Poor Productivity Is the Pink Elephant in the Economy

by | Mar 8, 2017

Trump is another president in a long line of presidents with a magical plan to restore the economy to high growth, especially for the working class.  But other than some temporary blips, the nation hasn’t seen sustained high growth since the economic glory years that ran from the early 1950s to 1973.

Those years saw high growth because they were years of high productivity.  Unfortunately, productivity has languished since then, with the notable exception of the early years of the new millennium.  This has been the case not only in the USA but also in Europe and Japan, in spite of technological advances stemming from the computer chip, such as robotics, artificial intelligence, and the Internet.

Productivity is key, because economic growth, higher wages, and a better standard of living depend on higher productivity—that is, on getting more output from a given amount of labor, capital, or raw materials.

You wouldn’t know this economic truth from the rhetoric coming from the current administration or from the rhetoric of past administrations.  Instead of citing the problem of declining productivity and developing plans to reverse the trend, one president after another has joined with the Federal Reserve, the Treasury, and Congress in pushing the same ole buttons of tax policy, fiscal policy, trade policy, immigration policy, regulatory policy, monetary policy, and education policy.  Depending on the ideology of those in charge of the government, the policies have followed the precepts of either Keynesian economics, supply-side economics, free-market economics, voodoo economics, or neo-Marxist economics.

Unfortunately, regardless of ideology, the buttons have operated like the buttons on the heating/air-conditioning thermostat in today’s hotel rooms.  Pushing the thermostat buttons in different combinations and permutations doesn’t improve the temperature in the room, just as pushing the policy buttons has not improved productivity.  The button-pushing only gives the button pusher the illusion that things will be better.

Here’s where the seemingly random button-pushing has gotten the USA and other Western nations:   Labor productivity in twelve of the largest and most prosperous industrialized nations averaged a remarkable increase of 4.6% per year from 1959 through 1973, versus only 2% a year over the quarter-century following 1973.  For the USA alone, In terms of what economists call multifactor productivity, the numbers are just as striking:  Over the 13 years from 1960 to 1973 multifactor productivity increased 34%; but in the thirteen years from 1973 to 1986, it increased only 7%.

Not surprisingly, there was a similar trend in business investment:  In the wealthy economies, business investment increased an average of 5.6% per year between 1960 and 1973, but only 4% per year over the following two decades.  In the more recent times of quantitative easing and near-zero interest rate, businesses have “invested” in stock buybacks and mergers and acquisitions instead of research and development and plant and equipment.  As a result, the economy became “financialized,” with money going to the financial industry instead of the manufacturing industry, thus leaving steel mills, car plants, and other factories in outdated and oftentimes decrepit condition, just as global competition was increasing and they needed to be state-of-the art to survive.

Still, in an example of survival of the fittest, there have been exceptions to this economic death trap.  Manufacturers that have survived have become more productive, mostly by replacing labor with computer-controlled equipment.  But these productivity gains have been more than offset by the growth of the services economy, where productivity improvements are harder to achieve.

Moreover, how does one even measure the productivity of Facebook and other social media, which have market values that exceeds the market values of many large industrial companies?  Yes, such social media let people connect easily with each other to exchange pleasantries, gossip, or whatever.  But is it a productive use of time to spend hours per day on what are essentially advertising delivery systems instead of devoting this time to work, study, spousal relations, child-rearing, and intellectual and cultural pursuits?

It should be noted at this point that some of the information in this commentary comes from the must-read book, “An Extraordinary Time:  The End of the Postwar Boom and the Return of the Ordinary Economy,” by Marc Levinson.  I judge the value of a book by how many marginal notations and underscores that I’ve made on its pages.  By that measure, the book is extremely valuable.  There is nary a page of my copy that went unmarked.

The book’s main thesis is that the glory years that ran from the early 1950s to 1974 were an economic anomaly, due to high productivity resulting from factors that are not likely to recur anytime soon, and certainly not by pushing the standard policy buttons.

Levinson seems to tilt towards the left, but he is merciless in detailing the harm done to the economy by both the left and right—by unwavering believers in the social-welfare state and unwavering believers in the free market.  As such, close-minded ideologues on both sides will find a lot to dislike in the book.  But those with an open mind will find a great history of the economic changes and policy changes that have occurred since the end of the Second World War.  I egotistically consider myself to be well-informed on economics and history, but there was much in the book that I didn’t know.

The book also includes some funny anecdotes.  For example, it describes the leader of a movement in Denmark to reduce government spending, especially military spending.  The rabble-rouser said that the country should eliminate its military altogether and replace it with an answering machine, with a recorded message in the event that its purported enemy, Russia, were to call.   The message would say, “We surrender.”

Most of what Levinson details about the causes and effects of poor productivity are spot-on, although he overlooks some important factors.  Regardless, the overall issues are undeniable, no matter who points them out.

One undeniable issue is that poor productivity has hurt the middle class the most, especially blue-collar workers.  At the same time, certain segments of society have done well in spite of lower productivity:  the upper-class, the well-educated “knowledge” class, the government class, the political class, the lobbying class, the think-tank class, and the sports and entertainment class.

Whether to assuage their guilt or to keep the classes beneath them from overthrowing the system, these elites have opened the social-welfare floodgates, flooding the lower levels of society with entitlements, welfare programs, unemployment compensation, tuition loans, housing subsidies, child care subsidies, unbridled K-12 education spending, and even bread and circuses by means of subsidies for sports stadiums.  The effect has been to exacerbate the socioeconomic problems that tend to flow downhill to the middle and bottom levels of society but do not flow uphill to the upper levels and the penthouse.  As dependency on the state has increased, dependency on marriage has decreased, resulting in a significant increase in divorces and single-parenting and a corresponding decrease in household income and savings.

Meanwhile, the elites, knowing the value of two-parent families, have been very careful about selecting spouses, staying married, living in good neighborhoods with good schools, and giving their offspring every advantage possible. This is true whether the elites are stereotypical bleeding-heart liberals or hard-hearted conservatives.  Whether left or right, they know what is best for themselves and their families—and what is best for them is the opposite of what they have inflicted on the classes below them.

A related fact is that the burgeoning welfare/regulatory/environmental state has crowded out investments in productivity enhancements and has increased taxes and/or lowered income for those most hurt by lowered productivity.  Much of the blame for this lies with the left.  At the same time, much of the blame for growing deficits lies with the right, which has been opposed to raising taxes to pay for its favored government programs, especially military spending.

Then there is the overriding American culture of consumerism and indebtedness.  Over the last half-century, this culture has supplanted the former culture of saving and living below one’s means, thus putting Americans at a long-term economic disadvantage to countries with higher savings and thus higher investments in productivity improvements.  Most people automatically think of China in this regard, but in actuality our trade deficit is higher with Germany, which has a high savings rate.

Levinson is largely silent about the economic effects of immigration, which can be a double-edged sword.  Japan is dying demographically because its birth rate is below the population replacement rate and because it doesn’t allow immigration to make up the difference.  On the other edge of the sword, the USA has allowed an influx of 12 million or more low-skilled and poorly-educated immigrants, most of whom are from Latin America.   They tend to go into jobs where productivity gains are difficult to achieve, such as cooks, maids, and landscapers.

Trigger warning:  It’s politically-incorrect to say this, but immigrants from outside of Latin America, especially Asia, have helped to increase economic growth and productivity. For example, according to a recent Wall Street Journal editorial, the largest percentage of finalists in what is known as the Junior Nobel Prize come from India, China, Japan, Singapore, and South Korea.  It’s a similar story with respect to the founding of start-up companies valued at $1 billion or more.  Noticeably missing from the statistics were immigrants from Latin America.  This doesn’t mean that Latins won’t catch up someday, but productivity will suffer in the interim.

Levinson also is mostly silent about education, which many economists see as essential in improving productivity.  But productivity in the huge education sector of the economy is abysmal.  For K-12 schools, there has been a 70% decline in productivity over the last half-century, as determined by comparing flat test scores with skyrocketing per-pupil spending.  Productivity is almost as bad in higher education, where the cost of a degree has skyrocketed.

Productivity also stinks in the government sector.  There are over 12 million more government employees at the state and local levels than there would have been if the growth in government employment had stayed even with population growth instead of exceeding it.

Levinson doesn’t see any way out of the productivity doldrums, for he believes that the social, economic, and demographic conditions of the glory years cannot be replicated today, regardless of what policy buttons are pushed.

I disagree.  With the right leadership explaining the problem, the public can be convinced to make the short-term sacrifices necessary to increase productivity so that economic growth can return to where it used to be.  They can be convinced to spend less and save more, to stop demanding subsidies and handouts from the government, to spend less time on social media and watching TV and more time on reflection and self-improvement, to take off their ideological and partisan blinders, and to hold politicians, teachers, and other public servants accountable for achieving more with less.

On second thought, I agree with Levinson.  It’s delusional to think that any of this will happen.

 

Craig Cantoni

Craig Cantoni

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