A step closer to the core of one of our most common problems

Trading Away Productivity

FOR a quarter-century, American economic policy has assumed that the keys to durable national prosperity are deregulation, free trade and a swift transition to a post-industrial, services-dominated future.

Such policies, advocates say, drive innovation, which leads to enormous labor productivity and wage gains — more than enough, supposedly, to make up for the labor disruptions that accompany free trade and de-industrialization.

[N.B. In fact, labor productivity has been an eternal obsession of the US capitalist, shared at one point by the now-defunct comrades in the planned economies. Have a look at The Politicos vs An old man]

In reality, though, wage gains for the average worker have lagged behind productivity since the early 1980s, a situation that free-traders usually attribute to workers failing to retrain themselves after seeing their jobs outsourced.

[N.B. So what does it mean if this were indeed a failure of the workers? Too bad they could not retrain themselves to become neurosurgeons or derivative traders?]

But what if wages lag because productivity itself is being grossly overstated, especially in the nation’s manufacturing sector? Then, suddenly, a cornerstone of American economic policy would begin to crumble.

Productivity measures how many worker hours are needed for a given unit of output during a given time period; when hours fall relative to output, labor productivity increases. In 2009, the data show, Americans needed 40 percent fewer hours to produce the same unit of output as in 1980.

But there’s a problem: labor productivity figures, which are calculated by the Labor Department, count only worker hours in America, even though American-owned factories and labs have been steadily transplanted overseas, and foreign workers have contributed significantly to the final products counted in productivity measures.

The result is an apparent drop in the number of worker hours required to produce goods — and thus increased productivity. But actually, the total number of worker hours does not necessarily change.

This oversight is no secret: as Labor Department officials acknowledged at a 2004 conference, their statistical methods deem any reduction in the work that goes into creating a specific unit of output, whatever the cause, to be a productivity gain.

This continuing mismeasurement leads economists and all those who rely on them to assume that recorded productivity gains always signify greater efficiency, rather than simple offshoring-generated cost cuts — leaving the rest of us scratching our heads over stagnating wages.

[N.B. Why would few push this, where was the organized labor?]

Of course, just because productivity is mismeasured doesn’t mean that genuine innovations can’t improve living standards. It does mean, however, that Americans are flying blind when it comes to their economy’s strengths and weaknesses, and consequently drawing the wrong policy lessons.

Above all, if offshoring has been driving much of our supposed productivity gains, then the case for complete free trade begins to erode. If often such policies simply increase corporate profits at the expense of American workers, with no gains in true productivity, then they don’t necessarily strengthen the national economy.

[N.B. This seems a clear case when regulation should help protect capitalism from capitalists.]

In this regard, the case for free trade as a stimulus for innovation weakens, too. Because productivity gains in part reflect job offshoring, not just the benefits of technology or better business practices, then the American economy has been much less innovative than widely assumed.

How can we actually increase innovation and real productivity? Manufacturing, long slighted by free-market extremists, needs to be promoted, not pushed offshore, since it has historically accounted for the bulk of research and development spending and employs the bulk of American science and technology workers — who in turn spur further innovation and real productivity.

Promoting manufacturing will require major changes in tax and trade policies that currently foster offshoring, including implementing provisions to punish currency manipulation by countries like China and help American producers harmed by discriminatory foreign value-added tax systems. It also means revitalizing government and corporate research and development, which has languished since its heyday in the 1960s.

Much of government policy and business strategy rides on false assumptions about innovation, and although the Obama administration acknowledges the problem, it has done nothing to correct it. With the economy still in need of government life support and the future of American manufacturing in doubt, relying on faulty productivity data is a formula for disaster.

Alan Tonelson, a fellow at the United States Business and Industry Council, is the author of “The Race to the Bottom.” Kevin L. Kearns is the president of the council, which is an association of small manufacturers.

1 comment:

George Edwards, England said...

* Decades of Fake Prosperity in USA *
Prosperity is usually measured by GDP growth, but if GDP is growing due to consumption fueled by artficially created credit, then GDP growth is being distorted with what I call artificial GDP growth. This is GDP growth out of thin air because it was orginated from money out of thin air. No one produced a product and sold it, and saved the cash profits in the bank. It was the Federal Reserve running the printing presses and artificially creating credit that fueled a lot of the U.S. "prosperity" of the past 30 years.
This apparent prosperity has been built on debt and behind the debt there is no real savings, but Federal Reserve money, created out of thin air.
As an example of this, let's say we have a household, the Smiths, with 0 debt and say $100k in income (in 2008 dollars) in 1999 and no assets. The Smiths, in 2004, buy 2 cars and a house worth $350,000 thru credit. Let's assume that the household still has the same income of $100k in 2009. For all the neighbors, it would seem that the Smiths are doing extremely well compared to where they were in 1999. Let's now assume that after a few years and due to the crisis the home is now worth $200k and that the cars have depreciated. The Smiths total debt by 2009, in mortgages and loans is $290k, but there assets (home and cars) are only worth $220k in the market. Are the Smiths really better off? This is what I call "artificial prosperity" and is very much what has been happening in the aggregate American economy in last 20 years.
It is prosperity thanks to credit, not due to increased production. That is why you cannot solve the present crisis by lowering interest rates to promote even more credit.
If the Smith's faced foreclosure of their home, giving them more loans is not going to solve their financial problems, it would only make things worse. That is exactly what the Federal Goverment is doing, it is going into debt to "prime the pump" with fiscal spending and lowering interest rates to promote even more credit. This is going to hurt more than it helps.

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