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Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site www.greatconservatives.com
First
quarter labor productivity growth, published by the Bureau of Labor Statistics
Wednesday, was unexpectedly positive, with non-farm labor productivity rising
2.2% over the previous quarter. Wall Street mostly rejoiced at this number (the
stock market was down, but irrationality is the middle name of most short term
trading moves.) However to the impartial observer it was a very odd statistic
indeed, for two reasons. First, productivity generally declines going into a
recession, as unexpected cuts in output surprise companies which do not have
time to lay people off (or don’t want to, in case output blips back.) Second,
the oil price is now substantially above its real level after the 1973 oil
crisis. Since that episode ushered in a decade of exceptionally poor
productivity growth in the
United
States, why aren’t we seeing the same effect
now?
Currently
there is little evidence for a productivity slowdown, although the Bureau of
Labor Statistics figures can be revised substantially several years after they
first appear. Multifactor productivity, the best measure of productivity (since
it takes account differences in labor’s skill levels and the capital intensity
of the economy) rose by 1.3% in 2000-07, just slightly above the long term
average of 1948-2007 (1.2%) but well below the rate in the halcyon years of
1948-73 (1.9%). To show the extent of the 1970s slowdown, multifactor
productivity DECREASED by 0.3% in 1973-82, then increased by a fairly steady
1.0% annually from 1982-2000 – there was no significant acceleration in the
1990s.
Multifactor
productivity growth has in the last 40 years been considerably lower than labor
productivity growth because of the steady decline in the efficiency of capital
utilization. This capital productivity increased by 0.6% per annum in 1948-66,
but has declined by a fairly steady 0.9% per annum since then, with a modest
reversal in the 1980s. One can imagine why: the period since 1966, with the
exception of about a decade 1979-89, has been one of very low or even negative
real interest rates. In such an environment, when capital is so cheap, it
simply gets wasted.
Academics
are not entirely agreed on the reasons for the productivity slowdown of the
1970s, to put it mildly. Some such as William Nordhaus blame the oil price
spike, and the need to reorient the economy to an environment of permanently
higher oil prices—Nordhaus points out that the productivity slowdown was most
severe in oil-related industries. Others have noticed that service employment
grew rapidly during the decade, and that productivity growth in services was
much less than in manufacturing. Others attributed some of the decline to the
entry of the idle and self-absorbed baby boomers into the workforce. Finally
there is the environmental cleanup mandated at the beginning of the decade,
with endless resources being devoted to cleaning up healthily cooling sulfur
emissions, downsizing
Detroit’s
finest products and finding new and previously unheard-of species of newt to
protect.
Similar
productivity slowdowns occurred in other countries, suggesting that the oil
price rise, the only constant global factor, must have had something to do with
it, although in
France and
Germany
socialist governments with sloppy public spending policies, transferring
resources to the public sector, certainly bore some of the responsibility.
We can rule
out immediately some of the possible causes of the 1970s productivity slowdown
as potential repeaters. The baby boomers are coming towards the end of their
careers, while today’s kids entering the workforce are a bunch of hard-working
conformists with much better grades than their parents and no significant drug
or even alcohol habits. The generational explanation for the 70s slowdown is
even more attractive than it at first appears, since you could also credit the productivity
speedup of the late 90s (to the extent it wasn’t entirely a statistical
fiction) on baby boomers reaching their 40s and deciding it was time to
straighten up, fly right, and work on funding their pensions. Their
disappearance from the workforce into penurious retirement might be thought
likely to increase productivity further. However, generational effects are too
easy an explanation; the equivalent generation in other countries appears to
have had a significantly different upbringing and character, and yet
productivity slowdowns happened globally in the 1970s as well as domestically.
Service
employment is more difficult to dismiss as a potentially recurring factor.
While services have become overwhelmingly the dominant feature of the
US economy,
much of that growth has been in the financial services sector, with such fields
as mortgage origination and securitization taking a surprisingly chunky slice
of GDP. Since the only way to measure output of such financial services is to
calculate the fees charged for them, the significant increase in the overall cost
of mortgages since the 1970s has produced a substantial nominal increase in
output and a corresponding increase in reported productivity (with the collapse
of the savings and loan industry in 1989-92 and the housing boom thereafter it
represents a significant portion of the apparent productivity speed-up of the
1990s.)
This should
now go into reverse for two reasons. First, volumes of home sales and home
mortgages should be depressed for at least a decade. Second, securitization has
become a thoroughly suspect technique, suggesting that many home mortgage originators
will revert to direct lending, producing less measured economic output but
significant savings for the homeowner. At least some slowdown of recorded
productivity in this service sector is thus likely.
The oil and
commodities price spikes are much more likely to cause downturns in
productivity, particularly if they persist for a while, even if reducing
somewhat from their peak. The
United States
uses less oil than in 1973, and foodstuffs form a less important part of its
budget, which has led commentators to claim that oil and commodities prices
cannot have the effect on the
US
economy that they had in the 1970s. However, there are two reasons to think
that this is wrong. First, the oil price rises of the 1970s occurred in two
distinct episodes, in late 1973 and 1979-80, with a substantial period of quiet
inflation for the
US
economy to adapt to the first price-spike before the second hit. Second, oil
prices at $120 plus per barrel are now significantly higher than their 1980
peak, which equates to about $103 in today’s money and was in any case
short-lived (the highest oil price that persisted for more than a few weeks was
equivalent to about $80 in today’s dollars.)
While oil
prices will probably descend from their heights as they did after 1981, there
are a number of factors propping them up. Most important, the West has now
definitively lost control of the oil market. In the early 2000s, it appeared
that the emergence of major new production from
Russia would finally break the grip
of the OPEC oil cartel. However
Russia
has instead inserted a sinister new factor into the oil market, a player whose
interests are not congruent with those of consumers, but which derives a perverse
pleasure from making Western economies totter. In addition, the percentage has
risen of the world’s oil reserves controlled by state oil companies, with at
best 1970s technology for complex exploration and exploitation and often under
control of megalomaniacs like Vladimir Putin, kleptomaniacs like the rulers of
Nigeria or
Angola
or simple maniacs like
Venezuela’s
Hugo Chavez. To counterbalance this, tar sands and even (at $120 per barrel)
oil shale have come within the realm of practical extraction, but
environmentalism and Chavez’s perverted ideology have prevented these sources
from being ramped up to the extent necessary.
This brings
us to the final factor believed to be partly responsible for the productivity
slowdown after 1973: increased regulation.
Detroit, which had manufactured automobiles
of great beauty with remarkable efficiency in the 1960s, found itself compelled
to put ever increasing amounts of expensive environmental fiddle-faddle in its
products, and to redesign them around Congress’s bizarre idea of how an
automobile should perform (resulting in the regulatory-loophole-driven SUV.)
Steel plants and utilities were forced to retrofit expensive pollution control
equipment. Given the passage of the Clean Air Act in 1970, it is quite clear
that these regulations were a major factor contributing to the 1970s productivity
decline.
This factor
is however still with us, and indeed about to be intensified. Global warming
may or not be real, but the economic effect of a “cap and trade” carbon
emissions control system certainly will be. The Corporate Average Fuel Economy
standards, which had been allowed to remain static since they produced the SUV
and halved Detroit’s US market share in the 1980s, have recently been
intensified, again to the advantage of Asian producers of mini fuel-sippers and
against the interests of the US industry. If we get a Democrat President and a
large Democrat majority in both houses of Congress this November, we can expect
an intensification of regulation as the bureaucracy’s wish-lists, thwarted by
Presidential indifference since 2000 or even 1980, all get enacted at once.
There is
another factor which will further depress productivity growth this time around,
which is trade protectionism. It is now clear that trade liberalization agreements
are impossible to pass either in the current Congress or its likely successor.
That will suppress globalization, which, aided by modern telecommunications,
has been the main factor increasing worldwide productivity and lowering costs. Moreover,
other countries, seeing the
United
States turn to protectionism, will match it.
Already the EU is attempting to extend the Common Agricultural Policy beyond
2013, in spite of world food shortages and a price environment that renders it
entirely unnecessary for its original stated purpose. Without forward progress on new trade
agreements, existing arrangements may well fall apart in an orgy of special
favors and “anti-dumping” lawsuits.
Finally, capital
will probably become more expensive in the years ahead, as the
US works its
way out of the current mess and savings rates are at least partially restored.
That will make capital productivity once more rise, as it did in 1948-66. The
reversal will probably have little effect on multifactor productivity, but will
lower reported labor productivity growth, as more of the gradual improvement in
multifactor productivity will come from more effective usage of capital and
less from labor efficiencies.
With at
least two of the four factors thought responsible for the 1970s productivity
slowdown in place, an additional factor in protectionism that wasn’t present in
the 1970s and a reversal in capital costs tending to lower reported labor
productivity growth figures, reported labor productivity increases will in the
coming years fall far below what we are used to. Just as president Bill Clinton
bore little responsibility for the apparent (and largely spurious) increase in
productivity growth in the 1990s, but nevertheless took the credit, so whoever
is in power after 2009 will be blamed for the decline in apparent productivity
growth, even though he or she will bear at most a modest portion of the responsibility
for it.
The
upcoming Presidential election isn’t one I’d want to win!
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