NBN lift is more hope than reality

It’s one of Australia’s oldest social rituals; politicians storm around the country pretending to make promises and we pretend to believe them.

So, when Kevin Rudd told the National Press Club that the national broadband network (NBN) will “massively increase” business productivity, no one in the audience even bothered to smirk. After all, the Prime Minister was just repeating the conventional wisdom, which holds that super high-speed broadband is as vital to our future prosperity as railways were in the 19th century. As Rudd put it, the NBN will provide crucial infrastructure for our “knowledge-based economy”.

I am not sure whether there exists somewhere an economy based on ignorance, but our present “knowledge base” does not contain any evidence that spending billions of dollars on the NBN will increase our economic productivity. As the Nobel Laureate economist Robert Solow once quipped, “You can see the computer age everywhere but in the productivity statistics.”

Economists call the gap between the level of investment in information technology and measures of productivity the “productivity paradox” – information technology is supposed to increase productivity, yet it doesn’t.

In his speech, Rudd unintentionally illustrated the paradox when he noted that, through most of the 1990s, Australia’s productivity increased at a rate of 2.5 per cent per year. This healthy growth took place when broadband coverage was either non-existent or very slow, before the appearance of Facebook, Twitter and YouTube and when there were no smart phones, iPads or internet televisions.

When these technologies and services came on stream in the 2000s, they were expected to increase productivity; but that’s not what happened. Instead of increasing, productivity growth slowed to 1.2 per cent per year and in 2004 it stopped altogether. Today, after a decade of apps for everything, Wi-Fi everywhere and explosive growth in social networking, productivity growth is drifting backwards.

What is going on?

The usual answer is to blame the collapse in productivity on special circumstances.

Some observers blame the global financial crisis (GFC), but this cannot be correct because the fall in productivity growth began years before the GFC.

Business leaders blame rigid labour markets for our low productivity. This may be true, but labour productivity actually increased over the past decade, which somewhat blunts the force of their argument.

A likely reason for the slowdown in productivity may be the huge investments made in mining, desalination plants and renewable energy. Because productivity is measured as the ratio of economic outputs to inputs (capital plus labour), large infrastructure investments increase the denominator of the ratio, thereby shrinking productivity. As new mines and other projects begin to operate, however, productivity will resume even without an NBN.

Will the NBN add an extra boost to productivity? In a widely cited paper, economist Robert Gordon argues no. According to Gordon, fast broadband is wonderful but it will not change the economic equation in the fundamental way that railways once did. Gordon believes that the economy has already factored in the main gains from information technology (the takeover of routine and repetitive tasks by computers). As John Cassidy points out in a recent New Yorker article, some new Internet applications may even reduce productivity by tempting workers to post pictures of their cats on Facebook when they should be working.

Writing in the Centre for Independent Studies magazine, Policy, Robert Kenny notes that no one has yet identified any productivity-enhancing application that requires the NBN.

Perhaps we just need to be patient. So many new devices and products have been introduced over the past 10 years that government statisticians have struggled to keep up with them. It is well known among economists that productivity statistics underestimate the value of new inventions. Statisticians also have trouble accounting for the outputs of our increasingly service-based economy. It may simply be too soon to judge the economic impact of broadband, iPads and social networking.

Unfortunately, Australia is not waiting. The NBN is rolling out now with the hope that someone will find some productive use for it. It is just a hope. Contrary to the Prime Minister’s claim, no one knows whether the NBN will produce a “massive increase” in productivity. There is little evidence to suggest that it will, and much experience to suggest that it won’t. Australia is taking an expensive gamble, and we won’t know the result for many years. For now, the NBN is just another election promise.

Steven Schwartz is a senior fellow at The Centre for Independent Studies.