And Here's How To Double Productivity

Huge Mining Truck

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 labour 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 30. 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-labour and materials-labour 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 consistent with the construction of new hospitals and all the sudden liberals realised 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.

This post originally appeared at Falkenblog.

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