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Poor Productivity Is the Pink Elephant in the Economy

Poor Productivity Is the Pink Elephant in the Economy - The Libertarian


*Poor Productivity Is the Pink Elephant in the Economy*

March 8, 2017

By Mencken's Ghost

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

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

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

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.

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