Faster productivity growth more important for future wellbeing than climate change measures

Faster productivity growth is more important than climate change measures for the future wellbeing of kids today, the author argues. Photo / Michael Craig

OPINION

It is fashionable to see climate as the main threat to the future quality of life of young people today. The word “climate” is commonly followed by “crisis” or “emergency”.

School kids are being organised and encouraged to march the streets. While it is commendable young people are taking an interest in important issues, agitating for uncosted policies assumes New Zealand households have no competing spending priorities.

Any casual glance at our daily news shows that, in fact, spending priorities are an issue. Many household budgets are already stretched.

Poorer countries have even more pressing “here and now” priorities. Life expectancies are lower due to hunger, disease and war. Poorly funded education limits future prosperity.

The Copenhagen Consensus Centre in Denmark has taken the lead in pulling together global experts to assess how human wellbeing globally could best be raised with limited resources. Its experts prioritised meeting the addressable needs of impoverished countries.

Faster productivity growth is arguably more important for the future wellbeing of young people today and for their children than are climate change measures.

The following calculations illustrate this possibility. The most alarming and implausible of the United Nation’s climate emission pathways to 2100 is the one it calls RCP 8.5. In a 2019 working paper, the International Monetary Fund calculated that the temperature increases under this pathway would lower world GDP per capita for 2100 by 7.2 per cent. That is relative to what it would be without those increases.

This reduction is the estimated effect of cumulative temperature increases between 2014 and 2100 - 86 years. It amounts to a cut in world GDP per capita growth of 0.08 per cent a year.

Now, imagine the world follows a stagnant, low-growth path for labour productivity until 2100; one so stagnant that real GDP per capita only rises at 0.5 per cent a year. Real GDP per capita in 2100 would be only 54 per cent higher than in 2014. Climate change under RCP 8.5 would cut that growth rate to 0.42 per cent a year but real GDP per capita would still be 43 per cent higher.

There are no grounds even in this dismal scenario for young people to despair.

But the dramatic contrast is with a world that, in the words of the UN’s climate change committee, “places increasing faith in competitive markets, innovation and participatory societies to produce rapid technological progress and development of human capital”.

Suppose in this world that innovation and investment raise labour productivity fast enough to increase world GDP per capita at an average annual rate of 2.5 per cent a year in the absence of climate change. By 2100, it would be 738 per cent higher than in 2014. If the extreme temperature rises projected under the pathway RCP 8.5 reduced that by 7.2 per cent it would still be 690 per cent higher.

Faster productivity growth makes everything more affordable. More leisure time is more affordable. Climate change response is more affordable. A cleaner environment is more affordable. Better healthcare is more affordable. All the material good things in life are more affordable.

Do the school kids marching on Parliament over climate change understand this?

New Zealand’s low productivity growth is a real threat to their future prosperity (if they stay in New Zealand).

A fortnight ago, Stats NZ released its productivity estimates for the year ended March 2023. Productivity was lower, not higher, than in the previous year.

In the past decade, labour productivity across the sectors that Stats NZ measures grew at a dismal average of 0.6 per cent a year. Contrast that with the decade to 2006, when it was much healthier at 1.9 per cent a year.

This rolling 10-year growth rate has steadily declined since 2006.

Take the gap between generations as being 30 years. If New Zealand’s labour productivity grew by 2 per cent a year for the next 30 years, the average annual household income from salaries and wages could increase from $83,000 last year to $150,000 in constant dollars. However, at a sluggish annual rate of 0.6 per cent, which is currently more likely, it might only reach $99,000.

That represents a major difference in the next generation’s ability to afford a higher standard of living, a cleaner environment and more leisure.

Today’s activist school kids should be informed that these choices have major intergenerational implications.

Turning the last decade’s dismal trend around will be no easy feat. It requires a sustained long-term effort from successive governments. That, in turn, requires informed public support.

If New Zealand were more open to overseas investment, attracting more capital per worker would be easier.

Red tape can be reduced to encourage innovation.

Improving educational outcomes for kids is vital, with school attendance dismal and average literacy and numeracy outcomes alarming.

Nor is it just schoolchildren who need to understand the importance of embracing change and innovation.

The message in the latest productivity statistics is: “Wake up New Zealand.”

- Written by the New Zealand Initiative’s Dr Bryce Wilkinson.