Productivity – A new perspective

George Rebane

[This piece continues the RR series on the US economy and the factors taking it into new regions - unknown unknowns - during these pre-Singularity years.  As usual, the frail and the young should be spared from these deliberations.]

Productivity of a nation’s workforce is an important metric in understanding its prospects for growth and its ability to compete globally.  The bottom line metric of workforce productivity has been to divide gross national product (GDP) by the number of workers involved in producing it.  But puzzling on it a bit reveals that there’s more to the story.  After all, we are talking about a nation’s ability to output product at some level of unit cost – note that I did not say ‘unit of labor cost’.

Since the GDP of a country includes government spending, and since a big part of what government spends is in transfer payments that don’t directly support production (see figure in endnote), shouldn’t that somehow enter the productivity calculation?  Also, workforce members not participating, due to a number of reasons, are still sustained by the economy (to a large part by transfer payments), should they not be factored in since they remain as a ballast or deadweight in their unemployed condition?

In short, if we were to compute a true productivity index for a nation in the units of productive GDP per each member of the workforce, whether employed or not, then we should compensate that index for these factors since they affect both growth and global competitiveness.  My effort to do that required searching for a lot of data that could be used commensurately.  The result is shown as the ‘Available Workforce Compensated Productivity Index’ (AWCPI) which uses the workforce as consisting of the total of employed and unemployed for any given year.  The GDP is compensated by subtracting out that year’s direct transfer payments, but leaving in any multiplier effect from such payments – i.e. a consumer spending his unemployment check on household expenses, entertainment, etc.

All the government reported nominal dollar amounts in the AWCPI are appropriately discounted to the official chained government price deflator (‘inflation index’) anchored at 2005.  This allows us to do an apples-to-apples comparison over the 22 year time interval that is shown.

The disquieting part of the plot is its relative flatness since 2000.  Advances in technology have provided an enormous amount of sector specific productivity gains during the last decades.  But when we make these gains ‘carry the weight’ of non-workers, and take out direct payments to people who don’t produce, then our economy has made little or no real gains in productivity in recent years.

The effects of low growth in real productivity are twofold – 1) it does not portend well for us globally because second and third world countries have learned to produce more for lower costs, and 2) since wealth is produced by fewer and fewer workers, that wealth tends to concentrate enormously in the hands of those who can put technology and competitive labor to work together efficiently.  Such wealth disparities are a call to arms for every leftist naïf and class warfare warrior in the land (you can hear them howling on these very same pages).

We have covered the politics and economics of this phenomenom for the last years, and will continue to do so as Obama intends to make the situation worse and capitalize on the political outfall of it during his years in office.  Here all I want to do is introduce a new perspective that helps explain away why and what is happening with regard to our economic doldrums, unemployment, federal deficits, bankruptcy of local jurisdictions, and ultimately the financial ruin that faces us and causes the feds to prepare for large scale civil strife.  Enjoy.

Endnote: Please refer to the previous posts on my prognostications on unemployment, understanding GDP components, and the relationship between the growth of GDP, productivity, and the workforce.  Below I have included the GDP flowchart for reference and your convenience.

Comments

[Brad Croul]

George, your link to “GDP components” did not work and froze my browser.

“Exports add, while imports subtract, from GDP. Imports are greater than exports, and so the net effect of trade is a deficit. Imports are growing faster than exports, thanks to jobs outsourcing in manufacturing. (Source: U.S. Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.5., Gross Domestic Product) Article updated April 12, 2012”.
- This could account for a “flattening” of GDP since 2000.

- The real estate, and credit, bubble, and military/defense spending in the mid- 2000s could account for the rise in GDP during that period.

“Fixed investment also includes residential construction, which includes new single-family homes, condos and townhouses. Just like in commercial real estate, the BEA doesn't count housing resales as contributing to GDP.”
- We are still trying to work through the “surplus” inventory of existing homes and commercial real estate.

“Government spending added $3.03 trillion to the economy in 2011, a little more than 20% of total GDP. This was up from 17% in 2000 and a bit more than the 19% it contributed in 2006. That makes sense, because one of the roles of Federal government spending is to boost economic growth enough to end any recession. The Federal Government added 8% to GDP, or $1.2 trillion. Two-thirds of this, or $825 billion, was defense-related spending.”
- Interesting that government spending is only up 3% since Bush took office and only 1% since Clinton’s term. These facts seems to be at odds with the claims made regarding the “horrors” of Obama’s “big” government.

“In 2006, companies added $60 billion to inventories. In 2007, they only added $29 billion. After the 2008 financial crisis hit, businesses depleted their inventories by $41 billion, and withdrew another $160 billion in 2009.”
- so, during the, pre-Obama, Bush years, companies were already reacting to decreased demand and increased inventories.

“ Economists knew the recession was really over in 2010, when businesses added $66.9 billion to inventory.”

New, increased, consumer spending, which accounts for 70% of GDP, will probably remain relatively flat until Americans get easy access to credit again. So, don’t expect to see the GDP curve heading skyward right away.

[Ben Emery]

George,
Try these graphs and compare where the gap began to drastically go askew between productivity and wages. If wages don't track along with productivity than we get a huge spending power gap that needs to be filled with credit. The banking industry loves Reaganomics/ Trickle Down/ Supply Side Economics but the practice of it devastates a huge majority of the people.

http://www.epi.org/files/2012/ib330-figureA.png.538

http://i.huffpost.com/gen/258375/WAGES-PRODUCTIVITY.jpg

Here is a link that you will find interesting and it uses your type of language. About a quarter of the way through is the topic of wage gaps.

http://www.ravibatra.com/a-new-theory-of-unemployment.htm

[George Rebane]

BradC 844am - The 'GDP components' link works on other computers - have tested IE, Firefox, and iPad's Safari. Thanks for the input and interpretation from the Bureau of Economic Analysis. There appear to be many reasonable explanations, but my concern is that Washington still ignores the gorilla in the room - systemic unemployment abetted by technology (smart machines) and a dysfunctional education system that doesn't provide the necessary skilled workers.

[George Rebane]

BenE 907am - the 'epi.org' plot is very revealing and I've discussed its data before (the 'huffpost' plot is misleading since it implies that divergence occurred around 1989 when both productivity and wages were indexed at 100).

Wages and productivity (calculated in the accepted way, not as the AWCPI, began diverging soon after 1970. That coincided with several concurrent factors - the wind-down of Vietnam war, stock market doldrums starting, US going off gold standard, worldwide oil embargo, and the explosion of the mini-computers. All of these winds blew in the direction of "stagflation" which created an essentially flat economy (in real terms) for the 70s.

That decade the penetration of computer technology made a quantum leap, starting with the PDP-8 and ending with the HP-85 and intro of the first PCs. Productivity soared in areas such as word processing, accounting, maintenance support, and, of course, manufacturing. Were we to calculate the AWCPI for that epoch, I believe we would see a much closer tracking of real productivity and wages. In fact, the AWCPI supports or explains away the divergence that you have noted (thereby contributes value in these analyses).

Of course, none of this addresses your (i.e. the collectivists') concern about wage stagnation and wealth disparity (see the Lorentz curve discussion http://rebaneruminations.typepad.com/rebanes_ruminations/2009/03/our-new-course-is-declared.html ).

We have circled this barn before. I believe your view has been that this is disparity is unjust and immoral, and needs to be corrected by government intervening to redistribute wealth by force. I believe that wealth must be distributed better, but in a manner that doesn't lower the aggregate QoL in an economy. And class warfare incitements to achieve 'social justice' and more equal wages by the gun is guaranteed to bring on national poverty as it has done elsewhere.

That is where our debate lies - you and yours first want some measures of equality by diktat, hoping that the good life will then be maintained; I want the low-end QoL raised regardless of how wealth and income are distributed to achieve that. And in no way will we achieve my objective within a beggared economy. Again I offer my Non-profit Service Corporation (q.v.) as a candidate for at least starting the discussion (so far rejected out of hand by the Left).

My concern with Batra's paper and development is that it has the causal direction of recessions confused. It is a classic mistake made in economics that develop relational models of economic factors which exclude time as a variable. These models literally have no predictive power, and their ability to explain data is strictly limited to rear view mirror exercises which promote erroneous (sometimes public policy catastrophic) causal conclusions.

Bottom line, productivity/wage disparity is the result of other factors which may be mediated by recessions. (Note that the disparity kept growing no matter how recessions came and went.)