Economists are famous for lifting concepts from scientific theory and applying them to issues in their field. In that spirit, I propose adding one more – "kludge" – because it goes a long way to explaining sluggish economic growth and poor business productivity, in Canada and beyond.
To "kludge" (rhymes with nudge), the Oxford English dictionary tells us, is "[to] improvise or put together from an ill-assorted collection of parts." In essence, kludging is a quick fix that keeps a system running, rather than a long-term solution to an ongoing problem. It is a process used extensively in computer software coding and engineering. Anyone with a smartphone or tablet has encountered kludges, otherwise known as app updates to "fix bugs" in the code.
Software engineers do not view quick-fixes and work-arounds as a scourge in their industry. Instead, kludges are seen as innovative, often referred to as "MacGyver tape" (after the highly inventive television character of the 1980s), allowing the system to stay up and running despite its clear need for a bigger overhaul or replacement. A side benefit to the engineer is that the way the problem is fixed is usually not understandable to anyone else, and thus serves as a form of job protection.
But what is good for the MacGyvers of the world is not necessarily good for the economy.
The concept of kludge has already made the leap from science to public policy, and at least partly into the realm of economics. Nobel-winning economist and New York Times columnist Paul Krugman referred recently to the new Affordable Care Act as "The Big Kludge," an overly complicated law cobbled together as a series of compromises between ideologically divergent Democrats and Republicans. An earlier piece in National Affairs by political scientist Steven Teles expanded on "kludgeocracy" in the U.S., and the costs to the public of an overly complicated tax system and its huge thicket of regulations.
Opponents of kludgeocracy note that parliamentary governments are less prone to complicated patchwork laws and regulations because the ruling political party can more easily reform them without having to make significant compromises to the opposition parties. Thus Canada is thought to be less prone to kludge. An example was the successful Mulroney government overhaul of the tax system in the late 1980s and early 1990s, which simplified and cut personal income tax rates, eliminated the narrow manufacturing sales tax and replaced it with the broader Goods and Services Tax. The initiative was not without its opponents and did necessitate some compromise, but in the end Canada got a more modern tax system.
In the private sector, however, evidence is strong that kludge is restraining growth.
There are at least two ways kludge can suppress private sector economic growth. When a business opts for a quick fix rather than a complete overhaul or replacement of out-of-date software or machinery, it holds off investing in new and more productive capital equipment. Quick fixes enable a business to achieve a near-term boon to the firm's bottom line, and thus shareholder returns, but at the expense of sustained corporate performance.
Moreover, what is good for a hacking software engineer or machinist's job security (and overtime pay) is bad for the firm in general, because resources must be diverted from revenue-generating workers. In a nutshell, the more businesses opt for kludging, the more tech support staff they need and the fewer salespeople they can hire.
Economic data suggest that Canadian businesses have become constant kludgers. In the past decade, business investment in equipment, technology and structures has grown at half the pace needed to replace worn-out capital. During the same period, corporate profit margins have grown handsomely and labour productivity has eked out a measly 0.5-per-cent annual gain.
If businesses are not fully replacing worn-out capital, how are they still managing to produce products? Why by hiring more MacGyvers, of course. Such are the costs of kludge.
Sheryl King is an independent macroeconomic strategist with more than 20 years experience in the international financial industry and central banking.