Does the UK need a productivity commission?

And why it must be 'radical'

Should the UK create a new statutory public body to ‘spur productivity’?

Prof Diane Coyle (of Cambridge University and The Productivity Institute) thinks so. In the FT, she argues it would tackle the UK’s two biggest problems: chronic under-investment and policy churn.

Meanwhile in New Zealand, the wonderfully named Alliance of Consumers and Taxpayers (ACT) just made the abolition of the Kiwi equivalent part of the price of them joining the National Party in coalition. This is somewhat ironic given the fact that the New Zealand Productivity Commission was only created in the first place because ACT made it a condition of a confidence-and-supply agreement with the National party back in the day.

There is, of course, something a bit funny about a government-funded productivity research institute arguing that we should create a new quango tasked with researching productivity. Who do we think they have in mind to run it? It might be true that the UK should do it, but surely they shouldn't be the ones calling for it. “Oof, not a good look” as they say on Twitter.

My hot take on the matter is that a good version of this idea would be good (though not transformative) and a bad version of this idea would be bad (though mostly irrelevant, rather than actively harmful).

What a good ‘Office for Productivity’ would do

Let’s focus on the good version first. In an ideal world, a UK productivity commission would be a dry-as-dust institution focused on putting forward uncontroversial supply-side measures. When I say uncontroversial, I don’t mean in the normal sense that most members of the public wouldn’t object. But rather, uncontroversial in the specific sense that few economists would disagree. It would then be up to think tanks and politicians to build the political case for doing these reforms, armed with the cast-iron credibility generated by the boring-but-serious body. 

What would such a body look like in practice?

Take this 2017 paper from Australia’s Productivity Commission on road pricing. Pages 13 and 14 in particular stand out as the best explanation out there for why pricing beats free-at-the-point-of-use when it comes to driving.

Or read this great, but long, paper on planning policy from New Zealand’s Productivity Commission. Chapter 2 is essential reading for understanding why eliminating restrictions on housing supply is key to raising living standards and how restrictions on density hurt poorer households. 

I particularly like their recommendations that planning rules should only apply when they “offer a clear net benefit, where the link to externalities is clear, and where alternative approaches are not feasible” and that “attempts to force the creation of economic, social or environmental benefits through restrictive rules” should be avoided. To anyone with an economic background it should be completely uncontroversial, but implies a massive change to the way land use planning currently works.

None of these studies are particularly revolutionary and I suspect think tanks in both countries will have made the case again and again, but there is a value to having an independent respected body restate such claims. Think how many times people have defended their pet policy on the grounds the Climate Change Committee endorse it or the OBR say it won’t increase inflation. Appeals to authority shouldn’t be debate enders, but they clearly help.

Let’s have some more examples of the sort of papers my dream Office for Productivity would publish.

This study from Australia’s Treasury on the economy-wide impact of various taxes is useful. It shows that shifting the tax burden from business investment (e.g. company income tax/corporation tax) and housing transactions (stamp duty) to consumption (VAT) or land (property tax/land value tax) would boost growth.

The above study could, of course, contain more nuance. For instance, we know that the base (what is taxed) can be more important than the headline rate when it comes to corporation tax.

The UK may lack a statutory productivity commission, but it does have something similar – it just happens to be rarely used. The Competition and Markets Authority (CMA) isn’t just there to enforce competition policy and fair trading practices; it’s also there to advise the government on how to open up markets and make them deliver for consumers. Or, as their charter puts it, “to promote the importance of competitive markets for consumers and wider society.”

A few years back, they produced some fantastic advice for the Department for Transport (sadly, not acted upon) on the case for airport landing slot auctions. The advice explained how the existing system of ‘grandfathering’ for allocating landing slots, where airlines are given indefinite righta to extremely valuable landing slots so long as they use them 80% of the time, harms competition, creates a massive barrier to entry, and ultimately, makes consumers worse off. Drawing an analogy with how OfCom auctioned off spectrum rights, they set out a market-based alternative and rebutted some of the airline industry’s self-serving arguments against reform.

What do all of the above papers have in common? They all focus on eliminating what economists call a deadweight loss. In other words, they focus on what we lose due to barriers that either distort prices or prevent worthwhile exchanges from happening.

What a bad ‘Office for Productivity’ would do

My main fear about a bad Office for Productivity is that it would be insufficiently radical. Now when I say radical, I don’t mean it in the sense of extreme, but rather its original meaning, to focus on the root cause.

Take a commonly cited explanation of the UK’s low productivity levels: management quality. This is a topic that’s clearly important (I’ve written a paper on it) and is extremely well-evidenced. When businesses adopt best practices in management, their workers produce more. If you don’t believe the piles of academic studies, just try watching a few episodes of Ramsay’s Kitchen Nightmares. Keeping an inventory; monitoring the productivity of different product lines; and promoting on the basis of merit (not seniority): these sorts of things really matter.

Accepting this fact can take someone in one of two different directions. 

First, they can take the radical approach and try to understand why low hanging fruit isn’t picked. In essence, they might try to identify what frictions prevent managers from adopting what works. Take a paper from Bloom, Seiler, Propper and Van Reenen on management practices in the NHS (summary here). Using a bunch of clever statistical controls they find that hospitals that are effectively forced to compete for patients (the result of New Labour reforms) tend to adopt better management practices and deliver better outcomes.

The finding that management quality improves when competition is strong is uncontroversial and is found not just in the NHS, but in manufacturing too. So if the concern is that productivity is too low because firms are badly managed, then this ‘radical’ (root-cause) approach tells you to start looking for obstacles to competition such as barriers to entry and anti-competitive regulations.

Alternatively, there’s the un-radical approach. This approach says that since we know that management quality is linked to productivity, instead of trying to boost competition, we can try to design schemes to directly give firms with poor management (usually SMEs as large companies are typically better managed and more productive) knowledge of good management practices.

This attempt to short-circuit the process, focusing on the symptoms rather than the root cause, leads us down the alley of looking at different business support programmes and trying to figure out which ones work and which don’t. This isn’t an entirely worthless exercise, but it is unlikely to move the dial on productivity.

Take the much touted Help to Grow: Management scheme introduced over the last few years. By all accounts, it is pretty darn good. It’s an affordable mini-MBA based on other highly-regarded and well-evidenced programmes. Yet take-up has been poor and even if you quintupled its take-up you would be unlikely to find any evidence of it in the productivity statistics.

I’m not saying don’t do stuff like Help to Grow: Management. I wouldn’t be surprised if the companies who go through the scheme are better off as a result. But, if you spend all your time on stuff like it and don’t go any deeper then you won’t move the dial on productivity for two reasons. First, even assuming you can get the management changes to stick – something Chef Ramsay typically fails at – you are never going to be able to cover a meaningful chunk of the business population. 

But second, it misunderstands how productivity growth is the result of natural selection under market competition. One of the main reasons why businesses in competitive markets tend to be better managed is that if they aren’t then they will soon lose market share to ones that are. And if they keep it up they will go bust and their assets will be reallocated to companies that are.

Where the radicals and un-radicals differ most is on the role of incentives. A ‘radical’ like myself will attribute low productivity to some sort of problem with incentives. Why haven’t businesses adopted best practices in management?  Maybe they have too small an incentive to acquire them because they don’t face any real competition, or maybe the costs are too high because there is a labour market regulation preventing them from putting them in place. 

By contrast, un-radicals tend to see business behaviour as being driven by some other factor such as culture. For instance, I think I can remember reading someone argue that the UK’s management problems were down to lazy bosses who had no desire to grow as soon as they earned enough to afford a BMW. 

The issue with the latter approach is that even if you are right that culture, myopia, or ignorance matters it is not clear how useful that information is. What are the tangible policy recommendations that follow from it? Spend a bit more on business advice? Force businesses to engage with it at gunpoint?  A bad version of an Office for Productivity wouldn’t be actively harmful, just irrelevant.