree Travis, I guess my question is, how does this dynamic change? What kind of strategies can massage the reality that breaths in the highly visual contradictions but output but a muttering of some mad neo- cons who are then reified by those wanting to understand.

    That to me is the predicament I thought potentially the information age would slowly gnaw away at the tendons of this distopia before finally some of the limbs of this neo-con corpse fall off.

    Pt

  • What seems evident is the boomers are not going to go for increased public investment because in their median brain the basic equalities are: increased public investment = increased taxes = lower standard of living in retirement.

    I could go on but I sense my words are turning “amer” and in the process acerbic.

Leave a Reply

Your email address will not be published.