Danielle Wood can rescue the Productivity Commission. But is it worth saving?

Grattan Institute CEO Danielle Wood has been announced as the new head of the Productivity Commission (PC), after incoming candidate Chris Barrett pulled out in favour of a promotion at Victoria’s Treasury.

Wood is undoubtedly an inspired pick — she’s a well-regarded economist and a proven leader of an influential think tank. Her analysis of important issues like tax reform and childcare is generally astute. She will also be the first woman to lead the PC, a welcome break from the economics profession’s male-dominated leadership.

However, the role the PC will play in future policy formation remains uncertain. The government advisory group is indelibly associated with the heyday of neoliberalism, and as that ideology fades, so has the PC’s influence. It still produces thorough research, but its recommendations are mostly reheated covers of its outdated ’90s hits (tariff reform, microeconomic reform), or lukewarm restatements of current consensus (improving education, managing the energy transition). Either way, much of its work now makes the fifth or sixth page of the newspapers and gathers dust on bureaucrats’ shelves.

Earlier this year, the Australian Council of Trade Unions called for the PC to be abolished entirely, claiming it has been “stacked” with former Coalition advisers and business lobbyists. Treasurer Jim Chalmers has since mooted an overhaul, to be expected in the coming months.

If anyone can save our nation’s once-revered econocrats from irrelevancy, it’s Wood and the next generation of economists she represents. But is the PC even worth saving?

An unproductive debate

Perhaps the most pertinent question is: has the PC helped increase the nation’s productivity? It certainly claimed so after its formation in 1996, amalgamating various existing agencies. It soon announced that Australia was experiencing a “productivity miracle” which was “the ‘predictable’ outcome of policy reforms” like market liberalisation, which it had championed.

However, as economist John Quiggin recently wrote, “the productivity miracle fizzled out completely”:

Dispute remains over whether it was a statistical illusion or an unsustainable blip. But … over the period since 1990 (which includes the “miracle” years), annual labour productivity growth has averaged 1.6%, lower than the 2.4% recorded in the 1960s and 1970s.

The decline is partly due to Australia’s shift from a manufacturing to a service-led economy, which market liberalisation sped up.

That’s not to say there was nothing worthwhile in the PC’s moves to open up Australia’s economy. However, the Nordic countries, which preserved higher state capacity and a more extensive social safety net amid globalisation, have generally enjoyed better labour productivity growth than we have.

How productive is a $3 million trust fund?

The PC’s more recent research is a mixed bag. One can find useful reports like its stocktake of mental health and suicide prevention policies, and its alarming inquiry into the costly trade-offs of Australia’s rising incarceration rate. Then there was its report on why young people’s incomes have declined, which was interesting but neglected to mention union membership once.

Least impressive was its 2021 report on wealth transfers and inheritance, which claimed they “are reducing some measures of relative wealth inequality in Australia”. Commissioner Catherine de Fontenay highlighted that “when measured against the amount of wealth they already own, those with less wealth get a much bigger boost from inheritances on average.”

Such Freakonomics-style contrarianism predictably spawned suggestions that inheritance taxes would increase inequality.

Yet this galling framing fails to imagine alternative paths. Instead of allowing the very wealthy to transfer enormous sums untaxed, so that the poor can retain occasional one-off lumps that are only meaningful due to their contingent poverty, we could tax and redistribute wealth progressively and smoothly over time. But that apparently didn’t cross the minds of our mainstream econocrats, who seem only to bemoan “inefficiency” and “churn” when it benefits the state or the poor.

Where to next?

Commissioner Lisa Gropp also reassured us, “By the time people receive inheritances, they’ll usually be well into middle age — about 50 years old on average. This limits the impact inheritances have on opening up lifetime choices and opportunities about career and family”.

Vast wealth sits idle for decades, then is delivered to people long after they most need it, and somehow that’s a good thing?

The PC strangely buried the lede — we already have a much more efficient means of reducing inequality and smoothing income over one’s life cycle. It wasn’t mentioned in the report’s media release, but if you scroll down to pages 39 and 48, you’ll find that “welfare payments reduced immediate-term relative wealth inequality by 20 times more than [private] wealth transfers”.

Needless to say, one should expect a higher standard under Wood’s leadership. But if she cannot comprehensively modernise the PC’s output, then perhaps — in a true ’90s throwback — the PC ought to be privatised.

Subsidising mediocrity is simply unproductive.