Posted on 12/30/2005 8:06:32 AM PST by SirLinksalot
The Most Important Economic News of the Year
By Arnold Kling 29 Dec 2005
"[P]roductivity is the best single measure of what leads to differences in economic performance. Even though GDP per capita is the all-encompassing measure, GDP per capita is determined primarily, almost entirely, by productivity. People basically work in order to have a place to sleep and something to eat and so on and so forth. The huge differences around the world are the efficiencies with which they work -- their productivity." -- William Lewis
Politicians and pundits re-assess the state of the economy often. They look at many short-term indicators and statistics. They follow statistics, such as the unemployment rate and inflation, which come out monthly. The sickest addicts even pay attention to other data that comes out weekly. My understanding is that the President receives a daily briefing on economic data.
Personally, I find this bizarre. The way I see it, there is no rational reason to try to assess the economy more frequently than every six months. The thrill that many journalists and economists obtain from "digesting" the daily minutia of economic reports is as puzzling to me as the enjoyment people get from playing the slot machines in Las Vegas.
My favorite indicator of the state of the U.S. economy is productivity, as measured by output per hour for the nonfarm business sector. This information is compiled by the Bureau of Labor Statistics (BLS), and it only comes out four times a year.
Even though productivity data are reported quarterly, it is not wise to pay attention to quarterly fluctuations. Most of us who follow productivity try to look for long-term trends. For this essay, I took the average annual growth rate of productivity over five-year periods. Taking a five-year average tends to smooth out the quarterly fluctuations. Although many experts use more sophisticated methods for filtering out short-term fluctuations, all of these methods result in minimizing the impact of any one quarter's data. If all the President wanted were a briefing on trend productivity, he could see his economic advisers once a term rather than once a day.
The table below presents annualized productivity growth for various five-year periods, starting with the period 1955-1960 (from the fourth quarter of 1955 to the fourth quarter of 1960).
Five-year average annual productivity growth, first quarter to first quarter:
Period | Average Productivity Growth
1955-1960 | 2.03
1960-1965 | 2.79
1965-1970 | 2.09
1970-1975 | 2.31
1975-1980 | 1.55
1980-1985 | 1.38
1985-1990 | 1.65
1990-1995 | 1.59
1995-2000 | 2.28
2000-2005 | 3.39
What the table says is that the economy today is in great shape. The average productivity growth rate in the last five years is the highest over the past half century.
No Political Point-Scoring
What does this outstanding productivity performance say about economic policy under President Bush? Nothing. Let me repeat. Nothing. There is no political point-scoring to be made out of the news on productivity.
First of all, it is important to understand that, for the most part, productivity growth is the economy's gift to policymakers, not the other way around. It would be foolish to attribute to tax cuts that which ought to be attributed to Moore's Law.
Second, even when economic policy affects productivity growth, the effect comes with a long lag. We do not know how much of today's productivity growth reflects Clinton-era policies or Reagan-era policies or even the deregulation that began under President Carter.
Finally, one should not necessarily use these productivity figures to brag about anyone's economic policy. One could argue that our productivity growth really ought to be higher. In a column I wrote called Rationally Exuberant, I pointed out that computers are an ever larger-share of the economy. Suppose that productivity growth in the traditional economy is 1 percent per year and that productivity growth in computers is 50 percent per year. In that case, an economy that is 6 percent computers and 94 percent everything else should grow at a rate of 3.94 percent per year. If so, then perhaps from a policy perspective the question we ought to be asking is, "What are we doing wrong?"
The Great Race, Revisited
In a recent TCS interview, Robert Fogel suggested that productivity growth of 2 percent per year would be sufficient to ensure the soundness of Social Security. With three percent productivity growth, even Medicare may be sound.
In The Great Race, I argued that our economic future boils down to two trends. Moore's Law is raising productivity, helping to increase the size of the economy relative to government spending. On the other hand, Medicare is growing, which tends to increase government spending relative to the size of the economy.
In the 2-1/2 years since I wrote that essay, nothing has been done to slow the growth of Medicare. However, if the economy can sustain or increase its rate of productivity growth, the long-term outlook may be reasonably good. We are headed for the scenario that I called "affordable welfare state," meaning that the lavish benefits that we have promised ourselves when we get older will require relatively modest increases in tax rates. Tax revenues will be high because incomes and payrolls will be high.
The politicians have done nothing to slow the growth of entitlements. The mainstream media have totally missed the most important economic news of the early 21st century, which is the strong productivity growth. The state of the economy in 2005 is that it is performing well in spite of both the pols and the pundits.
Arnold Kling is the author of Learning Economics.
Now if we could get the Federal Reserve to give up on the idea that rising wages are inflationary, then maybe wages will keep pace with productivity growth.
I'm so productive that I can raise a tent in 30 seconds.
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Now if we could get the Federal Reserve to give up on the idea that rising wages are inflationary, then maybe wages will keep pace with productivity growth.
>>>>
I need to be educated here. How is rising wages NOT INFLATIONARY ?
This is my straightforward way of understanding things -- If Company X has 1000 employees, and pays them on the average $20/hour, and because of wage pressure, now has to pay them $21/hour, that would mean $1000/hr more in cost to the company. How is the company going to maximize profits other than to :
A) Not hire more people;
B) Layoff more people and make the rest work harder/more ( raising productivity further )
C) Increase the price of its goods/services.
Am I missing something here ?
So what? I can do that without standing up. ;-)
The article you posted, what is it about?
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The article you posted, what is it about?
>>>>
It's about rising productivity.
Lets see if I get your point by going back to my illustration.
Company X has 1000 workers with an average wage of $20/hr.
Because of increase in productivity ( say, new software and computers, outsourcing, etc. ), they now need only 900 workers ( as an example ) to do the same work 1000 people once did.
Hence, they can increase the wages of 900 people because they laid off 100 people.
1000 people at $20/hr costs $20,000/hr
900 people at $22/hr costs only $19,800/hr
Savings of $200/hr due to productivity
In this sense, they do not really have to increase the price of goods/services because COSTS remain the same or less ( they do the same work with less people ).
Is this the point you are driving at ?
The question then becomes --- what happens to the 100 who are now out of work ?
No wonder there isn't much optimism among working people ( especially the older ones ) inspite the growth of productivity.
What happened to the millions who used to farm in the US? They got better jobs and we produce more food, more cheaply than ever before.
With wood?
He gives no basis to accept this assertion as true.
A few years ago, I read an interview in Barron's with John Chambers, CEO of Cisco Systems. He said that without the Regan tax cuts in the 80's, we never would have had the tech boom in the 90's, which has given us the incredible productivity gains of this new century.
I'd say Chambers' observations offer a pretty solid indication that this assertion is true.
Which is why we have Luddites. Productivity has probably put more people out of work than any other factor throughout history.
But there are different solutions to the equation. If a company's market is growing, it can freeze hiring, or slow down the pace of hiring.
If employees have to learn new technology to be more productive, or take on responsibility for higher output because of higher productivity, then they should receive higher wages. That doesn't mean they should get all of the extra revenue, but there should be a nice balance between higher wages and higher profits. A healthy market will allow that, but the market isn't healthy when the Federal Reserve body slams the entire economy when people start getting higher wages, even when those higher wages are due to higher productivity.
Of course, there are many managements out there that lack any creativity whatsoever, so they use the sledgehammer approach and they do layoffs first, which forces the remaining employees to be more productive. Most employees actually go on to better careers. They are forced to go to more successful companies, or to improve their education and become more productive that way. Some will go to work for startup companies in somebody's garage, such as Google, Apple, Microsoft, Cisco, and many other now large companies used to be. That's why venture capital and entrepreneurship is so important in an economy that relies so much on productivity gains.
The economy is booming, and getting this message out is key for conservatives and Republicans in 2006 elections. We need to get the message out, because the phony liberal news will spin everything to hide this fact - e.g. "predictions for housing sales down xx.xx%" and such crap. The economy is booming, and yes, I am always told you cannot use the stock market as a measure of a good/bad economy, but if the DOW hits 11K the conservatives and Republicans better act like America just hit the universal lottery - every "conservative" commentator needs to help, when a "political analysts" of a moderate or conservative bent is being interviewed on some cable news channel, even if the subject is "how red are the tomatoes?" they got to get the message in "yes, and with the booming economy more folks will be buying those tomatoes" if you know what I mean. Repeat it over, and over, and over, and over again. It's the key to victory in 2006.
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