What They’re Not Telling Us

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economy

I read in the Guardian that there has been a sharp drop in U.S. productivity growth since 2003. John Schmitt and Dean Baker write,

All the bad news about the bursting of the US housing bubble and the related meltdown in US share markets has deflected the world’s attention from what is arguably an even more fundamental problem facing the US economy: the sharp deceleration in productivity growth since the middle of 2004.

For Americans, the long-run implications of this little-discussed slowdown, if sustained, are actually more important to future living standards than any of the other events currently worrying world markets. For Europeans, long-encouraged to see the United States as the flexible economic ideal, the productivity slowdown sounds another note of caution about the US model. Europeans already know that the US economy generates substantial inequality. The last three years of slow productivity growth now suggest that all that inequality apparently doesn’t even guarantee faster growth.

Notice that this is not a decrease in productivity itself, but in productivity growth.

Economists define “productivity” as the value of goods and services produced per hour by an economy’s average worker, and agree that the growth rate of productivity is the single most important determinant of the long-run prospects for a country’s standard of living.

The deceleration in US productivity growth since the second half of 2004 is striking by historical standards. Between 1947 and 1973, the golden age of postwar capitalism, productivity growth averaged about 2.8% per year in the United States. At that pace, the output of the average worker was set to double about every 25 years, allowing roughly comparable increases in national living standards. From 1973 through 1995, however, productivity growth took a nosedive, with the average rate dropping to just 1.4%. At this lower rate, average worker output would take about 50 years to double, implying far slower progress in living standards.

From the mid-1990s on, however, official productivity growth again accelerated rapidly, returning to a 2.9% rate reminiscent of the golden age. Quite suddenly, though, in the second half of 2004, productivity growth dropped sharply. From the third quarter of 2004, productivity growth rate, at 1.3% per year, has not even managed to match the 1.4% growth rate of the productivity bust of 1973-1995.

But we’re still beating lazy ol’ socialist Yurp, right?

Meanwhile, how has Europe been faring? According to internationally comparable data from the Groningen Growth and Development Centre, between 1995 and 2004, the United States outperformed most of Europe, with productivity growing about 2.5% per year in the United States, compared to 1.7% in Germany, 2.0% in France, and 2.2% in the United Kingdom.

Between 2004 and 2006, however, the US lead all but evaporated. The US rate fell to 1.7%, not much different from the rates in Germany (1.7%), France (1.4%), and the United Kingdom (1.4%). If current trends continue, US growth rates may soon be trailing those of Europe (as was the case for almost the entire postwar period before 1995).

Well, damn.

I’m not an economist, but let me speculate anyway: Perhaps companies are not reinvesting in facilities and technology and “growing their people” as they did in the 1990s. “The driving force behind the 1996-2004 productivity acceleration … was massive investment in computers, software and related high-tech machinery, all of which become obsolete much faster than earlier generations of capital goods.” Now companies may be upgrading and replacing technology, but it’s not like in the 1990s, when PCs appeared on every office desk for the first time.

And then there’s the fatigue factor. Workers are worn out and stressed out. They’ve skipped vacations and worked way too much underpaid and unpaid overtime. They are not being rewarded. Their wages are stagnant, even as the cost of living rises. So workers subsidize their employer’s profits by going deeper into personal debt, struggling to maintain a “normal” middle-class lifestyle. (See also “Spherion Study Shows Less Than Half of U.S. Workers Are Satisfied With Their Jobs; Benefits and Compensation Inadequate to Retain Employees.“)

Back in the days of the Cold War we patriotic Americans were told, over and over again, that Communism is a bad system because it doesn’t provide a personal incentive for people to work. If everyone is going to be taken care of by the state, whether they work hard or not, then why bother? And I think that’s a valid criticism. You can’t deny that Communist countries produce piss-poor economies in the long run.

But I think King Capitalism is making the same mistake. If everyone is going to be pissed on by their employer whether they work hard or not, then why bother? What’s the incentive?

See especially “Our Sub-prime Economy” by Rick Wolff:

From 1973 to 2005, this is what happened to the 80 percent of US workers in non-supervisory jobs. Their hourly wages — adjusted for inflation — rose from $15.76 to $16.11. That is, over a 32 year period, most US workers enjoyed a stunning 2 percent increase in what their hourly pay could buy. Because their work weeks shortened over those years, their real weekly pay — what they could actually afford for a week’s pay — actually fell from $581.67 to $543.65, a decline of 6.5 percent. This means that workers’ wages could buy less in 2005 than in 1973.

Over the same thirty years, US workers produced 75 percent more. In the language of economics, that’s how much output per worker — “productivity” — rose. Corporations got 75 percent more goods and services produced per worker. They sold that extra output and thus got much more revenue and profit per worker employed. Yet what they paid those workers did not rise. Stagnant wages did not allow the workers to buy any of the extra output they produced.

Americans measure success by levels of consumption, Wolff writes. As the bumper stickers say, Whoever Dies with the Most Toys Wins. So as wages flattened, American workers compensated to maintain the lifestyle to which they had become accustomed. First, in the 1970s, women entered the workforce in large numbers. This of course was partly because of second-wave feminism, but it also corresponded with the slowdown of the economy that occurred after 1972. Second, people got used to carrying larger and larger chunks of debt to pay for the stuff they believed middle-class people were supposed to have, but which they couldn’t afford. As I said, they’re subsidizing their employers’ profits by going into debt.

Wolff also makes this observation:

The numbers on productivity and real wages before then — from 1945 to 1975 — were very different. Productivity rose much faster then than afterward. But the big difference is what happened to real wages: hourly, they rose 75 percent from 1947 to 1972, while weekly they rose 61 percent. In other words, US workers wages then rose with their higher productivity — exactly what stopped happening after the mid-1970s.

The welfare state economy of 1945 to 1975 was driven by two interconnected fears: of lapsing back into the Great Depression and of succumbing to socialism. History reduced those fears enough so that, after 1975, business could undo the New Deal and go back to the pre-1929 gaps between rich and poor. Most paid commentators cheer the business reaction as if it were good for everyone, but workers suffering the new sub-prime economy may reckon differently. The explosion of workers’ debts has postponed that reckoning. So too have fundamentalism, escapism, and the noise from all those commentators.

I’ve finally gotten around to reading Dear Hunting With Jesus by Joe Bageant, which expounds on this theme big-time, but more colorfully. However, Bageant’s subjects are so used to being pissed on by The System that they don’t even question it.

Those of us who were children in the 1950s and 1960s got so used to economic times getting better and better that we assumed that was the way the world would always be. Any slowdowns were just temporary glitches. In the early 1980s, when mortgage rates went through the roof, lots of my contemporaries cheerfully took out balloon mortgages because of course in five years they’d be making a lot more money. But, as a rule, they didn’t. Now I think most people have stopped expecting. They’re just hoping to hang on to what they have.

I’ve believed for a long time that much of America’s prosperity — whatever’s left of it, anyway — has been floating on the wealth created in the postwar years. That’s when all those veterans got college degrees on the GI Bill and went out and started businesses or created new products. That’s when all those middle-class couples, booming with babies, bought their first houses with mortgages subsidized by the U.S. government. That left with them income to buy new refrigerators and cars and television sets, growing the refrigerator and car and television set industries in America. It was win/win for everybody.

Well, those days are gone, huh? And if you want to get really depressed, take a look at this episode of Bill Moyers Journal.

Also, this guy says that people who are even worse off than we are, are subsidizing us — “a good many developing countries are actually subsidizing U.S. consumers indirectly (by keeping their currency undervalued).” Face it; the world’s economy isn’t “trickle down”; it’s “trickle up.” American workers are middle men, passing the world’s wealth up the chain after taking our little cut.

I don’t know what the solution is. I understand that old-style protectionism isn’t workable any more. On the other hand, Ian Welsh keeps patiently explaining to me that globalization is not inevitable. He understands economic stuff much better than I do, so I’ll take his word on that.

I do think that we must begin to think in terms of investing in ourselves again. If workers and business were relieved of the burden of health care costs, wouldn’t that help the economy (except for the insurance industry, of course)? If a college education were a lot more affordable, wouldn’t that (in the long run) help the economy, as it did in the 1950s and 1960s? And if workers felt that their hard work was actually being compensated, that there was a reason to work hard beside not getting fired, wouldn’t that put a spring in their step, so to speak?

The “I got mine, so the heck with you” attitude is not just unfair; it’s strangling all of us.

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8 Comments

  1. ken melvin  •  Oct 14, 2007 @5:57 pm

    That’s what you get when you hire cheap labor and have them do menial tasks.

  2. Bonnie  •  Oct 14, 2007 @6:48 pm

    U.S. corporations are so busy collecting golden eggs that they don’t see that they are killing all the geese that lay the golden eggs. Soon there will be no geese and the corporations will wonder what happened to the golden eggs.

  3. PFT  •  Oct 14, 2007 @7:44 pm

    A significant part of that productivity growth may be overstated due to phantom GDP caused from imported product/services being counted as domestic production/cost savings.

    Also, it is interesting that indviduals working overseas must pay taxes on their entire income after the first 80,000, regardless of if they bring their savings home, while companies profits overseas are taxable only if they bring the profits home, which most do not. Why the double standard. I thought the courts ruled that corporations have the same rights as individuals under the constitution.

    In fact, many companies use their offshore operations as a way to reduce their US tax burden by overstating the costs of services/product provided by their overseas company, thereby shifting the US profits abroad, and less taxes. To counter the reduction in tax revenue, Bush allowed companies to bring back profits earned before 2004 and be subjected to only a 5% tax rate, which may explain the increase in corporate tax revenues the last couple of years. Instead of reinvesting it in new factories, many simply used to to buy back stock or provide their CEO’s with bigger bonuses (technically not allowed but since IRS does not audit them and their accounting firms they hire cover the tracks they can get away with a lot).

    People don’t get it. Tax cuts for corporations simply frees up money for them to invest overseas and reduce US jobs. It’s not the same as 30 years ago when tax cuts freed up money that they used to expand in the US and creat jobs, now it simply accelerates the export of US jobs. Sure, their are still jobs being created, but the skills and knowledge needed are how to use a bed pan and knowing to ask the customer if they want fries with their order.

    The companies do not need Americas 300 million geese, as there are 3 billion ducks on Asia who will be laying many more golden eggs in the 21st century. The corporations are divorcing the American working class geese and moving in with their Asian mistress ducks. Don’t count on the alimony or child support payments. American working class are being Left Behind in the Corporate Rapture.

  4. Ms. Clear  •  Oct 14, 2007 @7:56 pm

    The irregularity of the post WWII years cannot be mentioned enough. That was a magical time for those with white, middle class status. We’ve been watching it fade for thirty years now, people are just starting to wake up to that.

    We can build a great society again, but it will take a European model, at least for health care. I think it will happen in my lifetime, but not for about another decade. We’re a stubborn bunch.

    In the meantime, what I recommend for the average person who is awake and realizes that debt slavery is not cool is hardcore, anti-consumerist frugality. Think Freecycle, think yard sales, think bargain shops and church fairs. Learn to cook, use a clothesline etc. You’ll be needing the money you save.

  5. erinyes  •  Oct 14, 2007 @8:57 pm

    Great post and comments.
    Also check out the video interview with Bill Moyers and Anouar Majid., I caught the last several seconds of both interviews on PBS last night, thanks for the link that allowed me to view both.
    Good night everyone……….

  6. Doug Hughes  •  Oct 14, 2007 @9:21 pm

    Level the playing field. We live in a global marketplace, but we have rules here which protect the environment (sometimes) and which protect consumers (sometimes). This – plus the difference in labor costs – provide the incentive which drives busines overseas. Theoretically, we reap the benefit of cheaper products here. But are those products safe? What about pollution? The benefits of a cheaper toy fade if the toxic paint poisins your baby’s brain. Pollution does not observe national boundaries. In the water, and the air it has an effect on all of us.

    The answer is not easy, but it is nescessary. Any contry who wants to play in the global economy has to allow impartial international inspections. On a fair, consistent standard, all countries would have ratings on each other. Does a country use slave labor? Can workers change jobs and/or move to a better job? As a percent of the value of goods produced, what do the workers receive? How much does industry pollute?

    These rankings could be worked into a tax code; taxes levied on the goods based on the rank of the source country. Special benefits could be worked into the code where a ‘bad’ country showed significant improvement. The idea is a tax-free status for countries that have a decent status, incentives for improvement and penalties on the goods from countries with piss-poor scores.

    Drive up the cost of business in countries with the worst records; level the playing field with countries whose regulations protect the worker and the environment.

  7. rachel  •  Oct 15, 2007 @7:24 am

    In the meantime, what I recommend for the average person who is awake and realizes that debt slavery is not cool is hardcore, anti-consumerist frugality. Think Freecycle, think yard sales, think bargain shops and church fairs. Learn to cook, use a clothesline etc. You’ll be needing the money you save.

    Amen, amen. We say “debt slavery” and “wage slavery” so flippantly, but the fact is that the need to earn that wage to service your debt can cage you into a life you hate. How many people out there can afford to just walk away from an intolerable employer? No-one who is in debt can when the prospect of getting a new job that pays enough to service that debt is poor. And of people who enjoy their jobs, how many debtors live in dread of what will happen to them and their families if they lose that job? For every debt you take on, your freedom is reduced by that much.

  8. Platypus  •  Oct 16, 2007 @8:20 am

    Laissez-faire capitalism has always had a lot in common with communism, in that both are designed around ideal people instead of the ones we have. Communism’s Big Mistake was to assume that people could be taught to put altruism ahead of self-interest and work for the good of others. It didn’t work. Laissez-faire’s big mistake is assuming that people will put principle ahead of self-interest and avoid the temptation to game the system or outright cheat. That doesn’t work either. Competition is good, markets are good, the power of each should be harnessed as much as possible in preference to governmental fiat, but the fact is that the race will degenerate into a brawl if somebody doesn’t enforce the rules. Markets don’t do that. Perverse incentives always creep in, and externalities never go away. Markets can correct for changes in circumstance, but not for their own intrinsic flaws. Governments and markets need to work in tandem, with each correcting the other’s flaws instead of exploiting and magnifying them as seems to be the case now.

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