Janet Yellen believes a lack of strong productivity gains may be responsible for tepid wage gains.
Financial Times writer Edward Luce is confused, as are many others. Luce discusses The Mystery of Weak US Productivity.
Osborne on Productivity
In 2105, then UK chancellor George Osborne made boosting UK Productivity a Priority.
“Let me be clear: improving the productivity of our country is the route to raising standards of living for everyone in this country,” he said. “Our future prosperity depends on it.”
Greenspan on Productivity
In an Interview with Gold Investor Alan Greensppan blamed the aging of baby boomers.
"We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the aging of the ‘baby boom’ generation. Social benefits (entitlements in the US) are crowding out gross domestic savings, the primary source for funding investment, dollar for dollar. The decline in gross domestic savings as a share of GDP has suppressed gross non-residential capital investment.
Output per hour has been growing at approximately 1⁄2% annually in the US and other developed countries over the past five years, compared with an earlier growth rate closer to 2%. That is a huge difference, which is reflected proportionately in the gross domestic product and in people’s standard of living.
As productivity growth slows down, the whole economic system slows down. That has provoked despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, for example. Rather it is a cry of pain, where people are saying: Do something. Help!"
Yellen on Productivity
On May 22, 2015, Janet Yellen pointed a finger at the recession while also blaming low productivity for lack of wage growth in her Outlook for the Economy.
"I have mentioned the tepid pace of wage gains in recent years, and while I do take this as evidence of slack in the labor market, it also may be a reflection of relatively weak productivity growth.
Economists debate how optimistic to be about our nation’s productivity prospects. Some argue that the decade starting in the mid-1990s was exceptional, with unusually large advances in information technologies, and that the more recent period provides a better guide to the future. Others are more optimistic, suggesting that recent technological innovation remains as impressive as ever, and that history shows it may take some years to fully reap the economic benefits of such innovations.7 I do not know who is right, but I do believe that, as a nation, we should be pursuing policies to support longer-run growth in productivity.
It also is possible that a portion of the relatively weak productivity growth we have seen recently may be the result of the recession itself."
Chart from the Resolution Foundation.
Myth #1 Shattered
Yellen blamed the recession and lack of productivity for poor earnings growth. Greenspan blamed the aging of baby boomers.
Given real earnings have been nearly flat since 1979 while real output is up 94.9%, those theories are obviously faulty.
Doesn’t the Fed bother to test their theories against actual data? You have the answer.
The Fed is puzzled over rising income inequality. It ought to look in the mirror. Its bubble-blowing tactics and insistence on 2% inflation in a technological price-deflationary world are to blame.
Myth #2 Shattered
Economists and writers are puzzled by the decline in productivity. I can explain in a series of charts.
The decline in overall productivity is tied to a slowdown in manufacturing productivity. This too should not be hard to figure out.
Despite all the talk of burger robots, trucking robots, Amazon robots etc, productivity enhancements in the service sector are very slow
- We need the same number if not more teachers, policeman, firefighters, etc.
- We need an increasing number of nurses due to aging and poor diets.
- We have not seen any enhancements in trucking or limo services.
- Amazon likely boosted productivity but that is at the expense of a decline in productivity at brick-and-mortar stores. It takes a minimum number of people just to open the doors.
Why the Slowdown in Manufacturing?
In the first quarter of 1979, there were 17.465 million manufacturing employees. The index of real output was 69.789.
In the fourth quarter of 2016, there were 12.235 million manufacturing employees, a decline of 5.23 million jobs. Meanwhile, the index of real output jumped to 86% 129.665.
The law of diminishing returns is in play. Robots are not going to eliminate every job.
Manufacturing shipments are down vs the index of aggregate wages. This is a strong profit warning.
Productivity Overstated or Understated?
Many believe productivity is understated. They cite cell phones and other technological advances.
That’s actually a reason to believe productivity is declining. People are tied to their phones for work. How many hours do people spend on the phone while on vacation, on weekends, or on their days off answering corporate emails?
There are no numbers on the above, nor are there any numbers on the hours that supervisors at McDonald’s, Target, Macys etc, put in. Given performance pressures on big box retailers, pressures to work more than 40 hours while getting paid for 40 hours must be intense.
- Declining productivity is not responsible for tepid wage gains as many, if not most economists believe.
- Declining overall productivity is directly tied to declining manufacturing productivity.
- Service sector productivity is likely overstated due to off-hours work by email or phone.
- The Fed’s serial bubble blowing efforts, bank bailouts, and insistence on 2% inflation in a deflationary world are to blame for stagnant real wages.
- The Fed cannot do a damn thing to increase productivity other than to get the hell out of the way. Abolishing the Fed would be an excellent start.
Those who are baffled by productivity never bothered to put their theories to rudimentary tests.
Nonetheless, Greenspan is correct on some things, especially social benefits crowding out genuine investment. Thus, those proposing some sort of guaranteed minimum living wage are totally off base.
Entitlements are already a massive problem, let’s not make them worse. Massive handouts have never solved any economic problems, and never will.
Unfortunately, there is no data prior to 1979 for my Myth #1 chart.
It is quite possible, if not highly likely, the productivity mess that appears to have started in 1979 has its actual roots in 1971 when Nixon closed the gold window.
Regardless, the above charts show the secular stagnation theory of Larry Summers and Brad DeLong is highly suspect.
Secular Stagnation Thesis
Brad DeLong discusses Larry Summers’ “secular stagnation thesis” in Three, Four… Many Secular Stagnations!
DeLong list 17 reasons and his number one reason is “High income inequality, which boosts savings too much because the rich can’t think of other things they’d rather do with their money.”
Pin the Tail on the Donkey
At no point does either DeLong or Summers pin the tail on this donkey. Neither can, because income inequality is a symptom of the problem.
That problem started the moment Nixon closed the gold window. The event is now described as “Nixon Shock”.
Indeed it was. Unencumbered by a need to redeem gold, credit exploded.
Credit Market Before and After Gold Window Closed
Gold Window Synopsis
- Total credit exploded from $1.7 trillion to $63.5 trillion at the end of 2015.
- To service that growing pile of debt, the Fed had to keep slashing interest rates.
- Instead of allowing consumers to benefit from technological advances that are inherently price deflationary, the Fed sought to increase inflation. This is to the benefit of the banks and already wealthy.
- A policy of 2% inflation coupled with no restraints on trade deficits (thanks to removal of the gold window), encouraged the outsourcing of jobs.
- After the dot-com bubble burst in 2001, the Greenspan Fed stepped on gas blowing the biggest housing bubble on record. Then the Fed bailed out the banks, the asset holders and the wealthy. This chain of events left the median person being worse off than before.
- Given that executive pay is based on performance, rising share prices further benefited the top 1%.
- Fed policy itself, coupled with a rampant expansion of credit thanks to Nixon closing the gold window is totally responsible for the rising income inequality from 1971-present.
Instead of attacking the symptoms of the problem, as Summers and DeLong do, let’s be honest about the real problem. Let’s also be honest about the alleged scourge of deflation.
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Grasping Reality With Both Hands
Delong’s blog is entitled “Grasping Reality With Both Hands“. It would behoove, Delong, Summers, and Ben Bernanke to do just that.
A good starting point is “why” income inequality is rising as opposed to investigating ridiculous wealth-transfer schemes and government stimulus projects in a fool’s mission to fix a problem that Summers, DeLong, Bernanke, Krugman, and Yellen all fail to understand.
Finally, it would be a good idea to consider what happens when service sector productivity picks up (and it will, led by driverless trucks).
Here’s a hint for Yellen: Millions of workers will be displaced and demand for jobs will pick up. Wages pressures will be to the downside, the opposite of what Yellen believes.
Mike “Mish” Shedlock